Natural Gas Pipeline Regulation: Natural Gas Pipeline Regulation: - - PowerPoint PPT Presentation

Natural Gas Pipeline Regulation: Natural Gas Pipeline Regulation: Costs and Benefits of the Costs and Benefits of the Canadian Approach Canadian Approach

Glenn Booth Chief Economist National Energy Board Gold Coast, July 2004

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Outline Outline

• 1. Mandate and Goals of the NEB
• 2. Canadian natural gas market
• 3. Economic objectives of pipeline regulation:

framework for assessing costs and benefits

• 4. An assessment of the Canadian experience
• 5. Conclusions

Note: All views expressed in this talk are mine and do not

necessarily express those of NEB Board Members

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Mandate of the National Energy Board Mandate of the National Energy Board

Regulate interprovincial and international

pipelines: construction, tolls, terms of service, environmental & safety considerations

Regulation of gas, oil & electricity exports Monitoring of Canadian energy markets Created in 1959 Located in Calgary, Alberta

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Rocky Mountains from Calgary Rocky Mountains from Calgary

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National Energy Board Goals National Energy Board Goals

1)

NEB-regulated pipeline facilities are safe and perceived to be safe

2)

NEB-regulated pipelines are built and operated in a manner that protects the environment and respects the rights of those affected

3)

Canadians derive the benefits of economic efficiency (from pipeline regulation)

4)

The NEB meets the needs of the public to engage in NEB matters

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2001 Worldwide Natural Gas Reserves 2001 Worldwide Natural Gas Reserves

100 200 300 400 500 600 700 800 900 1000 C a n a d a U . S . W . E u r

• p

e A l g e r i a N i g e r i a I r a n Q a t a r F a r E a s t C h i n a M a l a y s i a A u s t r a l i a

Tcf

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2001 Worldwide Gas Production 2001 Worldwide Gas Production

10 20 30 40 50 60

Argentina Canada Mexico U.S. Netherlands Norway U.K. Russia Other FSU Algeria Iran Saudi Arabia Australia China Indonesia Malaysia

Bcf/d 5 10 15 20 25

Percent of Total World Production

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Top Gas Producers, 2001 Top Gas Producers, 2001

500 1000 1500 2000 2500

E n C a n a B u r l i n g t

• n

D e v

• n

C N R L B P T a l i s m a n E x x

• n

M

• b

i l P e t r

• C

a n S h e l l H u s k y I m p e r i a l R i

• A

l t

• C
• n
• c
• A

n a d a r k

• P

e n n W e s t A p a c h e P a r a m

• u

n t C h e v r

• n

M u r p h y E n e r p l u s

MMcf/d

2 4 6 8 10 12 14 16

Percent of Total Canadian Production

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Major Natural Gas Pipelines in Canada

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Early Development of the Gas Industry Early Development of the Gas Industry

Large finds of oil in western Canada in 1947

and 1950s: gas found in solution

Natural gas was largely a by-product of oil

production or an accident of oil exploration

With no pipeline out of Alberta, gas was

“trapped”

Producers were willing to sell gas very

cheaply

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Challenge: Bring Gas to the Market! Challenge: Bring Gas to the Market!

All you need is a pipeline So what’s the problem? Where’s the market

failure?

It’s the “hold-up” problem

Once a specific large capital investment is made, each party

has an incentive to renegotiate the terms of the contract

Shippers can threaten by-pass, search for alternatives Pipeline can try to extract monopoly profits

Result: high risk and uncertainty

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Primary Purpose of Regulation Primary Purpose of Regulation

Regulation reduces the uncertainty and

risk associated with a huge capital outlay:

Restricts entry and thereby protects the

• riginal investor

Reduces costs associated with contract

negotiation

Reduces risk and thereby reduces overall cost

• f financing

Creates an incentive to invest and provide

the desired service

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Secondary Purpose of Regulation Secondary Purpose of Regulation

Granting monopoly franchise creates need

to:

Protect shippers against monopoly abuses Ensure right to be served Regulate prices

All of these activities will result in “second

best” outcomes (but are they also second level objectives?)

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NEB Economic Regulation Objectives NEB Economic Regulation Objectives

1)

Ensure adequate pipeline capacity is in place

2)

Ensure that pipeline system provides shippers with desired services at reasonable cost

3)

Ensure that pipelines are financially viable

(are able to raise adequate capital to maintain system and finance expansion)

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Adequate Capacity Adequate Capacity

Belief that a little too much capacity is

much better than too little

Key measures of adequate capacity:

Basis differential between markets Capacity utilization factors

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Upstream Gas Spending and Export Revenues Upstream Gas Spending and Export Revenues

• vs. Transmission Expenditures
• vs. Transmission Expenditures

10 20 1999 2000 2001 2002 $C Billions Upstream Gas Drilling & Equip. Spending Canadian Gas Export Sales Revenues Transmission Facilities Spending

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Gas Cost Components Gas Cost Components1

1 ($/GJ)

($/GJ)

1 2 3 4 5 6 7 Field Gate Price Intra-Alberta Transportation TCPL Transportation to Dawn Distribution

1 Average cost components to Toronto industrial consumer in 2003

TransCanada Transmission Mainline TQ&M Westcoast Kern River Northwest Northern Border TransCanada Alberta (NGTL) NGPL ANR ANR El Paso PG&E SoCal PGT Texas Eastern Panhandle Algonquin Transcontinent al ANG/ Foothills NGPL Northwest Foothills El Paso Transwestern Trailblazer M&NE CNG IroquoisPNGTS Alliance Lakes Great

North American North American Gas Pipeline Grid Gas Pipeline Grid

Key Pricing Point for Canadian Gas NYMEX AECO-C Sumas Dawn

• St. Stephen

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Importance of Adequate Capacity Importance of Adequate Capacity

0.00 0.10 0.20 0.30 0.40 0.50 0.60 1995 1996 1997 1998 1999 2000

Basis Differential (Daw n- HH) ($US/M cf)

200 400 600 800 1000 1200

Intra-AB Sales Volum e (Bcf) Basis Differential (Dawn - Henry Hub) Intra-AB Sales Volume (Bcf)

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Example: Benefits of Adequate Capacity Example: Benefits of Adequate Capacity

Difference in basis differential = roughly $0.40 Minimum:

800 Bcf (intra-Alberta sales) x $0.40 = $320 million

Maximum:

5.8 Tcf (all sales) x $0.40 = $2.3 billion/year

$2.3 billion better estimate of “deadweight” losses

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Start up of Alliance

0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1997 1998 1999 2000 2001 2002 2003 2004

TransCanada Alliance

Competition and Canadian Gas Pipeline Tolls Competition and Canadian Gas Pipeline Tolls

($/ ($/Mcf Mcf) )

Year Cost of Transportation from Alberta to Ontario

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Cost of Competition and Excess Capacity Cost of Competition and Excess Capacity

Cost = extra cost of capacity as reflected

in higher tolls

Approximately $0.20/Mcf Cost = 5.0 Tcf (ex-Alberta sales) x $0.20 =

$1 billion/year

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Costs of Too Much Capacity Costs of Too Much Capacity

• vs. Inadequate Capacity
• vs. Inadequate Capacity

Annual Cost of Inadequate Capacity:

$320 million to $2.3 billion/yr

Annual Cost of Excess Capacity:

5.0 Tcf (ex-Alberta sales) x $0.20 = $1 billion/yr

Is it a wash?? We don’t think so!

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Full Costs & Benefits of Full Costs & Benefits of Inadequate vs. Adequate Capacity Inadequate vs. Adequate Capacity

Costs

Foregone sales revenue Foregone royalties Inefficient allocation of

supply

Negative signal to

upstream investors Benefits

All gas/oil receives full

market value

Maximization of royalties Efficient allocation of

supply

Positive signal to upstream

and downstream investors

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Implicit Alberta to Ontario T Implicit Alberta to Ontario T-

• Value

Value

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 7

• 1

7

• 3

7

• 5

7

• 7

7

• 9

7

• 1

1

$US/Mcf

TCPL FT & Fuel Monthly Basis Daily Transport + Fuel Daily Basis

Jan 2002 - June 2004 (by month) (July daily)

26 0.800 0.900 1.000 1.100 1.200 1.300 1.400 1.500 1.600 1.700 1.800 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Normalized level TransCanada PipeLines Westcoast Energy Inc. Consumer Price Index

Gas Pipeline Tolls and the CPI Gas Pipeline Tolls and the CPI

(Normalized to the Year 1991) (Normalized to the Year 1991)

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Are Services Meeting Shippers’ Needs? Are Services Meeting Shippers’ Needs?

Services on TransCanada:

Long-term firm, short-term firm Biddable interruptible Parking and loans Multiple delivery points, multiple “handshakes” Firm and interruptible backhaul Active secondary market – efficient allocation

Services on Alliance

NGL transportation in gas stream Authorized overrun service (free overrun)

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What do Shippers Think? What do Shippers Think?

NEB is requiring pipelines to survey their

shippers

NEB has designed questions on:

Satisfaction with service Satisfaction with value for service Satisfaction with NEB’s role

First results to be received for 2004 We also informally meet with shippers

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Financial Integrity: DBRS Debt Ratings Financial Integrity: DBRS Debt Ratings

Superior Good Adequate Speculative Highly Speculative Investment Grade Enbridge Alliance TCPL WEI M&NP Terasen A (high) A (low) A A (low) A A (low)

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Financial Viability of Financial Viability of Cdn

• Cdn. Pipelines

. Pipelines

Return on equity determined by formula

Currently 9.56%

Deemed equity components from 25 to 35% Low by international standards Possible due to stable regulatory framework Lower ROE and equity components translate

into lower tolls

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Conclusions (1) Conclusions (1)

Regulation has placed emphasis on adequate

infrastructure

Canada has a strong natural gas & oil pipeline

infrastructure enabling it to transport about $100 billion of product annually

Large investment in upstream, putting Canada

as 3rd ranked gas producer in world

Upstream investors have confidence in

infrastructure

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Conclusions (2) Conclusions (2)

Tolls have increased with introduction of

competition

Satisfaction with services is under study Pipeline sector is financially viable

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Conclusions Conclusions -

• Final

Final

Bottom line is that you need to know your key

• bjectives

We believe we have met the key objectives Canada has an efficient pipeline infrastructure

that is meeting the needs of Canadian producers and buyers

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NEB website www.neb-one.gc.ca gbooth@neb-one.gc.ca

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TransCanada TransCanada PipeLines PipeLines Revenue Requirement Items Revenue Requirement Items

2003 Actual Return Depreciation Transmission by Others OM&A Costs Income Taxes Municipal and Other Taxes Gas Related and Electric Costs Other

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5 10 15 20 1960 1970 1980 1990 2000 2010 Bcfd

Gas production from WCSB Gas production from WCSB