The Battle for a High-Demand Gas Market
TransCanada Corp. (NYSE: TRP, TSX: TRP) just fired the opening salvo in the battle against fellow Canadian pipeline giant Enbridge Inc. (NYSE: ENB, TSX: ENB) to regain control of the Ontario gas market.
As we wrote in the September issue of Investing Daily’s Canadian Edge, the prolific Marcellus Shale formation has created a perverse situation for gas producers in Western Canada. The shale formation’s proximity to the high-demand province of Ontario means that U.S. producers have been able to crowd out their Canadian counterparts from one of their own country’s key markets.
In years past, TransCanada would move 1.5 billion cubic feet per day of natural gas to the U.S. at an export point near Niagara Falls, the company told the Financial Post. But in a sign of the times, that same point is now receiving 1 billion cubic feet per day of gas being imported from the U.S.
And with none of Canada’s liquefied natural gas (LNG) export facilities having yet received a final investment decision, odds are that the country’s gas will remain land-locked for the foreseeable future.
That’s created an existential situation for Western Canada’s gas producers, who have no export market aside from the country’s neighbor to the south and have already ceded about 60% of the Ontario market to U.S. gas producers. And that existential situation has been further compounded by the energy crash.
That, in turn, has implications for Canadian pipeline companies, whose contracts may insulate them from commodity-price volatility, but whose existence ultimately depends on energy producers remaining viable entities.
Although Enbridge is based in Canada, its pending mega-merger with Spectra Energy Corp. (NYSE: SE) will give it significant exposure to the Marcellus. In fact, one of Spectra’s biggest projects is its Nexus gas transmission pipeline, which will move 1.5 billion cubic feet per day of natural gas from the Marcellus to points in the Upper Midwest and Ontario.
But Nexus isn’t expected to commence operations until the end of next year. By contrast, TransCanada already has pipe in the ground that’s underutilized and can serve the Ontario market.
To win back market share and get the jump on competitors, which will also include Energy Transfer Partners LP’s (NYSE: ETP) Rover pipeline (scheduled to commence service at the end of next year), TransCanada surprised industry observers by cutting the tolls on its Mainline by roughly 50%.
This week, TransCanada launched an open season for new long-term contracts to move 1.5 billion cubic feet per day of natural gas—about 10% of Western Canada’s production—through its Mainline to Ontario.
The company had been expected to reduce tolls by about 30% to 40% to make it economic for beleaguered gas producers to ship their products to Ontario, but the 50% reduction is clearly a line in the sand for its pipeline competitors.
Additionally, TransCanada offered more favorable contract terms than usual: Commitments are limited to 10 years with options to cancel after five years, compared to the 15- and 20-year commitments required by competitors.
Of course, TransCanada wasn’t just looking to gain an edge on competitors. Canadian gas producers had also reportedly pushed back hard against the company’s earlier proposals.
Even so, opinions are divided over whether the current scheme will work. While analysts with GMP FirstEnergy see the terms being offered as having appeal for shippers, RBC worried that the proposed tolls still may not be quite low enough.
If the new rates are economic for Western Canada’s gas producers, then it could create a win-win situation for TransCanada and its shippers.
As TransCanada senior executive Stephen Clark told Reuters, “What we get out of this is some back-end enhancement of the viability of the Mainline as we get into the middle part of the next decade. What producers get out of it is near-term toll reduction that helps them preserve the market they have served over the last 50 years.”
Of course, TransCanada’s recent acquisition of Columbia Pipeline Group gives it a footprint in the Marcellus as well. So even if it can’t win over Western Canada’s gas producers, the Canadian pipeline giant’s diversified geographic footprint affords substantial optionality.