A milestone in the history of Canada’s natural gas industry is turning into a millstone.
TransCanada’s Mainline from Alberta to the big population centers in Eastern Canada, with extensions into the United States, has been a profit and job generator for the gas sector of the Western Canada Sedimentary basin for more than 65 years.
Those days could be winding down, reinforcing the grim messages over recent years from TransCanada and organizations such as the Canadian Energy Research Institute.
It’s a simple problem. Conventional gas supplies from the WCSB — hammered by high costs and low commodity prices — are in a decline from which no one can see an end.
The Mainline capacity of 3.5 billion cubic feet per day to the system’s northern zone over Ontario has tumbled to as low as 500 million cubic feet per day. In 2009, contracted long-haul volumes dropped to half what they were in 2006.
Rate changes over the past two or three years are estimated to have increased by as much as C50 cents per gigajoule.
Because the Mainline is regulated by Canada’s National Energy Board, the returns from those shrinking volumes must be recovered by higher per-cubic-foot rates.
For example, transportation tolls from Alberta to Niagara rose by 45 percent in January and to Iroquois, a key export point in the U.S. Northeast, by 37 percent.
That progression undermines the ability of WCSB producers to remain competitive against commodity prices of C$3 per gigajoule in Alberta and United States producers who are much closer to the primary markets, especially as low-cost production from the Marcellus and other shale plays enters regions of the North American market that were once major outlets for WCSB gas.
Challenge to entire industryMurray Newton, president of Canada’s Industrial Gas Users Association, said the challenge is one the entire industry has to contend with as either producers and end users swallow a lower netback or toll increases flow “right through to the market.”
TransCanada has been working over the last few months with its shippers to address the competitiveness of the Mainline and its Alberta network in hopes of reaching a consensus over the next two months before the NEB deals with a rate change proposal from TransCanada, which has declined to discuss the specifics.
However, TransCanada has indicated it is prepared to lower its eastern rates to compete with Marcellus gas. The customers have submitted their own counter-proposal.
In 2007, TransCanada reached a deal with shippers to set tolls on the Mainline at C$1 per gigajoule, with the ability to hike those rates depending on volume forecasts for the upcoming year. The current toll is C$1.65 per gigajoule.
In mid-spring, Max Feldman, TransCanada’s senior vice president for Canadian and Eastern U.S. pipelines, said the key objectives of the continuing discussions are to lower tolls, introduce greater toll stability and certainty, and provide greater alignment between the pipeline and its shippers.
Reduction proposedA comprehensive package submitted to the industry in March would result in a reduction of about C45 cents to C50 cents per gigajoule from Alberta to the Toronto market.
That reinforces the view of some observers that TransCanada is approaching a crunch point where rate increases would weaken its ability to cover operational costs.
Newton has described the current rate as “just out of the market” and unpredictable, resulting in a scramble for the exits by those who can de-contract out of the system.
But TransCanada is not without hope. The company’s recently retired Chief Executive Officer Hal Kvisle said pipelines from the Horn River and Montney shale and tight gas plays in British Columbia are due onstream over the next two years, although the prospect of 2 billion cubic feet per day from those sources still means TransCanada will need 10 bcf per day of conventional gas from Alberta and 2 bcf per day from British Columbia to ensure a healthy gas industry in the WCSB.