Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Energy–Regulatory, February 2009
Introduction and Background
On June 4, 2007, the Alberta Energy and Utilities Board (EUB) initiated an inquiry into the natural gas liquids (NGL) extraction business in Alberta (the Inquiry). Participation in the Inquiry was very broad including natural gas producers, pipeline owners and their customers, industry associations, owners of NGL straddle plants and fractionation facilities, petrochemical producers and governments, including the State of Alaska. The proceedings were extensive spanning 2007 and 2008. The main focus of the Inquiry was whether the existing convention for the extraction of natural gas liquids (NGLs) was equitable and in the best interests of the industry and the province.
Natural gas produced and delivered into the Alberta transportation system (the Alberta System) operated by NOVA Gas Transmission Ltd. (NGTL) is primarily methane but also often contains heavier hydrocarbons consisting of ethane, propane, butanes, pentanes and other molecules, all of which are referred to as NGLs. Extracted NGLs, when burned independently or used in a petrochemical process, have a higher energy value than methane and often attract a premium price even in excess of their thermal advantage over methane; this advantage is sometimes referred to as the liquid's "uplift value".
In the current regime, most natural gas producers sell their gas under the NOVA Inventory Transfer (NIT) trading system operated by NGTL which compensates gas sellers for the energy content of gas they deliver onto the Alberta System. In recent times, however, some market participants, especially producers, had begun to raise the concern that the NIT price does not fully recognize the uplift value that NGLs can attract.
On the NGTL Alberta System, the two most common types of transportation service are "receipt shippers" who deliver gas onto the pipeline at various receipt points throughout the province, and "delivery shippers" who own capacity to take gas off the system at Alberta border points. Much of the existing infrastructure for extraction of NGLs exists within "straddle plants" situated at or near the border points where the NGTL Alberta System leaves the province. As the Alberta NGL convention evolved over time, it had become the case that the delivery shippers contracted with the straddle plants for the value of NGLs extracted from the gas stream before it left Alberta. Although some of the upstream receipt shippers do engage in field extraction, the majority of the NGL extraction takes place at the straddle plants. Effectively, then, the NGL Inquiry was a contest between those who preferred the status quo (primarily the delivery shippers and the straddle plants), and the receipt shippers, concerning who should obtain the uplift value of NGLs extracted in the Alberta straddle plants.
Prior to the conclusion of the evidence being presented at the Inquiry, NGTL publicly announced its decision to seek a ruling that the Alberta System operated by NGTL should properly be under the jurisdiction of the National Energy Board rather than the provincial regulators in Alberta. Given that a significant aspect of the NGL Inquiry was to consider, and potentially change, the methodologies employed by NGTL relevant to the NGL extraction business, this announcement by NGTL led to challenges by some parties over the jurisdiction of the EUB to complete the Inquiry. The challenges were primarily brought forward by those opposing any change to the Alberta NGL extraction convention. Following a jurisdictional hearing by the EUB, as well as certain proceedings before the Alberta Court of Appeal, it was determined that the EUB had jurisdiction to complete the Inquiry and to issue recommendations for change to the Alberta NGL extraction regime.
The EUB Decision
Citing earlier EUB Decisions, the Board concluded, in part, as follows:
... [R]esource ownership should remain with the producer of the resource until the producer relinquishes ownership through a commercial contract. NGL are part of the natural gas resource produced from wells, and thus in the Board's view, the producers of natural gas have the right to the NGL entrained in the gas they produce until such time as they contract that entitlement to another party. Under the Current Convention, only an export delivery shipper has an entitlement to contract with respect to the extraction rights associated with gas being transported on the NGTL System.
...[P]roducers/receipt shippers do not have an opportunity under the Current Convention to realize an incremental value for extraction rights or to separately contract for the disposition of their proportionate entitlement to the NGL components of the Common Stream if they wish to sell their gas in the intra-Alberta market.
The "NEXT Model"
In the course of the Inquiry, NGTL had proposed a "receipt point convention", referred to as the "NEXT Model", which would monitor deliveries of NGLs onto the system at the upstream receipt point and compensate receipt shippers for their proportion of the total NGLs delivered onto the system using the Alberta reference price for NGLs. (The Alberta Reference Price is that which is used by the Alberta government for purposes of determining royalties on the specific NGLs produced from Alberta gas wells.) The EUB accepted that the NEXT Model successfully addressed many of the inequities in the Current Convention and recommended that it be brought forward as part of the NGTL tariff within three years. The EUB also recommended that NGTL should discuss with its stakeholders measures to facilitate the development of take-in-kind rights under the NEXT Model as well as other implementation procedures. By way of further recommendation, the EUB also suggested that ATCO Pipelines and AltaGas Utilities work with their stakeholders on the appropriateness of extraction conventions on those pipelines. Significantly, and partly with a view to attracting Northern gas volumes (Alaska and Mackenzie Delta) to the Alberta trading hub, the Board recommended:
... [T]hat NGTL should take immediate steps to encourage the development of a competitive, transparent NGL extraction rights market.
The full Inquiry Decision is extensive and contains considerable background on such matters as the long-term energy outlook for the province of Alberta, guidelines for future development of extraction facilities in the province, comments on jurisdiction as well as a full discussion of the history and operation of the NGL business in Alberta. Copies of the Decision are available temporarily on the EUB website at http://www.auc.ab.ca/applications/decisions/Decisions/2009/EUB2009-009.pdf or through Blakes.
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