Enbridge deal driven by bet on natural gas
Low-cost production in Marcellus headed for hungry U.S. markets
The proposed $37-billion acquisition of Spectra Energy Corp. by Calgary-based Enbridge Inc. announced Tuesday will substantially boost the company’s natural gas asset base, giving it a foothold in several critical North American gas markets.
The deal is part of a recent jockeying by major pipeline operators to grow their positions inside some of North America’s most promising gas fields, spurred in part by dwindling prospects for the transportation of “liquids” products, typically composed of crude oil.
“Our desire here is all driven by the fundamentals of natural gas and the future,” Enbridge CEO Al Monaco said in an interview. Enbridge plans to acquire Spectra in an all-stock deal for a combined enterprise value of about $165 billion, according to both companies.
The proposed acquisition comes just after TransCanada Corp., Enbridge’s main rival in the Canadian midstream space, closed its $13 billion purchase of Columbia Pipeline Group Inc. that boosted its position in the massive Marcellus formation in the Northeastern U.S.
Monaco said that perceived opportunities in the processing, distribution and storage of natural gas is a major part of the strategy of the deal, particularly due to the rapid increase of natural gas production in both the Marcellus and Utica formations and access to high demand markets in the Northeastern U.S.
“This is really critical infrastructure for people in the U.S. northeast,” he said. “That’s really a huge demand load that we’re really excited about.”
Upon completion of the deal, Enbridge would expand the total length of its long-haul natural gas pipelines to more than 30,000 kilometres, up from roughly 3,500 kilometres today. It would also add 300 billion cubic feet of natural gas storage capacity.
These include the 14,595-kilometre Texas Eastern Transmission system that supplies markets in the Northeastern U.S. from the Gulf Coast region, as well as smaller conduits such as the Maritimes & Northeast Pipeline system, which transports gas from Atlantic Canada to the eastern U.S.
The merger would also give the company better access to upstream assets in the Marcellus formation, which has seen production explode in recent years due to its low costs compared to other basins.
“The Marcellus really has changed everything,” says Samir Kayande, an analyst with RS Energy Group based in Calgary. “It’s a basin in which the resource quality is so high and the development cost is so relatively low that it will probably be the one of the cheapest sources of natural gas in the Lower 48 (states) for quite some time.”
That growth has kicked off a subsequent build-out of pipelines and other infrastructure in the area, with billions of cubic feet of pipeline capacity set to come online in the next few years.
“The Marcellus is an area that requires new pipes today, and there is growth already locked in today,” Kayande says.
Moreover, both companies see demand for Marcellus gas continuing to increase in the future, including in fast-growing markets like northern Mexico.
“As Mexican utilities start to use more and more gas they’re going to reach further and further into the market, including up to the Utica and Marcellus,” Spectra CEO Gregory Ebel said on a conference call with analysts.
“I don’t think there’s any doubt about the opportunities that are there. These assets, both on the Enbridge side and Spectra, are irreplaceable. You could not build those assets today.”
The expansion is part of a broader attempt by Enbridge to diversify its asset base amid lower oil prices and mounting pressure against major pipeline proposals, which continue to be stymied by opposition groups.
“If you’re not going to get growth out of the oilsands until oil hits US$60 or more, as we’ve been saying for quite some time, then what do you do to tide yourself over until oil hits a price at which you can get oilsands growth again?” Kayande said.
As part of the deal, Enbridge will also gain 2.9 billion cubic feet per day of capacity in the Montney formation in northern Alberta and British Columbia, which as faced stiff competition from Marcellus gas in recent years.