A simmering dispute over tolls and excess delivery capacity on Maritimes & Northeast Pipeline (MNP) has boiled over into a regulatory duel, with hearings scheduled to begin March 1 before Canada's National Energy Board (NEB) in the Nova Scotia capital of Halifax.
The East Coast Producer Group is calling on the NEB to dismiss -- as unfair and liable to sink any chance of suspended offshore natural gas drilling resuming -- an MNP application for a change in financial structure.
The pipeline's scheme would generate a 22% toll hike by 18 cents/MMBtu to C$1.00/MMBtu from 82 cents/MMBtu, predicts the group. The protesting shippers are the mainstays of Atlantic seaboard gas exploration and development: ExxonMobil Canada, Imperial Oil, Shell Canada, Encana Corp., Pengrowth Corp. and Mosbacher Operating Ltd.
The dispute centers on an arrangement devised by MNP's owners, led by Spectra Energy with a 77.5% interest, to finance its construction in 1999 as the first pipeline installed on the North American gas industry's northeastern frontier.
To offset risks that further exploration could falter, causing pipeline traffic and revenues to dive, the project's banking syndicate required creation of a jumbo "escrow account" as an insurance-like risk management device. The deal required MNP to set aside -- in the special account, for payment to its creditors -- all the earnings on its sponsors' ownership equity if the gas shippers' pioneer production platform, the Sable Offshore Energy Project (SOEP), failed a supply test eight years after operations began.
By the time of the test in 2007, SOEP confirmed that drilling risks were real in the Sable Island region, 250 kilometers southeast of Halifax. Project partners Shell and Pengrowth disclosed reserves estimates cuts of 60%, down to 1.4 Tcf from initial projections of 3.5 Tcf.
SOEP production -- still the sole source of traffic on the Canadian leg of MNP's line from the coast across Nova Scotia and New Brunswick to an international border crossing into New England -- has fallen off by about 40% to 350 MMcf/d.
The SOEP platform's output is also 40% below MNP's matching delivery capacity for 580 MMcf/d. On the U.S. side of the border, MNP is busier because it picks up export deliveries originating in New Brunswick from the Canaport liquefied natural gas (LNG) terminal at Saint John.
As gas prices dropped and shale supplies multiplied last year, the SOEP group turned down an offer of new shallow-water drilling rights from the Canada-Nova Scotia Offshore Petroleum Board, saying the area is no longer considered economic.
As of year-end 2010, the MNP loan repayment escrow account has accumulated about C$190 million. The total is projected to increase to a maximum C$263 million as of mid-2012, covering all principal owing to creditors that hold the pipeline's construction bonds.
MNP is seeking permission to recover the escrow money from its shippers at an annual rate of C$30.4 million, with a toll surcharge.
The shippers group insists that none of its members were informed of the risk management arrangement at the time that the pipeline project was put together and approved. MNP sought -- and obtained -- an above-average allowed rate of return on equity by telling the NEB that it faced above-average supply and traffic risks for Canadian gas pipelines, the group's filings also remind the board.
A partial recovery is on the horizon for East Coast gas production and pipeline traffic when a repeatedly delayed, smaller new project is scheduled to start up operations. Sometime in the second half of this year, EnCana predicts gas will start flowing into MNP from its Deep Panuke platform about 30 miles from the SOEP installation.
The heritage of East Coast supply uncertainty will continue when the new platform starts up. Deep Panuke's reserve projections range from 390 Bcf to 892 Bcf, giving the project a most likely or mean lifetime production outlook of 632 Bcf. No additional drilling plans have been disclosed and gas drilling in the region remains in limbo after a late-1990s exploration spurt yielded only disappointing results to all the participants.
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