Canadian producers selling gas to Western Gas Marketing Ltd., Calgary, face decisions on key options beginning this year.
Options include ending wellhead sales contracts termed decontracting-after a 4 year notice to Western or a reduction entitlement if total take under all of a producer's contracts with Western falls to less than 75%.
Paul Ziff, president of Paul Ziff & Co., Natural Gas Consultants Ltd., Calgary, considers the decontracting option the most significant event in the Canadian gas industry since market deregulation in 1985. He said many producers may take the opportunity to assume control over their gas and direct market it themselves.
Options to end or extend contracts are linked to the expiration date of each agreement. Some producers will face decisions as early as Nov. 1. Contract expiration dates in Western's pool presently run from 1994 to 2003.
Western, the marketing arm of TransCanada PipeLines Ltd., also of Calgary, has about 19 tcf of gas under contract.
Western and TransCanada serve markets in Central Canada and the U.S. TransCanada is involved in programs to sell and deliver western Canadian gas to new markets in the U.S. Northeast.
Western holds gas purchase contracts with 722 producers.
THE DECONTRACTING OPTION
John Maher, gas supply manager for Western, said decontracting is a misnomer. What the expiration provisions provide is reestablishment of a contract's expiration date.
Notice to retire an individual contract can be effective only when all prepaid gas is recovered under all the contracts to which the producer is a named party, including multiparty contracts.
Maher said the option to end a contract is a one-time decision that is not reversible.
"I think it is fair to say that exercising this option requires a degree of projection beyond the 4 year trigger period and a definite commitment for each contract under which notice is served," Maher said.
"Additionally, contract expiration will have two effects on supply in general. Real and projected rates for contracts remaining in the Western supply pool will rise, and remaining reserves to production projections may fall to a point that accelerates signing up new supply."
The reduction entitlement goes into effect on an annual basis after Nov. 1, 1994. It offers the producer the option to remove acreage and/or reserves from individual contracts or suites of contracts if the total take under all his contracts is less than 75%.
A CRITICAL YEAR
Western Pres. Craig R. Frew called 1990 a critical year for the company and its customers.
It is the first year in which producers can exercise the decontracting option. It also is the first year of potential price arbitration with Canadian distributors.
In addition, expiring long term contracts with U.S. customers have to be renegotiated, and TransCanada is seeking a major expansion of its pipeline capacity.
Frew estimated as many as 5% of Western's producers may serve the decontracting notice this year. Western is not facing decontracting of a large portion of its supply portfolio in any given year.
The Western president said the company is telling producers they are better off staying with their contracts. He noted the Western gas pool offers one of the largest supply aggregations in North America.
"At some time we will need to attract new supplies," Frew said. "However, our current focus is on retaining existing supply.
"Whether we wish to retain or attract supply we will be successful only if producers sell us gas because they wish to, not because they have to."
MAKING THE CHOICE
Richard Hilary, crude oil and gas manager for the Independent Petroleum Association of Canada, said some larger producers with their own marketing departments may choose to decontract, but smaller companies may want to stay with Western and its large gas pool.
Hilary expects a fairly small proportion-possibly 10% of Western's suppliers to decontract.
He pointed out that producers are facing decisions on options that will take effect in the gas market in 1994 and later.
Canadian Petroleum Association Vice Pres. Hans Maciej said CPA has not taken a position on decontracting because it is an individual corporate matter.
"I don't think you can say anything about this on a global basis," he said.
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