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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

than 500 MMcf per day) proposed pipeline builds out of the Rockies heading east-COCO, proposed by Colorado Interstate Gas and soon to be an El Paso affiliate, and Frontier, proposed by Williams.

Some might think that Westcoast is involved in Alliance out of desperation, while Enbridge is involved because it wants to be recognized as adept in the pipe business, able to work efficiently in both oil and natural gas business environments. Westcoast, however, may become the owner of some of the most valuable pipe space per square inch in North America if gas prices decline sufficiently and natural gas generators again become impressive investments. On the other hand, the financials of both Westcoast and Enbridge suggest that other companies may purchase them after the difficult work is done and the road ahead is clearer.

High Gas Prices: What Looms Ahead

Given the recent and huge runup in natural gas prices, two events could change market conditions quickly and dramatically, and make Alliance a huge success for all parts of the industry, including companies with natural gas-fueled generation:

  • Producers bring more gas on line, spurred by the higher prices
  • Consumers use less gas, deterred by the higher prices

Either of these events would eventually force gas prices down, increasing the rate at which new gas-fueled generation is installed, especially accounting for the better capability of natural gas generators to take advantage of price movements throughout the day.

Additional supplies from Canada could lower prices to between $3.50 and $4.50 per million Btu. Increased supplies of gas from Canada also would provide TransCanada with new opportunities to more fully use available space on its system and possibly lower its transportation rates.

Similarly, if gas use per customer is reduced due to high prices, 7 the effect also will be an increase in available supplies. Residential and commercial customers this winter are expected to conserve gas, lowering their use significantly because of expected 30 percent to 50 percent increases in the cost of gas service. If the winter weather is similar to last year, this conservation could reduce gas consumption in these sectors from 1999 levels by at least 10 percent. That, in effect, would increase available supplies by several hundred billion cubic feet.

Market Strategy:
More Efficient, More Flexible, More Products

Alliance always was viewed as a producer's pipeline. Yet it is also designed in an operational scale to make prices and services much more attractive for shippers than those on competing systems.

Efficiency. The chance of flows being interrupted from operational problems on Alliance would be expected to be less than on TransCanada, simply because the TransCanada system is much older. Thus, shippers would incur fewer costs associated with service disruptions.

Flexibility. Alliance provides shippers with approved shipment overruns amounting to 25 percent of their firm shipments. Alliance also intends to work with shippers to avoid imbalance penalties, an onus for many shippers. Yet whether the intention is followed by action remains to be seen. The operational integrity of a pipeline system depends on the independence of unexpected changes from the various