Alliance Pipeline Eyeing Alberta Hub for Arctic Gas

Abstract: Alliance Pipeline significantly improved transportation capacity out of Western Canada, helping shrink basis differentials. The pipeline is keeping its options open as producers increasingly look to exploit massive gas reserves in the Mackenzie Delta and Alaska.

Analysis: Alliance Pipeline, once just a line on a piece of paper, has delivered about 1.25 trillion cubic feet of gas since beginning deliveries of Western Canada gas to the U.S. Midwest.

Oil & Gas Advisory recently sat down with Allan Edgeworth, president and chief executive of the C$5 billion project, which moves about 1.5 billion cubic feet per day of gas from Alberta and northeast British Columbia to Chicago, to talk about the partnership's initial years and some emerging issues in the Canadian gas industry.

Q: What has Alliance, initiated largely by gas producers frustrated with the market dominance of TransCanada PipeLines Ltd., proved since it began flowing gas in December 2000?

A: We changed the paradigm significantly and that has provided an opportunity, we think, for all production in Western Canada to get its fair economic value in the North American marketplace, not just the volumes moving through Alliance but all volumes.

Although we only represent nine percent of the volumes in Western Canada, we did introduce competition into the marketplace. That's really why Alliance exists because it was what the producers wanted, at least in a small way--more competition in the marketplace. We have not only demonstrated that the rich-gas, high-pressure technology works, it makes us one of the most fuel-efficient pipelines in North America with some of the lowest carbon dioxide emissions per unit of throughput. I think we've demonstrated technology that you'll see in wider-spread use in new pipelines in the future.

Q: You say Alliance transports about nine percent of Western Canada's daily gas production, estimated at about between 16.2 and 16.6 billion cubic feet per day in 2002. The Canadian National Energy Board recently predicted that output would drop over the next couple of years unless some more Ladyferns, a large gas field found in early 2000 in northeast British Columbia, are discovered. What's Alliance's take on the future of gas production in Western Canada?

A: I'm probably more cautiously optimistic about supply. I do believe in the market and that drilling activity will pick up toward the end of 2003 and in 2004. With annual decline rates in the 20 percent range, we're having to find greater replacement volumes just to stay even. But I'm confident looking out over the near term--the next five to 10 years--we have the capability to do that if there are the right price signals in the marketplace. I certainly believe there are some larger discoveries because there are still a lot of opportunities in unexplored parts of the basin.

Looking out longer term, there's no doubt that both Arctic gas and coalbed methane will be supplemental to augment (conventional) Western Canada production.

LNG will be a very small but potentially growing component in the overall supply mix in North America. But with respect to our strategic interest, moving gas from Western Canada to the Midwest, I don't see it having a big impact.

Q: As Alliance turned from a dream into reality, many producers sold out to large, international energy players. But El Paso Corp. and Williams Cos. Inc., both squeezed by the credit crunch in the wake of Enron's collapse, have recently sold their stakes in Alliance. Enbridge Inc. and Fort Chicago Energy Partners LP, which owns the Aux Sable liquids extraction plant at the end of the line, will each soon own 38.2 percent of the line while Duke Energy Corp. will control the remainder. What does this say about Alliance and what impact will ownership consolidation have on the pipeline?

A: When they (El Paso and Williams) were looking for cash, the Alliance asset was something of interest to people. Both Fort Chicago and Enbridge, knowing the people at Alliance and our capabilities, sought to increase their ownership so I saw that as very much a validation and support of our vision and roots.

We have very solid support from our owners as to the future direction of Alliance, so the consolidation of ownership just reinforces that.

We are very much looking at smaller opportunities to provide supply flexibility on the upstream end. Where we can enhance gas coming into the pipeline, certainly we're interested in that. Secondly, wherever we can diversify and provide more delivery points off our system, that's a short-term strategy as well. We have seen some increases in both receipt point flexibility and take-away capacity at the far end of the pipeline.

Q: Producers are looking at multibillion-dollar pipeline projects to bring gas from the Mackenzie Delta and Alaska to southern consumers. How does Alliance view Arctic gas?

A: The Mackenzie volumes would be in the order of one billion cubic feet per day, although they can certainly increase from that, whereas Alaska is probably in the range of four billion cubic feet per day. The second thing is that the Alaskan gas is a much richer stream than the current Mackenzie Delta gas onshore, so the Alaskan gas certainly has a lot more synergies with our pipeline because of the richness of that gas stream.

Alliance, per se, is not involved in pipeline opportunities from the North down to the Alberta hub (a provincial government proposal to make Alberta the processing and extraction center for all Arctic gas). What Alliance is interested in is having someone bring the gas down to the Alberta hub, and where Alliance fits in strategically is being one of the players to move gas from the Alberta hub to market.

There's no doubt that there may be a number of players involved in the Alberta hub to market . . . but certainly Alliance is well positioned because geographically we have a straight line right down to the Midwest with high-pressure, rich gas. We have all of the competitive advantages.

Associate Editor: Robin Beckwith