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Seasonal, Regional Price Impact from Marcellus Spreading to Western Canada, Says Raymond James

A seismic shift in the Northeast natural gas market likely will lead to substantial and broad-based seasonal price differentials all the way to Western Canada, Raymond James Inc. analysts said Monday.

The question becomes how much gas the United States is able to export to Canada, given the oversupplied marketplace, which last summer had sent regional prices as low as $2.00/MMcf below Henry Hub, wrote J. Marshall Adkins and Kevin Smith in a note to clients.

"Over time (three to five years), the U.S. can potentially export another 1.5-2 Bcf/d to serve Eastern Canadian demand." Until then, the seasonal gas differentials could spread to Western Canada, the hub of natural gas production in the country.

"In 2014, we expect net gas imports to the U.S. from Canada to fall by another 0.5 Bcf/d," said the duo. "The largest portion of this decline in Canadian gas exports can be attributed to growing production in Pennsylvania and West Virginia. Last summer the AECO hub significantly disconnected from Henry Hub (trading at a $2.05/Mcf discount) as the East Coast market was swamped with gas."

Canada's National Energy Board estimates that 97% of the marketable gas production last year occurred in the Western Canadian provinces Alberta and British Columbia. This year's marketable production in Canada is expected to be around 13 Bcf/d. Most of the gas is piped through TransCanada Corp.'s Mainline, the primary conduit to transport gas from Western Canada to Eastern Canada (see related story). TransCanada management has said since late 2011 that abundant U.S. gas supplies eventually would reverse cross-border flows in the Niagara Falls trading region of Ontario and New York (see Daily GPI, Sept. 12, 2011).

"The Mainline pipeline has a capacity of approximately of 7 Bcf/d, and in 2000 it was running at basically full capacity," noted Adkins and Smith. "However, over the past decade, volumes have plummeted. In 2012 the Mainline's throughput averaged less than 2.5 Bcf/d...As throughput volumes fall, TransCanada has been forced to raise its tariff on the pipeline, making transporting gas...even more expensive relative to Marcellus gas."

Transcontinental Gas Pipe Line Co. LLC (Transco) Zone 6 gas prices in Pennsylvania traded at a 70 cent/Mcf premium to Eastern Canada gas at the Dawn Hub in 2007, which incentivized gas imports to the United States from Canada, they noted. As Northeastern gas supplies have ramped up, the Canada gas incentive has shifted to a slight discount, and in some areas of the Marcellus Shale, prices are trading at a big discount to Dawn. Also, since forming in late 2011, the Tennessee Gas Pipeline Zone 4, a southern Marcellus trading point, has traded at a discount to Dawn.

"With Marcellus gas trading at a 50 cent/Mcf or greater discount to Canadian prices, the incentive for local utilities to import natural gas from Canada has gone away," analysts said.

More than 31 different entry points are available for gas pipelines between the Canada/U.S. border, but on the U.S. East Coast, most of the entry points are north of major domestic demand areas. "Unfortunately for Marcellus gas producers, the gas fields generally lie southwest of these urban demand areas," said Adkins and his colleague.

For now, the industry has minimal capacity to export more gas to Eastern Canada, but analysts said four projects should alleviate the constraints over the next few years:

  • Northern Access Project expansion by National Fuel Gas Supply Corp. (NFG), to add 0.2 Bcf/d, with forecast startup in November 2015 (see Daily GPI, Aug. 18, 2011);
  • Clermont to Chippawa project by NFG and Empire Pipeline, projected for service by 2016, adding 0.3 Bcf/d (see Daily GPI, Nov. 21, 2013);
  • Nexus Gas Transmission project, scheduled for a November 2016 startup, and adding 1 Bcf/d from Ohio through Detroit and on to Toronto (see Daily GPI, May 7, 2013); and
  • Iroquois South to North Project, set for service also in November 2016, delivering 0.3 Bcf/d to TransCanada pipes at Waddington, NY (see Daily GPI, Jan. 24; Sept. 20, 2010).

"It seems clear to us that it is just a matter of time before the growing Marcellus/Utica gas supplies dominate the Eastern Canadian gas market," wrote Adkins and Smith. "If we examine just Ontario and Quebec, it seems likely they will receive a dominant share of their natural gas from the U.S. within the next five years." The two provinces average around 1.4 Bcf/d annually of consumption, making it a relevant route for Northeast gas.

Eastern Canada gas demand also is growing in part because coal-fired plants are being shuttered, the Raymond James team noted.

"Through the first six months of 2013 (most recent data), Ontario and Quebec combined consumed 20% more natural gas than over the same time period in 2012 and 45% more than the same period in 2009, according to data from Statistics Canada."

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