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The Great Canadian Gas Race

Northern gas rush proves timely for power generators.
Fortnightly Magazine - May 1 2002

all of the mergers, there tends to be only majors and large independents because "the whole mid-section of the spectrum has been bought out," Osten says.

It's been the mid-sized independents that have been the source of growth in Canada and in certain onshore areas of the United States. In the past, the companies that were the most aggressive drillers were companies like Renaissance Energy, which was a Canadian independent and was spending up to $800 million a year on exploration before its merger with Husky Energy. "They were spending all of their cash flow on drilling wells in Alberta," Osten says. "That was their growth strategy. As long as their finding costs were below the market price, they were growing and they kept borrowing for aggressive exploration programs."

Osten sees the proposed combination of Alberta Energy and PanCanadian and other mergers as "sort of the way of the world. You're losing the mid-sized independents in Canada."

For power plants, he believes it unlikely gas will be waiting there when new plants come online. It's more likely the power plants that come online in the next couple of years will have to go out and bid for the gas, he says.

Fueling the Future

One prominent merchant plant developer, though, doesn't have to worry about the availability of gas when many of its new gas-fired plants come online. Over the past few years, Calpine has acquired about 250 million cfd of gas production assets in Alberta to complement the 80 million cfd it owns in the United States.

"They are part of our core assets," says Dan Allard, vice president and Canadian regional manager for Calpine. "They represent to us a couple of things. One is security of supply. The other is we believe it offers to us a cost advantage to going out and contracting for gas."

Calpine's share price has improved over the past couple of months after the company announced it would cut spending and had closed on a $1.6 billion credit line, helping to resolve its liquidity concerns. The company, faced with a sharp drop in electricity prices linked to fallout from the collapse of Enron, saw its stock price tumble late last year while rating agencies cut its debt to junk bond status.

Allard says Calpine looked to acquire Canadian reserves because the prospects seemed more abundant there. With a strategy to own 25 percent of its gas requirements, Calpine last year acquired Encal Energy, a Calgary-based producer, for $1.2 billion. The deal provided Calpine with 1 trillion cf of proved and probable gas reserves in western Canada, as well as access to firm gas transportation capacity from western Canada to California and the U.S. East Coast.

Not many companies with generation assets have followed Calpine's path. Last year, Williams acquired Barrett Resources with an eye toward creating a physical hedge for Williams' planned buildup of power generation assets. Recent acquisitions by Dominion's exploration and production unit have included gas reserve assets in central Alberta and northeast British Columbia.

Neither of these companies was a pure merchant