Pipe toll charges linked to natural gas price dive
Western storage higher than last year
Prices for western Canadian natural gas are being undermined by rising tolls on the TransCanadaCorp. Mainline since a new tolling formula was put in place July 1, producers and financial analysts contend.
Gas prices usually rise in the winter heating season and fall in the spring but observers say a widening differential to U.S. prices this month suggests the price decline at the Alberta hub is also being influenced by market access forces driven by TransCanada tolls.
“What they’re doing is forcing the end-use customers in Eastern Canada to take out longer-term transport because they are moving the IT rates and the short-term firm service tolls to ridiculous levels,” charged Marcello Rapini, vicepresident of marketing at Calgary gas producer Perpetual Energy Inc., in an interview Tuesday.
“At one point they came out with an IT rate for winter at 1,200 per cent of firm. Like, how ridiculous is that?” he asked.
The spot price for natural gas produced in Western Canada and sold in Alberta, called the AECO-C price, does not include the cost of transportation.
That is paid by the end users which, in the case of the Mainline, are primarily utilities in Ontario and Quebec.
The New York Mercantile Exchange natural gas futures benchmark price, meanwhile, is based on delivery at the Henry Hub in Louisiana.
AECO for near month delivery closed at $2.69 per thou- sand cubic feet on Tuesday while NYMEX gas wound up at $3.74 per million British thermal units, a similar-sized unit of measure.
In a report, analysts at TD Securities said it appears Eastern Canadian buyers have been rejecting higher Mainline tolls and depleting gas storage reservoirs at that end of the pipe, leading to a glut of gas in the West that is reducing the AECO price.
“Since the beginning of July, the discount AECO trades at relative to Henry Hub has widened by over 40 per cent to 92 cents U.S. per mcf,” says the report authored by analyst Aaron Bilkoski.
“This compares with a threeyear trailing average of only 40 cents US per mcf”
TD predicts gas storage levels in Alberta could grow to 95 per cent of capacity by the end of the month, a record high that would be 25-per-cent higher than the five-year average for this time of year.
In contrast, storage levels at Dawn, Ont., are at 36-per-cent less than the five-year average, only 42-per-cent full, the report noted.
In a report Tuesday, FirstEnergy Capital made the same observation, noting that western storage is higher than last year at this time.
“The Empress, Alta., to Dawn, Ont., minimum interruptible bid toll floor has climbed from $2.08 per GJ in June 2013 to $3.12 per GJ (gigajoule, similar to an mmBtu) in July 2013,” wrote analyst Martin King.
“This increase in shortterm, uncommitted tolls on the Mainline could also be a factor in the seasonally low storage levels that we are seeing in Eastern Canada, as less gas may be getting to the region on the Mainline.”
The Mainline has been using only about a third of its six billion cubic feet per day capacity because of competition from growing Eastern U.S. shale gas production, said Stephen Clark, TransCanada’s senior vice-president, Canadian and Eastern U.S. gas pipelines.
He said that’s why it went to the National Energy Board two years ago to request changes to the tolling provisions that had driven its long-term takeor-pay contract rates to uncompetitive levels, making short-term contracts more attractive.
The NEB rejected TransCanada’s application to lower fees to attract more volume, instead setting a lower fixed toll through 2017 on longterm contracted transport from Empress to Dawn of $1.42 per GJ.
The NEB then gave TransCanada the right to set its own market-based prices for discretionary interruptible transport (IT) and short-term firm transport (STFT) to make up shortfalls.
“The decision the board came up with is not one that we sought or that we’re particularly keen on but we’re working with it,” Clark continued.
“The behaviours we’re using now are the ones we were instructed to deploy by the National Energy Board itself. They told us go out there, be competitive, maximize the revenue you can collect and cover your costs.”
Clark said TransCanada sets a floor price for available Mainline capacity and asks customers to bid.
If bids don’t meet the floor price, the capacity is left empty.
TD said the forward curve — the AECO price of gas committed to future deliveries — suggests wide differentials will persist for much of the rest of 2013 and will likely affect producer cash flows, naming Perpetual, Cequence Energy Ltd., NuVista Energy Ltd. and Birchcliff Energy Ltd. as some of the most exposed producers in Calgary.
Perpetual’s Rapini said he doesn’t see any way out of the current situation without regulatory action from the NEB, which could include more hearings over the Mainline’s future.
“We’re losing 40 cents a unit just based on their decision to price transport higher than what it should be based on a market-pricing scenario,” he said, noting the Alberta government is also losing royalties on the pricing shortfall.
He added the Mainline is the only choice for many shippers because alternative pipelines into the United States are currently full.
If the situation doesn’t change, western Canadian producers could lose Eastern customers as they find alternate suppliers, Rapini said.
NEB spokeswoman Tara O’Donovan said Tuesday that the board’s rejection of the TransCanada appeal of the spring ruling ended that application but a new application for Mainline tariff changes has already begun and a hearing is scheduled for September.
The changes are partly related to TransCanada’s Energy East plan to eventually convert part of the system to transport oil, which it says would benefit existing shippers by cutting at least $1 billion from the main line’s overall rate base of roughly $5 billion.
A group of utilities including Union Gas Ltd., Gaz Metro and Enbridge Gas Distribution Inc. recently filed a complaint with the NEB accusing TransCanada of “unjust and unreasonable tolls and conditions of service imposed upon future access to short haul service.”
They also complained the Energy East plan would remove gas capacity and lead to higher tolls.