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TransCanada’s Mainline Toll Discount Finds Too Few Takers

TransCanada Corp. Tuesday dropped a plan to refill its natural gas Mainline by granting toll discounts as deep as 47% for delivering production from Alberta and British Columbia to Ontario and Quebec.

Shipper demand in an open season sale of transportation contracts that started Oct. 13 fell “well short” of the minimum 1.5 petajoules (1.4 Bcf/d) that was needed to provide the cut-rate service, the pipeline said.

The discount offer, off the current Mainline benchmark of C$1.42/gigajoule (GJ) (US$1.15/MMBtu), ranged from C$0.75/GJ (US$0.58/MMBtu) for 250,000 GJ/d (238 MMBtu/d) or more to C$0.82/GJ (US$0.63/MMBtu) for less than 75,000 GJ/d (71,000 MMBtu/d).

But the pipeline demanded 10-year contracts in exchange for the toll breaks, while being in no position to guarantee that the reduction in shipping costs would make Alberta and BC gas competitive enough to recapture central Canadian or eastern export markets.

Competition from American supplies is expected to grow, thanks partly to eastern facilities projects that TransCanada continued to advance while attempting to sell service contracts to western shippers.

TransCanada is constructing increased capacity for imports of shale production from the United States under a co-operation agreement with Canada’s three biggest distribution companies: Union (Spectra) in southwestern Ontario, Enbridge in the Toronto-Ottawa region, and Gaz Metropolitain in Quebec.

In a terse statement announcing cancellation of the discount offer, TransCanada gas line manager Stephen Clark assured, "The Canadian Mainline system continues to be commercially supported and an important piece of energy infrastructure that connects the country's most prolific supply basin with North America's highest value markets.”

But no new plans were disclosed for the 57-year-old route across Canada and to border crossings into the U.S. Middle West and Northeast. Since the onset of the American “shale gale,” deliveries have deteriorated to less than half the Mainline capacity.

Records of the National Energy Board show the 2015 average throughput in the Mainline’s western leg was three Bcf/d or 43% of its 6.9 Bcf/d capacity. In the eastern leg, traffic last year averaged two Bcf/d or 38% of 5.2 Bcf/d capacity.

American exports to central Canada have risen from insignificant 10 years ago to sustained levels exceeding two Bcf/d. Canadian exports to the U.S. fell by nearly 30% to a 2015 average of 7.4 Bcf/d from the 2008 peak of 10.4 Bcf/d.

Heightened competition with American gas merchants in central Canadian and eastern U.S. markets figures in TransCanada’s Energy East proposal for partial conversion of the Mainline to 1.1 million b/d of oil service. The package includes complete replacement of all converted eastern gas capacity, to allow for continued high volumes of short-haul deliveries from the Dawn storage and trading hub in southern Ontario where American and Canadian supplies compete for sales.

The discount offer’s failure could ultimately be good news for shippers, according to an analysis by Sanford C. Bernstein & Co. LLC last month.

Sanford C. Bernstein & Co. LLC analysts Jean Ann Salisbury and Bob Brackett said that if three natural gas pipeline initiatives -- TransCanada discount, Rover newbuild and Nexus Gas Transmission LLC's newbuild -- that combined would carry up to 3.7 Bcf/d of take-or-pay gas to Western Canada were all approved, it could be the worst possible outcome for shippers.

The analysts said there is a "game theory element to the battle over Eastern Canada that could result in 3.7 Bcf/d of take-or-pay capacity to a 3 Bcf/d market the end of next year, with the likely effect of bringing down Dawn price $1.00 below Henry Hub, a losing scenario for all committed shippers."

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