Without TransCanada shipping deal, Western Canadian gas producers face lower prices

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Western Canadian natural-gas producers should gird themselves for lower prices should they be unable to reach a deal with TransCanada Corp. for shipping on its Mainline pipeline system, analysts and industry members say.

Citing a lack of interest, TransCanada announced this week that it was discontinuing its offer to producers to move natural gas on the Mainline – from Alberta to the Dawn hub in Southern Ontario – for about half the normal shipping rate. What stopped a bigger buy-in: Shippers were asked to sign a decade-long contract, a commitment much longer than the industry norm, and some producers were concerned that could put them at a serious disadvantage in the case of a natural-gas price drop.

However, many believe the Calgary-based pipeline company's announcement is simply a negotiating move. Barclays PLC natural gas and LNG vice-president Nicholas Potter called the situation "a game of pipeline chicken."

When TransCanada launched the open season in October, it said it needed a total subscription of at least 1.5 million gigajoules a day for the plan to go ahead. Jim Surbey, vice-president of corporate development at Birchcliff Energy Ltd., said his company committed to 100,000 gigajoules per day. He is disappointed the deal didn't go through as it would have given the gas producer the opportunity to sell to new markets in Ontario, Quebec and the United States.

"The facts we face is that all the other pipes are full. And we want to get gas out of here," he said of Birchcliff, whose largest shareholder is Canadian billionaire investor Seymour Schulich.

But Mr. Surbey suggested the plan is far from being quashed, as TransCanada insists. "This nut needs to be cracked, and we need to solve this issue. And I think we will."

It is in the interest of both TransCanada and Western Canadian Sedimentary Basin producers to get the deal done. TransCanada wants its aging Mainline to get more use and ensure its longevity.

And natural-gas producers, already hammered by years of low prices and loss of market share to prolific U.S. shale producers, could be in for an even rougher ride in the near-term if they don't find new access to markets. It had been hoped that a deal between producers and TransCanada could be hammered out before two new yet-to-be-completed pipelines – the Rover and Nexus projects – bring even more American gas to Dawn.

Gary Leach, president of the Explorers and Producers Association of Canada, said the lack of a deal is "pretty sobering."

The lower natural-gas prices get, Mr. Leach said, the more inevitable it becomes that only the lowest-cost producers with the most prolific supplies – many in the Montney formation – will flourish in the months and years ahead. The incoming Trump administration means U.S. natural-gas producers could be given more competitive advantages, including new access to federal lands for drilling, the continuance of beneficial tax deductions and significantly less enthusiasm for greenhouse gas-reduction policies, he added.

There's only so much available pipeline space to transport Western Canadian natural gas thousands of kilometres to the most populous parts of North America. The TransCanada Mainline, which already ships about one-fifth of the natural gas produced in Western Canada, is also the only natural-gas pipeline system with significant capacity to move more.

Samir Kayande, director of Calgary's RS Energy Group, said the lack of a deal heightens the risk that natural-gas basis differentials will widen by the end of next year – in other words, that Canadian producers with limited access to markets will be forced to accept even lower prices than other North American producers.

"There's nowhere else to send this gas," he said. "If you're in the gas business, you want production growth. You want to be showing margin and volume growth to your investors."

Mr. Potter at Barclays noted that even if both sides become more amenable to a deal, "given regulatory timetables, it now seems unlikely that a new tolling structure will be in place by the originally planned date of November, 2017."