Producers seek boost through natural gas deal
Plan to use existing main line to reach southern Ontario market ahead of rivals
CALGARY Western Canadian natural gas producers could get a US$25 billion boost in revenues over the next decade with a pipeline shipping deal struck with TransCanada Corp. on Monday, analysts said.
TransCanada Corp. announced that domestic gas producers agreed to send 1.5 billion cubic feet per day more gas over the next 10 years between Empress, Alta., and Dawn, Ont., on its underused main line.
The move is intended to send more Canadian gas to the southern Ontario market before competing pipelines from Pennsylvania are built and crowd domestic gas out of the region. Analysts say the deal will also save producers in Alberta and B.C. billions of dollars of lost revenues from lower prices and a smaller share of the market.
Cameron Gingrich, Solomon and Associates director of gas services, said producers would have lost a major market without the deal, and the lack of a deal would have also caused AECO, Alberta’s natural gas benchmark, to drop an average of 19 cents per gigajoule and production from Western Canada to fall by 1.1 bcfd.
“The combination of lower production levels and the lower AECO price would end up with US$25 billion less in revenue for the Western Canadian basin,” Gingrich said. “That goes to producers in terms of business plans, that goes to the Crown in terms of royalties and there’s a multiplier effect on that in terms of activity in the region — the hotels, the food and the drilling.”
“This is as big as an LNG announcement in some ways because without this deal we would have seen a smaller Canadian natural gas industry,” said Jackie Forrest, ARC Financial Corp. vice-president
... Transportation has always been the ‘moose in the room’ given that we are far away from market and at the mercy of an oligopoly of pipeline companies ...
of research.
“All else being the same, if this deal didn’t go forward I would have expected this industry to shrink by 1.5 bcfd over the next few years,” Forrest said.
Eau Claire Energy Advisory principal Ed Kallio also said the deal would provide a boost to AECO pricing, which has fallen in recent weeks, for all domestic natural gas producers — even those that didn’t sign onto TransCanada’s new arrangement.
“It helps everybody,” Kallio said, adding, “If you’re clearing more gas out, there’s more demand at AECO to fill that pipe.”
TransCanada had previously failed to convince domestic gas producers to send more volume down the line, but Gingrich said smaller natural gas companies had since learned that American producers in Pennsylvania and Ohio were threatening their prices in both Ontario and Alberta and committed to the most recent lowercost proposal.
TransCanada president and CEO Russ Girling said in a release that domestic gas producers “are facing a much more challenging landscape than they have in the past” and the new agreement “helps our customers compete more effectively.”
ARC Energy Research Institute executive director Peter Tertzakian said in an email that Canadian gas is competitive with plays in the U.S. but “transportation has always been the ‘moose in the room’ given that we are far away from market and at the mercy of an oligopoly of pipeline companies to get the stuff to market.”
He said Monday’s deal brings competitive transportation prices to producers in the West, but gas producers might soon face the same pipeline constraints that oil producers currently face.
TransCanada will now need to seek regulatory approval for the new tolling arrangement from the National Energy Board and the company said it intends to apply for approvals by April.
The company hopes to have the new service agreements approved and in place by November, which is also when Energy Transfer Partners’ Rover pipeline is expected to be in service.
University of Calgary School of Public Policy executive fellow and former NEB chairman Gaetan Caron said the new tolling arrangement could be in place earlier than November.
“If they have a true, negotiated contract with their shippers, the board’s practice is that it will accept the uncontested settlement as evidence of the public interest of the justness and reasonableness of the tolls,” Caron said.
“It will do one loop of consultation with shippers,” he said, “and if the process shows transparency, inclusiveness and no violation of basic toll principles, it will typically endorse the tolls.”