A vote of confidence for Canadian gas
It’s been years since the natural gas industry in Western Canada looked optimistically at the U. S. market. The shale-gas explosion from American fields like the Marcellus and the Eagle Ford, with their low costs and proximity to customers, seemed too big a barrier for Canadians producers to overcome.
But Terrance Kutryk, president and CEO of Alliance Pipeline, a Calgary- based natural gas transporter, said local producers are bouncing back from the “brutal” conditions of the past half- dozen years to capture growing gas demand in the U. S. Midwest and beyond. It’s the reason his company announced plans this week to assess the feasibility of expanding its Alberta-to- Chicago system by 30 per cent, or by about 500 million cubic feet per day, to 2.1 billion cubic feet per day.
“Western Canadian producers aren’t just surviving, but are thriving,” Kutryk said in an interview at the company’s Calgary offices. “I look at our customer base … and they are awash in optimism.”
The improved outlook is due to rising demand created by fuel switching away from coal, petrochemical industry growth due to low gas prices, new exports of liquefied natural gas from U.S. plants that are creating room for Canadian gas. In addition, the massive Montney play straddling Alberta and British Columbia has proven to be highly competitive with U.S. plays, helped by advancements in drilling technologies and by low transportation costs.
Alliance did its part. As part of a major restructuring, the company reduced its tolls to $ 1.10 per thousand cubic feet, from $1.50, from Alberta to Chicago.
The transformation involved a 40 per cent cut in staff (to 356 people), greater innovation and adoption of a more customer- focused culture. For example, the company assumed revenue and cost risk by providing fixed tolls, departing from the industry standard based on cost recovery from shippers.
As a result, the pipeline, which had been at risk of losing the majority of its shippers when 15- year old contracts ran out in 2015, has been fully re-contracted.
Alliance was conceived by a group of producers in the late 1990s. They believed pipeline companies deliberately kept capacity tight, depressing Canadian prices versus U. S. prices. After controversial hearings before regulators, the producers were granted a permit and the 3,848- kilometre system was built at a cost of $ 4.2 billion and started moving gas in 2000. The producers eventually sold out and today Alliance is equally owned by affiliates of Enbridge Inc. and Veresen Inc. Alliance remains the only major longhaul pipeline that transports natural gas liquids — ethane, propane, butane, and pentane — within the methane gas stream.
Alliance is integrated with the Aux Sable natural gas fractionation plant, located at its end point near Chicago, which allows producers to ship liquids- rich gas rather than having to process it in Western Canada. The plant is also owned by Enbridge and Veresen and just completed a $130 million expansion.
Today the pipeline is enjoy- ing record financial performance and throughput, Kutryk said. According to filings in the U. S., Alliance’s income in 2015 was US$ 81.77 million. By the third quarter of 2016, Alliance had already surpassed that, with income of US$84.8 million.
Alliance is seeking expressions of interests for its growth plans, which involve adding compression facilities. The expansion could be completed by 2020. It’s too early to estimate the cost of Alliance’s expansion, Kutryk said.
“I am confident that we are going to fill that capacity, but we will test the market,” he said.
Alliance’s announcement comes after rival TransCanada Corp. said Monday it had an agreement to send an additional 1.5 billion cubic feet per day of additional Western Canadian gas to Toronto over the next 10 years.
In a report this week, Citi Research said Canadian gas is getting a lift from a revival of the oilsands, new pipeline deals and competitive costs.
The “positive developments … should allow Western Canadian gas to better defend its markets, which should keep net exports more robust than some have anticipated,” said the analysts, including Ed Morse. However, Canadian gas remains in a constant battle for market share due to abundant resources in North America and export growth would require new LNG projects on the West Coast, they added.
Growth has had been challenging due to growing competition from U. S. gas in Eastern Canada, forcing Western Canadian producers to look for new markets in Asia through exports of liquefied natural gas from British Columbia.
But the startup of a B.C. LNG i ndustry has been stalled by environmental op- position, slow government decision making and faster LNG build-up in other places, notably the U.S.
Even if LNG projects are eventually built in B.C., Alliance sees a role for itself as a place to transport gas to the U. S. until projects are ready to take supplies, Kutryk said.
“We know that the Chicago market will clear, and that is probably the No. 1 requirement that producers have,” he said. “Those other alternatives are, at this stage, not ready, so producers have to make their own bets about when those other alternatives will be ready.”
Indeed, Alliance’s shippers include Progress Energy Canada Ltd., the natural gas company owned by Malaysia’s Petronas whose plans to build an LNG plant near Prince Rupert remain uncertain.