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TransCanada Touts Mainline Restructuring

While TransCanada Corp. awaits word from Canada's National Energy Board (NEB) on its Mainline toll restructuring, executives are gaining confidence that a portion of the pipeline has a future moving western Canadian and Bakken Shale crude eastward.

But first there is the matter of the toll structuring on the pipeline, which used to be a long-haul run from Western Canada to the East but now is used increasingly for short-haul service. "We are confident that the NEB will come back with a decision that will aid us in getting the Mainline properly restructured," Karl Johannson, president of natural gas pipelines, told financial analysts during the company's investor day in Toronto last Wednesday.

However, many shippers oppose the TransCanada proposal and told the NEB in filings that it would entail an unfair shifting of enormous costs (see related story).

Johannson said the Mainline "is still the largest transporter of Western Canadian Sedimentary Basin gas out of the basin, and it is still one of the largest throughput, or largest volume, pipes in North America. Even though we've seen a reduction in long-haul volumes, it is still a very, very material pipeline in the North American transportation scene."

A decision on the restructuring is expected from the NEB by the end of the first quarter of 2013. Meanwhile, TransCanada has drummed up plenty of interest in a conversion of some of the Mainline assets to oil service (see NGI, Aug. 6), Alex Pourbaix, president of energy and oil pipelines, told analysts.

"The focus for the past year has been determining whether it's technically viable and commercially viable, and by that I mean we had to satisfy ourselves that an eastern project would deliver acceptable netbacks to producers and that refiners wanted the product," Pourbaix said. "We're very much satisfied that we had a great deal of interest from shippers on this project. We're now entering into our stakeholder phase."

A conversion of a portion of the Mainline would be more attractive to regulatory and environmental interests than moving oil westward from Alberta's oilsands to the Pacific Coast for export, as others have proposed, for a number of reasons, Pourbaix said. "I think No. 1, with an eastern pipeline we already have 80% of the pipeline in the ground," he said. "Where we don't have pipeline in the ground, we already have right-of-way and have relationships with landowners in that part of the world. I think that's very significant.

"The other thing that we hear from stakeholders [is] right now, eastern Canada has the highest-priced refined products prices on the continent. And I think people in that part of the world see it as quite logical if we're importing higher-priced oil from Saudi Arabia or Nigeria or Libya, it doesn't take a great leap of logic for them to appreciate that that is significantly to the benefit of people in that part of the world."

Eastern Canada is more familiar with oil transport; tankers on the St. Lawrence Seaway are commonplace, he said. "I think everybody also gets the concept that to the extent we're able to extend the pipeline toward the East Coast, that would have the impact of actually reducing tanker transits, which I think everybody sees as more risky than pipelines."

Pourbaix said an oil conversion could be sized to move anywhere from 500,000 to 1 million b/d. "Depending on where customer and shipper support is, we have the option to choose different lines on the system," Pourbaix said. "I think under any scenario, we're probably only looking at converting one line, and there's various diameters of lines that we can choose to get that 500,000 to 1 million bbl range."

Executives said if a portion of the Mainline were converted to oil service, the company could still satisfy all of its existing natural gas shipper contracts. In fact, it's something that existing Mainline shippers should be rooting for.

"Just the general ideal of taking that gas pipeline capacity out of service and that pipeline being bought by the unregulated business from the regulated business, we would expect to have significant benefits for our gas shippers," Pourbaix said.

Alluding to calls by some Mainline toll restructuring intervenors to take a portion of the Mainline out of rate base while throughput is so low, an analyst asked Johannson whether TransCanada shareholders deserve to get for free any portion of the Mainline to be converted to oil service should that come to pass.

Johannson addressed the call to take a portion of the Mainline out of rate base. "I've seen no evidence at all from any of the intervenors that the [National Energy] Board should take that type of action," he said. "This is a cost allocation issue. We still have quite a bit of deliveries on our system...The shorter-haul portions are quite well utilized. It's a comment that's been made at the hearing, but I just don't think they substantiated it in any great way, and I just don't anticipate the board going down that road at all."

He was also asked about the idea of deferring a portion of gas transport tolls in anticipation of making up revenues with later oil transport service. Potentially creating "very large deferrals" on the system is not proper ratemaking, Johannson said, adding that deferrals are meant for errors in forecasting and not for addressing structural cost allocation issues. "I still believe allocating the costs correctly in the pipeline is the way to go, and then if we are successful in getting mainline repurposing...then we'll restructure our tolls to give [gas shippers] the benefit."

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