TransCanada Corp. and Alberta natural gas producers agree they need a new pipeline deal to fend off rival U.S. supplies. The challenge is to agree on how long it should last.
The pipeline operator is striving to get commitments for decade-long contracts to ship fuel east to Central Canada in exchange for lower tolls. The idea is to help Canadian supplies remain competitive even as two rival pipelines are set to link giant shale plays in the eastern U.S. to markets in Ontario and Quebec. But the length of the contracts is becoming a point of contention.
"What's really got some of these guys concerned is how long you have to commit to," Jeff Tonken, chief executive officer of gas producer Birchcliff Energy Ltd., said in a phone interview. While TransCanada aims to start a formal bidding process in October to sign up producers, Tonken said it may take until the end of the year before there's enough support to move ahead.
Holding on to clients in Canada's two most populous provinces is becoming critical for western gas producers as the U.S. meets more of its own demand, while projects to liquefy and export gas from the Pacific Coast struggle for approval. Competition is set to become tighter with the proposed Rover and Nexus pipelines from the Marcellus and Utica shales.
The mainline ships a significant amount of Canada's gas to market. The country produced about 15 billion cubic feet a day last year, and the mainline carried about 3 billion of that – or one-fifth – from the West. It was the largest single source of adjusted earnings in TransCanada's gas pipelines business in the second quarter. The company's stock has gained 37 per cent this year and is hovering near a record high after it made a big bet on gas with the purchase of Columbia Pipeline Group Inc. for $10.2-billion, which closed in July.
TransCanada has proposed tolls 40 to 50 per cent cheaper than the current rates for new firm, 10-year contracts, to as low as 82 cents a gigajoule if it can secure 2 billion cubic feet a day of commitments to ship from Empress, Alberta, to the Dawn hub in Ontario.
Currently, local distribution companies in Ontario and Quebec and gas marketers hold contracts to move gas east from Western Canada, many of which expire in 2022. Those distributors are increasingly looking to buy gas at the Dawn hub near Sarnia, Ontario, and elsewhere in the province, as more supply options emerge.
The requirement to sign up for a decade means producers would need to line up buyers for the fuel and would face fluctuating currency exchange rates affecting the viability of the tolls, said Tonken. Tonken is on a sub-committee of the Canadian Association of Petroleum Producers in talks with TransCanada.
TransCanada is optimistic it can overcome the producers' concerns in time to start a so-called open season for the tolls next month, said Steve Clark, the company's senior vice-president of Canadian & Eastern U.S. Pipelines. That timeline is necessary for regulators to approve the tolls so they can take effect in November, 2017, in line with the shipping calendar, he said. Competitors of the Canadian producers are prepared to sign up for terms exceeding 10 years on other pipelines, he said.
"That's the nature of the pipeline business these days," Clark said.
There's the added question of whether the 82-cent rate will be low enough to hold onto Central Canada.
"It's also not clear how much U.S. Northeast producers would be prepared to undercut Canadian producers to capture the market," said Randy Ollenberger, an analyst at BMO Capital Markets in Calgary.
Gas producer Peyto Exploration & Development Corp. has also raised the issue of a spate of outages over the last year-and-a-half on TransCanada's Alberta system while the operator was conducting maintenance. The work hindered shipments and cost producers about C$25-million for firm transportation service they weren't able to access, according to an estimate from Peyto. Darren Gee, Peyto's chief executive officer, said that type of "unpredictable risk" is preventing him from signing up for a long-term mainline contract.
TransCanada's Clark said the Alberta system work is wrapping up and the company is confident it will be able to make the necessary firm transportation service available. He declined to comment on Peyto's estimate on the cost to producers for the work.
Consultants hired by TransCanada have shown that the 82-cent rate would allow Canadian gas producers to compete with U.S. rivals, he said.
"Given we don't have to build anything here, we just have to get a rate approved, we think we have a timing advantage," Clark said. "But we can't wait forever. We need to move quickly."