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November 2007

Vol. 12, No. 45 Week of November 11, 2007

TransCanada eyes larger role

CEO Hal Kvisle ‘enthused’ about Mackenzie Gas Project being based on ‘flat-line’ gas outlook in Alberta; offers TransCanada’s expertise to build and operate the C$7B natural gas pipeline

Gary Park

For Petroleum News

Worried about declining natural gas production in Alberta, TransCanada Chief Executive Officer Hal Kvisle is making no secret of his company’s eagerness to expand its role in the Mackenzie Gas Project and get gas out of the Arctic.

That could include relieving the anchor gas producers of the estimated C$7 billion cost of building a pipeline along the Mackenzie Valley, while they spend billions of dollars developing reserves and processing facilities on the Mackenzie Delta, he told a conference call Oct. 30.

Kvisle was asked to deal with rumors that TransCanada would be open to building and operating the main pipeline if the economics of construction and operation don’t work for the four gas producers, whose rate-of-return expectations could surpass those of a pipeline company.

He said the MGP partners are “examining every alternative to come up with a toll that makes it attractive to the producers.”

“We’re discussing a whole range of different things and TransCanada has always been willing to contribute as best it can,” Kvisle said.

“We have a lot of construction expertise in building pipelines; we have a lot of cold weather expertise and a very good working relationship with the producers and the Aboriginal Pipeline Group. We’re working together to bring this project to fruition and that’s all I can say.”

Just three months after putting out word that TransCanada would sooner have a “larger interest than a smaller one” in the C$16.2 billion venture, he also gave an upbeat assessment of the project’s viability.

Kvisle told an Oct. 30 conference call TransCanada could single-handedly build and operate the proposed C$7 billion Mackenzie Valley pipeline like any other regulated Canadian pipeline.

He said Canada’s largest pipeline company is able to look a “little more optimistically” at the MGP, typically portrayed as a beleaguered undertaking, because he doubted anyone “would be more aware than us of the challenges of sustaining gas production in Alberta.”

For years, TransCanada has pointed to weakening performance in the Western Canada Sedimentary basin.

In early 2004, it said long-haul firm contracts dropped 78 percent in the previous six years, while short-haul contracts rose 1,421 percent, warning that near-term gas supplies from the basin could no longer meet intra-Alberta demand and fill all pipeline capacity out of Alberta.

Slump in output forecast

If anything, other forecasters have pointed to an even bleaker outlook for Western Canada, including the National Energy Board’s latest forecast that Canadian gas volumes could slump 7-15 percent over the next two years and Ziff Energy Group’s prediction that exports to the United States will dive to 5.9 billion cubic feet per day by 2015 from 10.1 bcf per day in 2005.

Kvisle said TransCanada now sees “roughly flat line production in Alberta and significant growth in demand, which sets the stage for higher prices.”

He said that scenario is likely to unfold across North America, bolstering the demand for both liquefied natural and gas from the Arctic regions.

“That would be the fundamental reason we remain enthused about (the MGP),” Kvisle said.

Commenting on recent bullish forecasts of gas production growth in North America, he said they overlook the “inexorable decline from our base producing sources in all parts of Canada and the United States.

He has been one of the strongest voices warning that if social and regulatory issues become too complicated, the MGP could become more trouble than it is worth.

“But at this point we remain optimistic that we can pull all the details of this project together,” despite efforts stretching over three decades.

“The challenges continue to be significant, but all parties are engaged and all parties are working on it,” he said.

Whether the MGP is economic currently depends on the outlook for gas prices, production rates from the Mackenzie Delta and how much other gas is available from the region, he said.

“If you use today’s gas prices and the very highest cost estimates that have been generated for it, I think you’d have to question the economic viability,” Kvisle said.

TransCanada’s role in the MGP includes covering the regulatory costs faced by the Aboriginal Pipeline Group, which is entitled to a 33.3 percent equity stake in the pipeline.

If a decision is made to proceed with the MGP, TransCanada has an option to acquire 5 percent of the anchor capacity (currently estimated at about 830 million cubic feet per day) and up to 50 percent of all or part of any interests sold by the anchor producers, Imperial Oil, Royal Dutch Shell, ConocoPhillips and ExxonMobil Canada.






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