Midwest route to Ontario new threat to Western gas

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A billion-dollar plan to pipe substantial new supplies of U.S. natural gas into Ontario stands to dramatically displace the Western gas that has long fed Central Canada.

Three major energy corporations are backing the Nexus Gas Transmission System, a 400-kilometre pipeline intended to connect Ohio's fast-growing Utica shale gas basin with pipe that carries gas into the Dawn Hub in Southwestern Ontario.

The Nexus plan is the latest effort to shatter a decades-old pattern of gas movements that saw energy pulled from the ground in Alberta carried across the country to Ontario, Quebec and adjacent American states. Now, however, new gas fields in the midwestern and northeastern U.S. are threatening to upend that pattern by supplanting Alberta supplies.

Though several smaller projects have been put in motion, Nexus would provide the most significant new source of U.S. gas to the Ontario market to date – potentially dealing further damage to already-struggling Canadian gas producers and the aging cross-Canada pipeline network that has long brought their product to market.

Backed by Enbridge Inc., DTE Energy and Spectra Energy Corp., Nexus would carry about a billion cubic feet of gas daily to a hub near Detroit, where the gas can feed both Michigan producers and the Vector pipeline, which has served as a major conduit for Western Canadian gas to reach central markets.

In 2011, Ontario and Quebec used just over three billion cubic feet a day. Nexus is still in its early days – it will seek binding contracts late this year. If those are successful, it could begin delivering gas by late 2015. But it alone stands to supply a major chunk of Ontario's and Quebec's gas needs. Add in the 400 million cubic feet a day of U.S. gas expected to flow through a pair of pipelines coming through the Niagara Peninsula by 2014 – a number that industry sources say could rise to 800 million – and half of the gas burned in Ontario and Quebec could, in very short order, be imported. It is, however, likely that at least some of those U.S. gas supplies will pass through Ontario and flow back into U.S. markets in, for example, New York.

Nexus would draw from the Utica shale, which is expected to grow from a dribble today to 1.5 billion cubic feet a day by 2017. Those seeking to build Nexus say they will also seek gas from the Marcellus shale, a tremendously large resource that is expected to reach over 11 billion cubic feet a day by 2020.

"We definitely think this pipeline could work for Marcellus as well," said Mark Bering, director of marketing for DTE, a major Detroit-based energy company with pipeline, electrical generating and gas storage assets.

Either way, it's clear most of the Ohio energy carried by Nexus will be destined for Canada.

"We're hoping that the bulk of it ends up in Ontario," Mr. Bering said. Gas users in Ontario, he added, are among the drivers for the project since they are "looking for new supplies."

The winners and losers on the pipe aren't yet clear, however. Nexus will connect to Vector, a Chicago-to-Ontario pipe fed by Alliance, another pipe that runs to Chicago from northern British Columbia. Alliance is half-owned by Enbridge, one of the Nexus backers.

Enbridge said it does not anticipate an impact on Alliance, since it can boost the capacity of Vector, which is now flowing full, if need be.

"Right now [the Utica gas] is just added supply. It is not displacing anything," Enbridge spokesman Larry Springer said. Still, he said, there aren't firm plans yet to expand Vector: "It's a little early to know what's going on."

But several gas traders and marketers said it's clear U.S. gas molecules entering Ontario will push out Canadian molecules – if not from Alliance, then from other pipes, such as the TransCanada Mainline. And Vector could prove to be a substantial source of new supply. Mr. Springer said initial plans for the pipe call for a 30-inch or 36-inch design; at 36 inches, industry sources said, it could be built to carry as much as two billion cubic feet a day.

TransCanada, by comparison, currently moves about three billion cubic feet a day on its Mainline pipe, and the company remains confident it will continue to move gas to customers outside of Dawn. "We do not feel this proposed pipeline would have much of an impact," a spokesman said.

Still, "it's clear that the dynamics for Eastern Canada have been changing," said Kevin Petak, vice-president of gas modelling with ICF International, a large Virginia-based consultancy. "Certainly, it seems all things point to the fact that supply for Eastern Canada is likely to originate from different spots than it has traditionally originated from."