From vision to reality
In the mid-90s, pipeline takeaway capacity was a major issue for western Canada's natural gas producers. Restricted capacity on the pipeline network taking gas to market forced producers to compete with each other and weakened wellhead prices.
As a result, producers were obliged to sell their natural gas - methane typically containing varying amounts of natural gas liquids such as propane, ethane, butane, and pentane - at a significant price discount compared to what was being earned in U.S. Midwest markets. Bottlenecked gas and depressed prices also meant that the resource owners - British Columbians and Albertans - were losing out on billions in royalty payments.
Although limited export capacity was a chronic headache, there wasn't enough competition in the gas transportation business to force a change, and existing pipelines were not adding new capacity fast enough to suit producers.
With so much at stake, a lot of people were looking for a solution, including John Lagadin and Glen Perry. The two worked at Direct Energy Marketing Limited, which bought gas from producers, arranged transportation and sold it to end users. By 1994 it had been 10 years since John had founded the company and now, as President and CEO, he was looking for a new challenge. "I enjoy the pioneer stage of doing things," says John.
Most people would have been more than content with a company the size of Direct Energy Marketing, but for John, starting a new business was more fun than running one. He had his "light bulb moment" that would lead to the creation of Alliance Pipeline when talking with Glen, who was head of Direct Energy Marketing's planning function, a mathematician by training and a visionary entrepreneur by nature. The idea came out of one of their recurring discussions about the need for a new natural gas pipeline between western Canada and Chicago.
It wasn't a new topic. The concept had been kicked around for years at industry functions, golf courses and restaurants; someone was sure to bring it up whenever Calgary's oil and gas patch people got together. In fact, Glen and Steve Haberl, a business associate from Sceptre Resources, had sketched a pipeline route on a pub napkin over a few drinks after work two years previously. The pipeline viability was assessed from several angles, but even though the economics were generally favourable, a marginal risk / reward equation made it a tough sell.
Building a massive 3,700 kilometre-long greenfield pipeline would constitute a multi-billion dollar venture. There were routing and construction expenses to consider, the cost of building processing facilities to strip out natural gas liquids (NGL) and transport them away for separate sale, and the challenge of obtaining regulatory approvals. Although commodity prices were significantly better at the southern end of the prospective pipeline in the U.S., the financial upside of moving dry gas - natural gas minus the NGL - was still slim.
As the two men talked, a thought occurred to John. If one could imagine the wellhead as being at the Chicago market hub, which had ample appetite for both methane and NGL, upstream costs to strip out the NGL could be avoided. But doing that would mean transporting liquids-rich "mixed gas", and the belief at the time was that the NGL first had to be stripped out.
That conundrum led to the second and most original part of John's inspiration: maybe the NGL could be kept within the gas stream. "The idea was to pack the molecules closer together and deliver more BTUs at less cost to the marketplace," says John. That's the thinking John got behind - and bankrolled. As 80 percent owner of Direct Energy Marketing, he had the ability to pull together the kind of expertise and money it would take to see if the idea had merit.
So it was 1994 when John asked Glen and a team of experts to investigate whether transporting mixed gas - natural gas and NGL together - under high pressure was feasible. They found that it was not only feasible, but in fact transporting mixed gas at higher pressures improved transportation efficiency, and therefore improved the transportation economics. Would it make financial sense? The numbers said it did, so John, Glen and their small but ambitious team (that would soon include industry veteran Jack Crawford and engineer and hydraulics PhD Ian Morris) started shopping the idea to producers with headquarters in Calgary.
The project took a lot of selling because proponents were squaring off against TransCanada Pipeline and Nova Corp., an oil patch Goliath that moved 80 percent of Canada's natural gas. Lagadin, Perry and Crawford presented their plan 150 or more times to different producers. Eventually they had enough believers and, in 1995, 22 producers formed an alliance and sponsored a $2.5 million feasibility study.
The Northern Area Transportation Study, or NATS, that was delivered on Christmas Eve 1995 would eventually lead to the producers backing the project with 15-year take-or-pay contracts worth $12 billion.
In February 1996, the CEOs of the 22 NATS sponsors and the Lagadin team met and made the decision to advance the building of the pipeline. A committee was set up to hire an Alliance Chairman and its first President and CEO. Lawyer and senior executive Norm Gish was brought in as Chairman, while Dennis Cornelson from Alberta Energy Co. was chosen as President and Chief Executive Officer.
The startup company began recruiting at a frantic pace. Skilled and energetic people were needed to undertake the monumental job of developing the necessary Canadian and U.S. regulatory filings. There were construction, procurement and logistics plans to develop along with all the engineering, environmental impact assessments, public consultation and countless other tasks that underpin these applications.
Alliance launched its first open season in September 1996 to secure shipper commitments for transporting 1.325 billion cubic feet per day. When the open season ended in early November, 120 shippers had participated, subscribing to 98 percent of firm capacity.
Alliance filed its regulatory application with the FERC on December 24, 1996 and its regulatory application with the NEB on July 3, 1997. The FERC approval came down September 17, 1998. Following what was, at the time, an epic NEB regulatory review process, with more than 3,000 Information Requests and a 77-day public hearing, the NEB granted Alliance Pipeline a Certificate of Convenience and Necessity December 3, 1998.
The pipeline construction teams - involving more than 7,000 workers at the height of the project - could now break ground on one of the biggest construction projects going on in North America at the time. In just two years, on December 1, 2000, Alliance Pipeline went into service.
Natural gas royalty payments in Alberta alone jumped from $2.4 billion in the 1999/2000 period, prior to Alliance going into service, to $7.2 billion in the 2000/2001 period, Alliance's first year of operation. Over the same 12-month time span, the price producers could fetch for their gas once Alliance was running went up from $2.66 per million cubic feet (mcf) to $6.07 per mcf. Alberta's natural gas royalties fluctuated, but over the next decade were always at least twice what they had been pre-Alliance.
There is much about Alliance Pipeline's evolution from a tiny feasibility study team to a modern, safe and efficient operating company that sets it apart. It includes a certain audacity among the founding team as they hatched, refined and pitched an idea for a multi-billion dollar, large-scale international project that a lot of people said would never happen; the technical inventiveness and commercial shrewdness of that initial band of visionaries who identified the value in keeping the NGL in the gas stream all the way from western Canada to Chicago (where it could be separated out at the Aux Sable processing plan and sold separately); and, in the end, the go-for-broke determination of the original employee-partners of Alliance who worked together so diligently to make it happen.