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Alliance Gas Pipeline: Early, Late, or Just in Time?

A story of big gambles, big assumptions, and spark spreads now turned upside down.
Fortnightly Magazine - November 15 2000

will continue to increase if Alberta supplies remain tight overall. In general, once Alliance is operating on a regular schedule and Alberta gas is serving the new system by BC Gas, designed to deliver 250 million cubic feet (MMcf) per day, and once TransCanada regularly promotes programs to reduce its cost of service, then smaller amounts of Alberta gas will be available for western markets. Already TransCanada has reduced its fuel cost from 8 percent to 6 percent, which at today's natural gas price amounts to between $0.08 to $0.10 per million Btu of gas shipped.

Under the current tight supply conditions and normal weather conditions, Alberta gas moving to Chicago along Alliance will have little influence on overall price behavior except that it should reduce volatility during winter cold spells. It also will tend to reduce the large difference between Henry Hub and Alberta prices observed at times this past summer. However, as stated, Alliance will contribute to increasing price levels in the Western United States. That will hasten the building of pipes heading west out of the Rockies. The difference between prices in the Rockies and East, as well as the robust reserves in the Rockies, probably also will be great enough to support the building of pipes carrying significant amounts of natural gas out of the Rockies heading East.

Eventually producing areas will be able to make more supplies available. This supply will amount to as much as 680 Bcf over a year's time from U.S. producing sites, or growth equivalent to more than 3 percent of natural gas consumption. When that occurs, prices will decline significantly. The full impact of Alliance will be felt as both Alliance and TransCanada and connecting pipes are used more uniformly throughout the year. At that time, they will be bringing large amounts of gas to power generators in the summer and conventional space heating customers in the winter. Thus, the meal that Alliance and connecting pipes are serving to all stakeholders in the natural gas industry is still cooking in the oven.

Long-Term Outlook: Uncertainty in Merchant Power

Only the addition of new electric generation customers with their large additional gas requirements will justify significant investments in additional pipe capacity. These customers may be conventional utilities, merchant plants, or industrial customers that produce power for their own use and for sale onto the wholesale market.

The full commercial value of gas shipments on Alliance is dependent on the shipment of gas on Vector and other connecting pipes. If Vector results in the creation of new power-generation markets in Indiana and Michigan, the added value could be substantial. If Vector merely re-channels Canadian gas to Vector from TransCanada and connecting pipes, there may be an increase in shipping costs for remaining shippers on TransCanada and these other pipes.

TransCanada has admitted losing firm shipments in Alberta that amount to about 1 Bcf per day. Total lost revenues from firm shipments on TransCanada and jointly owned systems such as Great Lakes Pipeline could exceed $100 million. TransCanada at some point will have to increase