TransCanada Corp. has shelved its offer to natural gas firms of lower tolls on long-term contracts to transport their product to Ontario, saying it didn’t attract enough interest to make the plan viable.
The company had put forward what it described as a “win-win” proposal to increase gas volumes on its underused Mainline and to bring more Canadian product to a competitive Ontario market hub. But Canadian natural gas producers say the rates being offered were still too high to sign a 10-year commitment.
“It’s a disappointment for the basin that we don’t have this in place,” said Stephen Clark, TransCanada’s senior vice-president in charge of Canadian natural gas pipeline operations.
“There’s a floor that we won’t go past,” he said. “People were testing what our walkaway position was, and frankly we reached it. And that’s why we terminated the process.”
Mr. Clark said that, while TransCanada will listen to any new ideas from producers, Tuesday’s announcement is not a negotiating move. He said there were months of talks with dozens of producers and he believes some have decided to wait in the wings, wanting to avoid a long-term financial commitment and hoping others would step up.
TransCanada said in order for the plan to go ahead, a minimum subscription was required. While Mr. Clark wouldn’t say how short TransCanada was in reaching its target, he noted there was a “significant gap.”
Already, the Mainline carries about one-fifth of Canada’s natural gas to market. While TransCanada would have liked the pipeline to be chocked full of gas, Tuesday’s news also isn’t positive for Canadian natural gas producers who had been hoping to have more to market at the Dawn Hub in Ontario.
“It’s not a win for either party. I think it’s a lose-lose,” said Darren Gee, chief executive officer of gas producer Peyto Exploration & Development Corp. “We just couldn’t find the balance that was a win-win – which really means it’s just back to the bargaining table.”
As low-cost U.S. shale gas production has increased over the past decade, Canadian producers have faced increased competition from traditional Canadian and American markets. TransCanada tried to make the argument that lower tolls to the east on an existing pipeline will allow Western Canadian producers to hold or even regain market share in Ontario and Quebec, or even the U.S. Midwest. The pipeline company contended this needed to happen before two yet-to-be-built pipelines – the Rover and Nexus projects – bring even more U.S. gas to Canada.
But speaking from the GMP FirstEnergy conference in Toronto, Mr. Gee said he’s not surprised TransCanada couldn’t find enough natural gas producers to sign onto a 10-year contract. He said producers fear being locked into a long-term shipping contract at too high a price when U.S. gas continues to flood into the Dawn Hub.
“The producers are saying, ‘Look, we’ve been grinding away on our costs, getting them down as low as we possibly can to get the resource out of the ground and get it at least to the border. You don’t seem to be moving enough on the shipping cost.’”
Every cent counts as many worry flat natural gas pricing will extend well into 2017 and perhaps beyond. For instance, the Alberta Energy Regulator forecasts an overall 2016 Alberta Market Price of $2.66 a gigajoule, and $3.23 in 2017.
TransCanada had been offering service tolls of about half the cost of other tolls on the Mainline, with a targeted in-service date of November, 2017. Last month, analysts said even the lowest end of the toll range – 75 cents a gigajoule for a minimum 250,000-gigajoules-a-day contract – might not be enough to induce customers to sign up for the service.
At Encana Corp., one of Canada’s largest natural gas producers, chief executive officer Doug Suttles said last month he was looking for toll rates of around 70 cents a gigajoule for the deal with TransCanada to work.Report Typo/Error