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Proposed Pipeline Would Link Chicago and Ontario Trading Hubs

Natural gas buyers in the northeastern United States, Ontario and Quebec are being promised improved ability to shop around for supplies -- potentially on a global market -- by a small but strategic pipeline project.

In a new construction application to the National Energy Board (NEB), Canadian and U.S. affiliates of Houston's Spectra Energy and Detroit-based DTE Energy are teamed up to build a new link between trading hubs at Chicago and Dawn in southern Ontario.

Under the name of Dawn Gateway Pipeline, the project seeks to increase delivery service between the hubs and among Michigan and Ontario gas storage facilities.

The NEB filing says the new connection will also give buyers improved access to emerging supplies ranging from liquefied natural gas imported overseas to North America and to shale production developing across the continent.

Costs of the project are not being disclosed except potentially on a confidential basis solely to the NEB if the board demands the information. Tolls are also being kept confidential, with the sponsors saying they have been negotiated with five likewise undisclosed shippers in a manner that does not affect rates for users of any other services in the region.

Only a modest 17 kilometers (11 miles) of new pipe between compressor stations in the Sarnia area on Union Gas Ltd.'s southern Ontario grid is needed to establish the new Dawn Gateway connection, says the construction application. The rest of the link between Michigan Consolidated Gas' grid in the U.S. and the Canadian trading hub will be achieved by shuffling ownership of parts of Belle River Mills Pipeline and St. Clair Pipelines. The two lines form a link between Ontario and Michigan as a route across the international border beneath the St. Clair River.

The plan calls for Dawn Gateway to go into service in 2010 with modest start-up capacity of 360 MMcf/d. But the connection will be laid with 24-inch diameter pipe, enabling delivery capacity to be rapidly and cheaply increased by adding compressors, the NEB application says.

The new connection "will allow downstream customers in Ontario, Quebec and U.S. Northeast markets to access gas from emerging supply regions like the U.S. Rockies, various U.S. Southeast shale basins and Gulf Coast LNG," the filing says.

"Significant growth" is on the horizon for gas flows between Michigan and Ontario into the Dawn trading hub, predicts a market study done by ICF International for the project sponsors in support of the NEB application. Traffic increases during the peak gas demand period of February and March will exceed 900 MMcf/d by 2018, the study estimates. Additional growth, by more than 300 MMcf/d, is forecast by 2021. The total increase in flows between the Midwest U.S. state and central Canadian province is forecast to be about 1.2 Bcf/d by 2021.

"Downstream markets require gas supply to meet growth and to offset the declining availability of gas from traditional sources, particularly from the Western Canadian Sedimentary Basin," the study says.

"In off-peak periods, the project will facilitate the movement of gas into the region for gas storage injection and working gas management as well as providing gas deliverability to meet growing and volatile power generation gas demand. The facility will foster enhanced liquidity, which assists in the management of gas price volatility to the benefit of all customers in the affected regions."

As well, "the project will assist the operation of the competitive market for gas storage in the Great Lakes Basin, providing additional options for gas shippers in Eastern Canada and the U.S. to access different storage service providers that compete in the integrated regional market."

ICF projects an annual average growth rate through 2030 of 1.2% for total Canadian and American gas consumption, with rising demand by power stations accounting for more than four-fifths of the increase. In the U.S., the consulting firm forecasts that gas use by electricity generators will grow by an average of more than 3% per year. At the same time, the Alberta production that Ontario, Quebec and the northeastern U.S. have relied upon for more than a generation is expected to shrink at about the same rate due to natural reserves depletion. The decline is expected to be accelerated by drilling slumps combined with increasing use of gas as fuel by thermal oilsands production in Alberta.

In addition to shale gas developing in other areas from the northeastern U.S. to British Columbia, increasingly important new supplies are projected to come from growing international LNG traffic. With help from the new connection, the Chicago and Dawn trading hubs are forecast to enable gas users to tap into all the emerging gas sources by integrating Michigan's storage for 600 Bcf and Ontario's facilities for 250 Bcf. At Dawn, trading volumes have increased by about 50% to an average 9.3 Bcf /d in 2008 from 6.1 Bcf/d in 2003.

"Annual changes in supply patterns hide one of the key changes expected in the market" when shorter-term traffic flow variations are also taken into account, ICF says. "LNG imports are expected to become increasingly seasonal as the international LNG supply increases. In the North American market, LNG imports are expected to be summer peaking, with much of the gas going into storage. During the winter, markets will rely increasingly on storage to meet demand."

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