Languishing gas pipes seek lifeline

• In 1994, two marketers frustrated with limited capacity to export natural gas from Western Canada drew up plans for the 3,000-kilometre Alliance pipeline on a paper napkin. More than two decades later, the resulting project faces a shaky future.

Alliance, now jointly owned by affiliates of Enbridge Inc. and Veresen Inc., carries gas rich in petroleum liquids such as butane, ethane and propane from northeastern British Columbia to the Chicago region. Its owners are currently negotiating with shippers to replace existing transportation contracts set to expire in December 2015.

Without new commitments, industry analysts say the line is headed for a similar fate as TransCanada Corp.’s Canadian Mainline, which saw volumes plummet and transportation tolls spike as the U.S. shale boom undercut demand for Canadian gas in the New England, Ontario and Quebec markets.

“The Alliance system could be the next one to be repurposed out of Western Canada,” Ed Kallio, director of gas services at Ziff Energy Group, a division of HSB Solomon Associates LLC, said at an industry forum in Calgary this week.

Such a move is not being contemplated, owners of the Alliance system say. But old pipelines are increasingly finding new uses to accommodate fast-growing output from Alberta’s oil sands and shale deposits in the U.S. The dramatic rise in U.S. shale gas production has also redirected historic product flows, challenging the economics of pipelines that transport gas over long distances.

Enbridge this week said it would spend $7-billion to replace its Line 3 oil pipeline between Alberta and Wisconsin, nearly doubling capacity along an existing route to 760,000 barrels a day. Company officials promised a smooth regulatory ride for the project, although Moody’s warned the plan could face increased costs and delays as a result of “increased public, regulatory and political scrutiny.”

Rival TransCanada this week cemented plans to switch portions of its main line system to oil service, filing a project description for its Energy East pipeline with the National Energy Board and regulators in Quebec.

The project involves converting about 3,000 kilometres of existing 42-inch diameter pipeline — one of six tubes that comprise the crosscountry network — to carry growing production from Alberta’s oil sands and the U.S. Bakken to export points in Quebec and New Brunswick. Another 1,500 kilometres of pipe would need to be constructed, with deliveries commencing in 2017.

Energy East is a product, in part, of shifting market dynamics in Canada’s natural gas business. For years, the Mainline helped keep lights on and factories running in Eastern Canada and the Northeast U.S.

But that role was usurped by production from lower-cost shale zones like the Utica and Marcellus formations, which are located closer to consumers. TransCanada has already switched portions of its cross-Canada system to make way for its existing Keystone oil pipeline.

Owners of Alliance say their system remains an important path for exports of liquids-rich gas from Western Canada. Indeed, the partners this week announced a long-term supply deal with Encana Corp. and a subsidiary of PetroChina Co. Ltd. for up to 195 million cubic feet per day of rich gas from the companies’ Duvernay shale lands in Alberta.

The arrangement starts in July 2014 and runs through 2020, providing some optimism that more supplies will follow. The pipeline is currently running at full capacity of 1.6 billion cubic feet a day, Enbridge chief executive Al Monaco said last month.

The route to Chicago “continues to offer rich gas producers a compelling value proposition,” said Dan Sutherland, Alliance’s vice-president of business development. “The Midwest U.S. natural gas market’s appeal was recently highlighted by the price spike caused by the extreme cold snap.”

But Mr. Kallio predicts the cost of shipping gas on the system is bound to spike. He predicts flows will dwindle to 870 million cubic feet a day by 2020, making it uneconomic for producers to use. “We see the Alliance system as potentially having problems down the road,” he said.

The industry consultancy estimates Canada’s web of natural gas export pipelines is running nearly half empty, with 8.2 bcf/d of an available 15 bcf/d of capacity being used. The group forecasts volumes will fall to about 5 bcf/d by 2020 as output is soaked up by the oil sands — where gas is burned in large quantities as fuel — and potential liquefied natural gas exports ramp up on Canada’s West Coast.

The outlook stands in sharp contrast to the tight capacity on existing oil pipelines, which has contributed to see-sawing prices for Canadian crude and threatened growth prospects in the world’s No. 3 petroleum deposit.

“Gas drilling is down and oil drilling is up,” Mr. Kallio said. “We certainly don’t need more gas pipe.”