TransCanada Corp. has formally said it will offer producers lower pipeline tolls to bring Western Canadian natural gas supplies to Ontario in a move it says could stop the erosion of Canadian producers' market share to prolific U.S. producers.
The Calgary-based pipeline company said it will begin to gauge interest from producers for heavily discounted long-term contracts to move natural gas on its underused Canadian mainline system from Empress, Alta., to the Dawn trading hub in Southern Ontario.
If Canadian natural gas producers are willing to sign a decade-long, fixed-rate contract, the scheme gives them a low-cost means of transporting their product to a hub that is a gateway to markets in Ontario and Quebec, as well as the U.S. Midwest.
Since first raising the idea earlier this year, TransCanada has spent months speaking with producers about the viability of the plan. The company said Thursday it has made changes to make the deal more attractive in terms of pricing and flexibility.
"It's a win-win for both the producers and us," TransCanada's Stephen Clark, a senior vice-president and general manager for Canadian natural gas pipelines operations, said in an interview.
"When we look at how Western Canadian production costs stack up against other sources of supply – combined with the toll that we're proposing – we think the delivery costs of gas will be competitive in the market."
Over the past decade, Western Canadian natural gas producers have ceded market share in Central Canada and the United States as Appalachian shale supplies have boomed.
TransCanada is making the case that lower tolls to the east on an existing pipeline will allow Western Canadian producers to hold or even regain market share. If TransCanada is able to gauge enough interest in the offer, analysts believe it could hurt the business case in favour of two yet-to-be-built pipelines that would increase the level of U.S. gas imports to Canada.
Goldman Sachs in particular has emphasized that the low Canadian dollar, the bevy of lucrative condensates and relatively low costs associated with the Montney formation in Western Canada could help Canadian producers compete with U.S. suppliers.
TransCanada is offering a contract term of 10 years with service tolls of about half of what they are for other tolls on the mainline. With a targeted in-service date of November, 2017, the new offering is conditional on a total subscription of at least 1.5 million gigajoules a day.
There remains a question of whether those lower tolls – lower than TransCanada's original position at the beginning of the summer – will be enough to attract producers. TransCanada's offering is akin to locking in a longer-term mortgage at a low rate, or buying a cheap airline ticket – there is much less flexibility for users, especially when it comes to the terms of the contract or the ability to deliver natural gas to alternative hubs.
Mr. Clark said on Thursday TransCanada is not going to budge further on the toll service rates.
Canadian natural gas producers have slogged through years of low prices and limited demand. Prices this year have at least risen since May, when the mass shutdown of oil sands plants owing to the Alberta wildfires pulled natural gas prices down to levels not seen since the 1980s. Futures for the main Alberta wholesale gas benchmark, AECO, were trading at $3 a gigajoule or more this week.
At those prices, every cent counts. RBC Dominion Securities Inc. analyst Robert Kwan said he worries that even the lowest end of the toll range – 75 cents a gigajoule for a minimum 250,000-gigajoules-a-day contract – "will not be enough to induce producers to sign up."
However, Mr. Kwan said TransCanada's promise to allow producers to opt out after five years, with some financial repercussions, could help to quell some of the concern about a 10-year agreement being too long.