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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

shippers' scheduled receipts and deliveries. If these changes are independent, then imbalances, in effect, are balanced by offsetting amounts of the different shippers. If, however, the changes are dependent, then the pipeline will need to impose penalties for unexpected changes to maintain the operational integrity of the system.

Diversification. Alliance allows shippers to ship wet gas for processing near Chicago, which can result in discounts on the cost of their firm shipments amounting to 16 percent. With this discount and approved overruns, shippers are expected to receive transportation service at a cost significantly below what competitors can offer.*


Profits from selling power onto the wholesale market using natural gas-fueled generators have been huge at times during the past few years. Such profits have been a driver for companies installing new gas-fueled generators to take advantage of the expected additional gas from Alliance and connecting pipes. Yet today, with the high gas prices, the outlook has become clouded for gas-fired merchant generation. Consider the downward trend in the Chicago area of days on which gas-fired merchant gen plants could earn high profits.

In 1999, in the Commonwealth Edison and Chicago market area, there were only 20 days—8 percent of the total number of trading days—when the spark spread exceeded $30 per million Btu. By contrast, this past summer in Chicago the number of such days fell to only ten. These are the days on which power producers with gas-fired plants would expect to earn their meal tickets.

Aux Sable: Achilles Heel?
The risk of adding ethane and propane to the product mix.

Alliance is not without possible threats. In addition to high natural gas prices working to undermine market growth, clear risks are associated with Aux Sable, part of the Alliance package.

The Venture. Aux Sable Liquid Products (Aux Sable) is a new, $365 million venture for extraction and factionation of natural gas liquids, to be constructed near Chicago, and supplied by Alliance. It will initially process up to 1.6 billion cubic feet of natural gas per day. It is expected to initially recover 70,000 barrels per day of natural gas liquids (ethane, propane, normal butane, iso-butane and natural gasoline), and become a significant propane supplier for the Midwest, particularly for Illinois and neighboring states.

Price Volatility. Nevertheless, the selling of such liquids is a risky business. Marketers must deal with volatile product price risk, which is influenced by international markets. They also must be able to hedge commodity price risk.

Examination of statistical characteristics of ethane and natural gas prices, the difference between which prices is the , a crude measure of profit potential, indicates the price volatility of ethane in recent years is much greater than the price volatility of natural gas. The correlation between changes in ethane prices and changes in natural gas prices also has been very small. Thus a natural gas company may be increasing its risk when it enters the ethane business, while a company that produces ethane may be reducing its risk by entering the natural gas business. The frac spread is very unstable, which