A senior producer has broken ranks with its peers to oppose any immediate toll increase on the principal natural gas pipeline from western Canada to the central provinces and export crossings into the MidWestern and Northeastern United States.
Shell Energy North America (Canada) Inc. is urging the National Energy Board (NEB) to freeze rates on TransCanada Corp.'s west-east TCPL Mainline until at least mid-2011.
"Without lower stable tolls the TCPL Mainline's ability to be competitive for existing and new eastern Canadian and U.S. markets is highly unlikely and this situation will be extremely disruptive to the long-term viability of natural gas resources in Western Canada," the Shell filing warns.
The Canadian Association of Petroleum Producers (CAPP), hoping to salvage a foiled partial toll settlement that was rejected by gas users and the NEB last month, has reluctantly gone along with an interim 37% toll hike requested for 2011 by TransCanada. CAPP accepts the increase as necessary to avert an even steeper 2012 increase as a result of a forecast C$750-million, 60% shortfall in TransCanada's authorized revenue requirement of C$1.3 billion this year. (The Canadian and U.S. dollars are currently at about par.)
But Shell insists that the proposed increase to C$2.24 per gigajoule (GJ) (US$2.35/MMBtu) from C$1.64/GJ (US$1.72/MMBtu) should "at a minimum" be postponed until the end of 2Q2011. (1 MMBtu is about 5% more than 1 GJ.) The pause is needed "to provide gas industry stakeholders some much needed stability and to reduce rate shock and market disruption," Shell said.
The rate freeze would buy time for gas shippers, producers and buyers to negotiate a new settlement or for the NEB to hold a hearing, Shell said. "Given the dramatic impact that such a significant increase would have on natural gas markets, it is crucial that such an increase only be allowed to take effect after the board has had the opportunity to consider the positions of all interested parties."
Since 2007, the TCPL Mainline's benchmark Eastern Zone Toll (EZT) has jumped by about 60% from a formerly stable level of C$1.03/GJ (US$1.08/MMBtu). The sticker shock is due to falling use of long-term, firm transportation services on the system, which has spread its costs thicker on reduced delivery volumes. The drop in traffic on TCPL results from deterioration of conventional Alberta gas production, rising consumption by the province's thermal oil sands projects, competition by the Alliance Pipeline to Chicago from northern British Columbia, U.S. shale gas output and interest in central Canada and the U.S. Midwest and Northeast in tapping into the new and much closer U.S. supply sources.
Shell predicts that if the interim TCPL Mainline toll plan is approved "flows will decrease even further, leading to substantial increases in revenue shortfalls in 2011. These shortfalls will exacerbate the competitiveness issue. Failure to address the underlying fundamental issues will only postpone finding a solution to the adverse impacts currently affecting western Canadian production."
That "competitiveness issue" is a serious loss of U.S. interest in Canadian gas imports, said Alberta Northeast Gas Ltd., a consortium of 17 U.S. local distribution companies serving franchise territories across the northeastern states. In NEB filings, the group is calling for "a significant reduction in TCPL costs. Unless TCPL costs are dramatically reduced now, there will be further erosion of throughput as the competitiveness of all gas transported on the TCPL system further deteriorates."
Among U.S. importers of Canadian gas in the toll fight before the NEB, Brooklyn Navy Yard Cogeneration Partners LP (BNYCP) is highlighting just how unattractive its traditional Alberta and TCPL Mainline supplies are becoming compared to new U.S. shale and pipeline sources. "The status quo is unacceptable. TransCanada's rates are too high and cannot continue. Already, its charges threaten financial jeopardy for BNYCP...and we feel certain that we are not alone," BNYCP said.
The Brooklyn gas-fired power and heat operation reports, "In a rate study that we performed of long-haul pipelines over 1,000 miles in length, TransCanada's rates are currently US$1.69/MMBtu, in comparison to rates ranging from US$0.52/MMBtu to US$1.23/MMBtu for Transco, Tennessee, Texas Eastern and Alliance."
The old mainstay Canadian pipeline has to face up to reality and lower its financial demands on the gas market by reducing depreciation rates and trimming other aspects of its regulated cost recovery apparatus, BNYCP said. "TransCanada cannot hope to continue to increase its rates and expand utilization. It is already the pipeline of last resort, and existing customers will continue to flee so long as existing or currently proposed rate levels continue."
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