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TransCanada natural gas transport deal comes ‘just in time’

Mike Rose, head Tourmaline Oil Corp. – Canada’s second-largest natural gas producer – said both TransCanada and producers groused about the 77 cents a gigajoule price that eventually settled the deal.

A landmark deal between TransCanada Corp. and Western Canadian natural gas companies for discounted, long-distance pipeline transport comes "just in time" to help stave off some competition from increasing U.S. production, says one of the key backers of the agreement.

Negotiations took months, and at one point last fall, TransCanada declared the deal dead. Speaking about the agreement that was eventually hashed out early this year, Mike Rose, chairman, president and chief executive of Tourmaline Oil Corp. – Canada's second-largest natural gas producer – said both TransCanada and producers groused about the 77 cents a gigajoule price that eventually settled the deal.

"We both ended up a little grumpy in the end, which probably says it's the right toll," Mr. Rose told an editorial board meeting with The Globe and Mail on Tuesday about the compromise that was struck.

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North American natural gas supplies are plentiful and wholesale prices are stuck at long-term lows. Canadian producers have seen their market share eroded over the past decade by increasing shale volumes from U.S. basins such as the Marcellus and Utica. Although there are plans for LNG facilities, Canada has no natural gas export terminals to send product to markets beyond North America.

In Alberta and British Columbia, where there are massive supplies of the hydrocarbon, the race is on to find new ways to efficiently move the low-cost product thousands of kilometres to key eastern markets.

That's where the deal between TransCanada and producers comes in: Last month, TransCanada said producers had agreed to a proposal to move at least least 1.5 million gigajoules a day of natural gas on its underutilized Mainline pipe from Western to Central Canada – more specifically, from Empress, Alta., to the Dawn hub 35 kilometres southeast of Sarnia, Ont. The offer is similar to an economy-class airfare where there is little room for changing travel plans once the ticket is booked. In this case, producers signed onto a discount deal where they won't have the same options as other shippers for transport to alternative hubs.

But they will get more access to a whole host of populous markets in Ontario, Quebec, and even the United States – and perhaps more importantly, could push back some American supplies of natural gas. Subject to National Energy Board approval, the service could be in place by November.

Mr. Rose said he and a number of other executives took a leadership role to make sure other firms understood that better access to the Dawn hub is not only about selling gas in the short term – it's also about protecting the market for decades to come.

"Once you lose it, it will be very hard to get back," Mr. Rose said.

"I would say that the timing is just in time."

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Ten years ago, the U.S. needed Canada's natural gas supplies more. But the U.S. is now the world's largest natural gas producer. A recent Conference Board of Canada report laid out the dramatic change of the last decade, saying U.S. natural gas production has increased by 40 per cent in that period.

Besides Tourmaline, companies such as Birchcliff Energy Ltd. have signed onto the TransCanada deal. Encana Corp. and Canada's biggest natural gas producer – Canadian Natural Resources Ltd. – have expressed an interest in the past. Others, including Peyto Exploration & Development Corp., have expressed concern that the rate is still too expensive given spot prices.

TransCanada will formally submit an application to the NEB by the end of the month. Karl Johannson, the senior executive in charge of natural gas pipelines for TransCanada, said he doesn't expect the application to go unopposed – including by those who are already paying higher rates for transport.

But he believes the Canadian pipeline company will be able to make the case for the new discount service.

"I will say that I'm quite comfortable," Mr. Johannson said.

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