BUSINESS

OPENING THE TAP

PRESSURES ARE MOUNTING TO INCREASE EXPORTS OF CANADIAN NATURAL GAS TO U.S. CUSTOMERS

JOHN DeMONT February 26 1990
BUSINESS

OPENING THE TAP

PRESSURES ARE MOUNTING TO INCREASE EXPORTS OF CANADIAN NATURAL GAS TO U.S. CUSTOMERS

JOHN DeMONT February 26 1990

OPENING THE TAP

BUSINESS

PRESSURES ARE MOUNTING TO INCREASE EXPORTS OF CANADIAN NATURAL GAS TO U.S. CUSTOMERS

Throughout the emotional debate over the Free Trade Agreement (FTA) in 1988, the Mulroney government’s message on energy was crystal clear: signing the agreement would not mean surrendering control of Canadian oil and natural-gas supplies to the United States. But now, critics of the agreement say that their worst fears are being realized. They say that the National Energy Board’s (NEB) power to determine Canada’s long-term gas needs is being eroded as a result of attacks from multinational energy companies and governments on both sides of the border. Says Maude Barlow, chairman of the nationalist Council of Canadians: “This is a tragedy. We will lose control over our own energy policy.” But, countered NEB chairman Roland Priddle: “Now is not the time for energy nationalism.”

This week in Washington, top U.S. trade

officials are expected to step up their attacks on the NEB at a regular meeting with their Canadian counterparts. And most western Canadian natural-gas producers and their provincial governments are jubilant at the prospect of

limiting the NEB’S power—what they see as the last major impediment to free access to the vast U.S. natural-gas market. The companies are backed by powerful allies in the Canadian government, which has already deregulated the petroleum sector and is now proposing to eliminate the NEB’S authority to rule on the export of electrical energy. At the same time, the NEB is under pressure from the U.S. government and U.S. utilities, which want unfettered access to Canada’s vast natural-gas supplies.

In a classic east-west Canadian confrontation, the energy-consuming provinces of Ontario and Quebec, along with the natural-gas distribution companies, are leading the battle against the gas producers. The consumers are concerned about maintaining a long-term supply of cheap natural gas. And they warn that Canadians could face higher bills to heat their homes in order to pay the cost of shipping natural gas south to the United States as well as higher domestic gas prices as a result of a gas supply shortage created by large exports. Last week, they won a partial victory when the Federal Court of Canada ruled in favor of 64 major industrial gas users, ordering the NEB to review its policy of allowing the gas transportation companies to pass on their construction costs to all consumers.

The NEB, the agency at the centre of the growing storm, was created in 1959 when the Diefenbaker government passed legislation establishing the federal regulatory tribunal to ensure that exports of oil, natural gas and electricity were “in the public interest.” The legislation gives the NEB the right to determine whether exports are in the strategic interests of the country. In 1960, in its first major decision, it ruled in favor of

I ^ exporting natural gas, but only if a 30Ip year natural-gas reserve was maintained. The NEB effectively cut its reserve requirement to 25 years in

.0 1966, and for the next 20 years that

II remained the key test governing natural-gas exports.

But since the election of the Mulroney government in 1984, the NEB’S role has changed, and it has supported the government’s drive to deregulate the oil-and-gas sector. As part of this initiative, Ottawa asked the NEB to loosen its strategic reserve requirement, a policy that had slowed exports by forcing the gas industry to maintain the 25year surplus of natural gas. Said Priddle, who was appointed by Prime Minister Mulroney in 1986: “The NEB has undergone striking revolutionary change. I take the view that a regulator has to take into regard the general political environment.”

Priddle, a 56-year-old former assistant depu-

SOURCE: NATIONAL ENERGY BOARD

ty minister for the department of energy, mines and resources, responded to the government’s new market-based policy by cutting the reserve period to 15 years. But because the reserve requirement could create an artificial gas-supply surplus that, in turn, would reduce prices, Marcel Masse, then energy minister, asked Priddle to review the reserve issue once more.

Following the review in 1987, the NEB agreed to replace the reserve requirement with what the board terms a “market-based export procedure.” Under this complex procedure, the approved natural-gas export price has to meet a benefit-cost test based on whether the price charged covers the cost of exploring for new reserves and bringing them to market. Now freed from the reserve requirement, exporters hope to be able to sell more gas in the United States. Said Priddle: “The NEB has become an agency that helps make things happen, and helps the market work.”

Under the former 15-year reserve formula and the new benefit-cost test, shipments of natural gas to the United States have almost doubled over the past four years to 1.3 trillion cubic feet annually—worth about $3 billion. The new exports amount to about 37 per cent of Canada’s annual production and about two per cent of established reserves. But after giving a green light to all natural-gas export proposals in the past four years, the NEB surprised observers in November when it rejected four applications to move 533 billion cubic feet of Canadian natural gas to the northeastern United States. The board ruled that the proposals failed to meet its benefit-cost test.

The ensuing industry and political outcry over the rejections has led to an NEB review of the critical test, which is expected to be completed by the middle of March. So far, about 100 submissions from industry and governments have been submitted to Priddle, and— with the exception of those submitted by the Council of Canadians, the Ontario government and the gas distribution companies—most of these want the test thrown out. In their briefs to Priddle, such energy-sector executives as James Gray, executive vice-president of Calgary-based Canadian Hunter Exploration Ltd., say that the free market should be the only mechanism setting energy prices.

And the petroleum industry also has the support of federal Energy Minister Jake Epp, who told Maclean ’s that the Canadian natural-gas industry would be healthier if it were able to sign a large number of contracts on both sides of the border, rather than being forced to rely heavily on marg kets in Ontario and Quebec. While Epp declined to set out his view of the longterm future of the NEB, he made it clear that he supported moves towards a more fully integrated North American market. Said Epp: “It’s better to have a multiplicity of customers spread across our border.”

And the NEB’s powers are also being reduced on another front. The Tories have introduced legislation, now before the Senate, that will make it quicker and easier to issue licences to export electricity. Under the proposed law, the NEB would leave export decisions largely to provincial governments. The move is in keeping with the NEB’S new role as a utilities regulator in a virtually free energy market, as opposed to its previous role as an energy-export watchdog. Said Priddle: “If you allow prices to move freely, energy markets work.”

As well, in addition to its changing role under the Conservatives, the NEB is also facing a significant court challenge to its powers. Three Calgary companies, Western Gas Marketing Ltd., Shell Canada Resources Ltd. and Direct Energy Marketing Ltd., and Chicago-based Indeck Gas Supply Corp. are appealing the NEB’s November export refusal to the Federal Court of Appeal. They argue that the benefitcost test in effect imposes a minimum price, something that is prohibited under the FTA.

And another challenge to the NEB’s remaining powers may come this week in Washington at a biannual meeting of top U.S. and Canadian trade officials. The U.S. officials are expected to argue that some of the board’s decisions have clearly violated the FTA. Some even say that they believe that government may be using the NEB’s benefit-cost test to effectively set a minimum price on gas exports. John Easton, the U.S. department of energy’s assistant secretary for international affairs and energy emergencies, says that the United States will detail its concerns surrounding the NEB and free trade at this week’s meeting in Washington. “It promises to be lively,” said an official at the U.S. department of energy.

But as the attacks on the NEB mount, some groups are rushing to the board’s defence. Nationalists such as Barlow are outraged by what they see as a giveaway of Canadian resources without establishing reserves for future Canadians. She says that her 16,000-member group would like to see the original powers of the NEB reaffirmed so that it can protect the ability of Canadians to control their own natural resources. “The benefit-cost test is the sole tool it has to stop the exploitation of our natural gas.”

And the Ontario government and natural-gas distribution companies are concerned that doing away with the benefit-cost test could eventually lead to a supply shortage for eastern Canadian natural-gas consumers. Said Robert Martin, president and chief-executive officer of Torontobased Consumers’ Gas Co. Ltd., which serves over one million customers in Ontario, western Quebec and northern New York state: “Emasculating the NEB by taking away the benefit-cost test would not be in the public’s best interests.” Added Ontario Energy Minister Lyn McLeod: “Without the test, it remains to be seen whether the NEB can live up to its mandate.” But with Priddle’s belief in the free market now dominating the NEB, the future of the benefit-cost test is clearly in doubt.

JOHN DeMONT with WILLIAM LOWTHER in Washington, JOHN HOWSE in Calgary and DAVID HATTER in Ottawa

WILLIAM LOWTHER

JOHN HOWSE

DAVID HATTER