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TransCanada cuts output forecasts as industry malaise deepens

Russ Girling, president and CEO of TransCanada, addresses shareholders at the company's annual general meeting in Calgary, Alberta April 27, 2012.


Pessimism about the prospects of Canada's natural gas industry is deepening after TransCanada Corp. slashed a series of output forecasts and said the cost of shipping gas across the country will rise by nearly a third as a result.

Most of Canada's gas is handled on TransCanada's vast network of pipe, giving it a unique vantage point on the prospects for an industry that has struggled against low prices and fast-growing U.S. competition.

A dramatically lower forecast from the company is another in a series of signs of trouble for western gas, which has been in rapid decline and faces the ugly prospect of being shut out of the United States, its only export market, in coming years.

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"It is obviously a significant change," one that "underlines the uncertainty" facing the entire gas industry, said Nick Schultz, general counsel to the Canadian Association of Petroleum Producers.

The changed forecast also throws a substantial wrench into a National Energy Board hearing into tolls on the Mainline, the cross-Canada pipe that connects western gas with central and eastern markets.

In the lead-up to the hearing, TransCanada had maintained a sunny outlook, predicting that western gas would stage a major comeback, surpassing the all-time highs seen in the early 2000s to rise above 17 billion cubic feet (bcf) a day by 2018. The company saw volumes on the Mainline rising from 3.4 bcf in 2012 to 4.8 bcf a day in 2020.

But that forecast almost immediately proved too optimistic, with 2012 volumes so far averaging 2.4 bcf a day (in part thanks to an unusually mild winter).

TransCanada now says it's likely the winter's pain is here to stay. In testimony before the NEB, it trimmed its average Mainline throughput expectation for coming years by one bcf a day. It also slashed its expected price of Canadian gas by $1.40 (U.S.) per million British Thermal Units (BTUs) between now and 2020. (In part, its calculations were based on the expectation that gas will begin to flow off the West Coast, through new liquid natural gas export terminals, by the end of the decade.)

The company argued that its plan for new tolls, which mainly involves moving costs onto pipelines other than the Mainline, still makes sense.

"The benefits of [the] restructuring proposal relative to the status quo remain substantially the same," said Karl Johannson, TransCanada's senior vice-president of Canadian and eastern U.S. pipelines.

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But he made clear the import of the company's revised forecasts: They are enough to boost expected tolls on the Mainline by 30 per cent, given that tolls rise when volumes fall.

Those tolls have been a source of friction to those who produce and burn natural gas in Canada. Between 2007 and 2011, tolls for cross-Canada gas service climbed 240 per cent, to $2.08 per gigajoule (roughly comparable to one million BTUs).

In its restructuring proposal, TransCanada had expected to cut those tolls by 32 per cent, to $1.41. Now, a 30-per-cent increase will claw back much of that anticipated decrease.

Even with the cutback, however, TransCanada's expectations remain optimistic relative to markets. The company had forecast gas prices of $6.30 per gigajoule by 2015; that number will now sit near $5. Markets, however, are currently pricing 2015 gas at about $4.

The Mainline is facing a double hit from "the momentum behind LNG and the downward momentum for Canadian gas production," said Chad Friess, an analyst with UBS Investment Research. In Canada, gas production is "essentially in freefall," and it's possible Canadian gas exports will "fall to nothing fairly quickly – within, say, 10 years," he said. "The writing is on the wall."

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