BUSINESS/ECONOMY

The billion-dollar gas debate

Ian Austen July 30 1984
BUSINESS/ECONOMY

The billion-dollar gas debate

Ian Austen July 30 1984

The billion-dollar gas debate

BUSINESS/ECONOMY

Ian Austen

Natural gas, the commodity that brought Canadian companies $3.9 billion in export earnings last year, was at the centre of two crossborder battles between Ottawa and Washington last week. On one front Canadian gas producers were cautiously optimistic. The U.S. federal energy regulatory commission reversed a decision that would have created turmoil in the market by not allowing U.S. utilities to

continue to pass on to American consumers the cost of Canadian gas that they had contracted to buy but which they now cannot sell because of weak demand. At the same time, another dispute—with much larger financial implications—was emerging between Toronto-based TransCanada PipeLines Ltd. and two U.S. consortiums over three new competing pipeline plans to carry more than $1.2 billion (U.S.) worth of Alberta gas to markets in the central and eastern United States each year.

The apparent backtracking by the U.S. officials on the gas-import issue followed some high-level diplomatic arm-twisting. On June 29 Canada’s ambassador to the United States, Allan Gotlieb, voiced Ottawa’s complaints at a

meeting with U.S. state department officials. Four days later Canadian energy officials met with their Washington counterparts to put Canada’s case again. Gas producers were confident last week that the efforts had been successful, but James Wright, an energy expert at the Canadian Embassy in Washington, cautioned that the full details of the U.S. energy board’s complex ruling will not be known until the board releases its full written decision later this month.

For one thing, although Ottawa hopes

that U.S. buyers will be able to honor the existing “take or pay” contracts, it is still uncertain whether the commission’s rulings will effectively end similar contracts in the future. If so, there is little hope of any of the three new pipeline proposals going ahead, because the contracts are, in effect, the developers’ major loan collateral for new construction. As well, competition between the bids, which entail conflicting national interests, promises to be both testy and complex. “It is a maze,” said Wright. And a U.S. state department official declared, “It’s a barrel of snakes.” One of the main points of conflict: which country will enj oy the economic spin-offs from the pipeline construction. TransCanada proposes to spend $811 million

in Canada developing a largely Canadian route starting in Alberta, crossing to the United States at Niagara Falls, Ont., and ending in Pennsylvania. The two U.S. schemes for expansion, by contrast, would take place entirely in the United States.

Under its plan TransCanada PipeLines, which has several U.S. utilities as partners, would spend more than half of a $1.3-billion budget on upgrading existing Canadian pipelines to carry Alberta gas to the U.S. border at Niagara Falls.

That proposal, the company claims, would generate $190 million worth of pipe business for Canadian steel makers alone and as much as $2 million for the Canadian construction industry.

The two U.S. schemes would spend only about $87 million in Canada. That is because both would involve expansions of the the ill-fated FoothillsNorthern Border pipeline—a 1,600-km system from Alberta to Iowa completed in 1982 which was to have been the first leg of the long-dormant 7,500-km Alaska gas pipeline proposal. One plan, which InterNorth Inc. of Omaha, Neb., and Detroit-based American Natural Resources proposed, would extend the pipeline’s current end point of Ventura, Iowa, through Chicago to Leidy, Pa. The

other U.S. proposal, by Midcon Corp. of Lombard, 111., would build a relatively short link between the Foothills-Northern Border system and an existing pipeline that feeds into Chicago from states on the Gulf of Mexico. After construction Chicago would switch over to Alberta gas, and the product from the south would then go through a new pipeline system to eastern states.

The last two proposals have obvious attractions for the United States. Among them: the two systems could carry future gas finds in western states to the energy-hungry east, and the builtin-America approach suits Washington’s current protectionist mood. But both U.S. plans also have a major Canadian backer in the Calgary-based Independent Petroleum Association of Canada (IPAC), whose membership includes about 200 oil and gas producers. IPAC president Gwyn Morgan argues that because the Foothills-Northern Border pipeline carries only about 40 per cent of its capacity, it is one of the most uneconomic in North America. Morgan said that the pipeline’s inefficiency in turn is one of the factors retarding gas exports from Alberta. In an effort to win IPAC’S support, TransCanada has offered to put an extra 140 billion cubic feet of gas through the Foothills-Northern Border system each year, but that falls far short of the estimated flow of 312 billion cubic feet from Canada that either U.S. scheme would likely bring. Acknowledged Robert Hale, TransCanada’s manager of market development: “We have not really completely resolved that problem yet but we are working on it.”

In a separate development the feasibility of all three plans increased this month when the Canadian government took action on the long-standing complaint of western gas producers that the country’s export price of $4.40 per thousand cubic feet was too high. Now the producers can set whatever price they want, provided it does not drop more than 30 per cent below the old regulated level. Still, the current glut of natural gas in the United States is not expected to even out for at least two years.

The first major step in sorting out the rival pipeline bids will come in September when Ottawa’s National Energy Board and U.S. regulators begin separate hearings. In the likely event that the two countries choose different plans, a series of private bilateral government talks will be held to devise a solution. Said a U.S. state department official who did not want to be identified: “This is a difficult and complicated problem, and we will need to find a compromise. The final result might be quite different from any of ^he three plans as they now appear.”

William Lowther

With William Lowther in Washington.