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DEVELOPMENT OF SABLE ISLAND GAS

Development of the gas industry in New Brunswick will depend on a number of factors, including the price of alternative fuels, availability and accessibility of laterals, the cost to convert existing facilities to gas, the amount of capital available for investment, the general level of economic activity in the market area, and the level of uncertainty associated with government policy options. Several points, however, can be made regarding its likely evolution, based on industry experience.

There are natural stages for development of the industry in frontier areas.

First, there must be a discovery of commercially significant resources. Producers must determine that enough gas is available to justify the construction of production, processing, and offshore pipeline facilities.

Second, there must be an economical way to transport the gas to a market. Producers often form joint ventures with pipeline companies to construct the pipelines required to deliver the gas to market. Mobil, which is one of the major Sable Island producers, is also a major owner of the M&NE Pipeline, along with Westcoast Energy, a major Canadian pipeline and distribution company and Duke Energy, a major U.S. pipeline. The Sable Island development project and the M&NE Pipeline are both justified based initially on the New England market.

The third stage is construction of pipeline laterals to serve major industrial or anchor loads. The M&NE Pipeline has determined that it is economical to build a lateral to the Saint John area under the NEB-approved lateral policy. The proposed Saint John lateral is based on long-term contracts with transportation customers willing to pay the pipeline rate. However, the anchor load customers have stated that they are not willing to pay additional distribution charges. The ability to construct additional laterals to serve loads in the Northeastern and Northwestern parts of the province may be tied, therefore, to the ability of the Saint John lateral to provide revenues that can be used to support other laterals under the policy.

The final stage is development of LDCs that are directly connected to the main line or laterals. These distribution franchises tend to serve a large number of small customers. The key to establishing LDCs is to have a concentration of potential retail gas customers in an area where there is access to competitive supplies. Laterals constructed to serve large industrial loads may provide just such an opportunity to serve nearby population centers, which alone would not economically justify building the laterals.

The lateral proposed for the Saint John area would not be as economic if built outside the lateral policy because it would become an incremental cost added to the mainline transportation toll. But once the Saint John lateral is built, it becomes more economically feasible to establish a distribution company in the Saint John area to serve the residential and commercial markets. Beyond that, in order to be effective, the LDCs will need to convert customers from their existing fuels. This would be even more difficult if the LDCs had to pay for the cost of the lateral in addition to the cost of the mainline transportation.

Allowing direct access to large industrial customers would provide the opportunity for volumes on the laterals to flow as soon as they could connect to the end-users. This could also happen if single end-user franchises were permitted. Since it will take longer for the LDCs to develop their markets and attract load, this is an important factor in the economics of building and operating the laterals. Once the laterals are constructed, the LDCs could build their systems using the laterals as the backbone of their supply system and contract for additional gas as their loads grew over time.




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