TransCanada Pitches Even Lower Mainline Toll to Clinch Deals

  • Cheapest rate offering dropped to 82 Canadian cents/gigajoule
  • Pipeline operator ‘working the streets’ to sign up shippers

TransCanada Corp. is hoping that giving up a few more cents on its natural gas mainline tolls will go a long way in convincing energy producers to sign up for long-term contracts.

The pipeline operator has lowered the rate it would charge companies to transport gas on its system from Alberta to Ontario on a 10-year term to 82 Canadian cents per gigajoule, down from a range of 85 to 90 cents, if it can lock in 2 petajoules (1.9 billion cubic feet) a day of volumes. The added discount is part of a toll reduction of 40 to 50 percent from current rates that TransCanada is offering to add long-haul supplies under long-term contracts.

“We’re out working the street right now and we’re starting to get uptick on it,” Stephen Clark, senior vice-president of Canadian and eastern U.S. natural gas pipelines for TransCanada, said in a phone interview on Friday. The company is pitching the offering to producers and their lobby groups to drum up support ahead of a bidding process planned for the fall, he said, after months of talks about how to boost shipments on the network.

A wave of U.S. gas supplies moving into Central Canada is threatening both the mainline and western Canadian gas producers, who have long called for reduced rates on the system as they seek to keep hold of their traditional market. Some of the biggest Canadian gas producers have said they’re considering doing deals with TransCanada, including Canadian Natural Resources Ltd. and Encana Corp. In an interview this month, Canadian Natural president Steve Laut said he wasn’t sure the initial tolls offered would be low enough to compete.

Competing Lines

The long-term contracts being discussed would increase volumes from Empress, Alberta, to Dawn, Ontario, on the Canada-only mainline and Great Lakes system, which dips into the U.S. before reaching the hub. They wouldn’t replace or reduce tariffs for existing services. The talks come as U.S. competitors advance plans for the Rover and Nexus pipelines, which would move gas supplies from the Utica and Marcellus shales north onto existing systems into Canada. TransCanada is seeking to ensure the mainline stays relevant into the next decade and beyond, Clark said.

“This is about Western Canada competing with other sources of supply and greenfield construction,” Clark said. “The near-term objective is to try to preserve market share because once it’s lost, it’s really hard to claw that back.”

The new tolls would allow local distribution companies buying gas at the Dawn hub in Ontario to consider western Canadian gas just as competitively priced as U.S. shale volumes, said Michael Loewen, director and commodities strategist at Bank of Nova Scotia in Toronto.

Price Pain

The discussions have occurred in front of a backdrop of price pain for some would-be shippers, which have contended with a steep drop in spot western Canadian gas prices in recent weeks as TransCanada restricted capacity on its system while performing an inline inspection.

Spot AECO prices, the Canadian benchmark, have averaged about C$1.71 in August and fell to 67 Canadian cents per gigajoule on Thursday before recovering to C$1.43 on Friday when the work was completed, according to data compiled by Bloomberg. Canadian gas producers have otherwise had a tough year for prices, even with a hot summer in the U.S. driving power generation. Western Canadian storage sits 96 percent full after production kept growing as a mild winter reduced demand.

‘Short-term Aberration’

The inspection work was planned and restricted a few hundred million cubic feet a day of shipments to Empress, and only for those volumes under so-called interruptible service contracts, Clark said, calling it a “short-term aberration.” Supplies under firm transportation contracts weren’t affected, he said.

Therefore because of the outage, shippers relying upon interruptible service couldn’t get to Dawn, so could only sell into the depressed AECO market. The gas under the firm transportation, like the contracts TransCanada is trying to sign up under 10-year terms, would have received the higher prices that have averaged about C$3.38 per gigajoule in August at Dawn, the data show.

“This is occurring while TransCanada is negotiating for shipping contracts on the mainline,” Loewen said. “The outages make firm transportation appear more appealing.”

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