Relief is at hand for shippers suffering from rising tolls on TransCanada Corp.’s natural gas pipeline network, the National Energy Board (NEB) has been told.

Toll cuts of up to C3 cents/Mcf (U.S. dollar at par) are just a small fraction of benefits forecast to come from overhauling the treatment of natural gas liquids (NGL) by TransCanada’s Nova grid in Alberta and British Columbia. Average price gains of C32 cents/Mcf are projected for all production that crosses the Nova web as a result of an improvement prescription called NEXT, short for NGL extraction.

The toll savings are forecast by TransCanada-Nova to arise from traffic that the formula is expected to attract into spreading the grid’s costs thinner over increased volumes of gas shipments. The price gains are projected to emerge swiftly from a magic ingredient in NEXT — market recognition for the value of NGL in gas at the inlets to the Nova web across Alberta and British Columbia (BC) production fields. The reform is sought in an application under review by the NEB as a separate case running parallel to a hotly contested, overall business restructuring proposal by TransCanada and Nova (see Daily GPI, Jan. 9).

Implementation of NEXT was recommended by Alberta’s Energy Resources Conservation Board (ERCB) after a 20-month inquiry, which was the provincial agency’s last action on Nova before jurisdiction over the grid was transferred to the NEB in 2008.

The reform plan is a blueprint for overhauling a legacy of a lopsided market that prevailed in Alberta from its gas industry’s birth in the 1940s and 1950s and has lingered despite mid-1980s deregulation. The heritage, known as the “current convention,” is a package of practices that became entrenched when virtually all Alberta production was dedicated by contracts to a handful of middlemen or aggregators that were affiliates of long-distance pipelines.

The old dealers paid uniform field prices for all gas that entered the then-independent Nova grid, whether it contained NGLs or not. Producers had no bargaining power to counter the practice because there were almost no liquids extraction plants available as sales alternatives. The old practices continued, thanks to a combination of inertia and a provincial government industrialization policy, after NGL extraction complexes were built at outlets from the Nova grid in the 1970s and 1980s. Known as straddle plants due to their locations astride points where Nova and long-distance pipelines intersected, the NGL operations developed to supply raw materials to a growing chain of petrochemical operations.

The manufacturing developments were encouraged by the Alberta government as a top-priority item in a provincial economic diversification strategy. The program relied on attracting investment in petrochemicals by maintaining an advantage in raw material costs over rival manufacturing locations including Ontario and the coast of the Gulf of Mexico.

The cost advantage consisted of giving Alberta gas producers only “shrinkage” rather than a separate market value for NGL when they were extracted. Shrinkage was — and remains due to rules embedded in Nova’s tariff system — a gas-only price: the value of the volume of reductions in pipeline flows after the liquids are taken out.

As of late 2010, TransCanada-Nova estimated that the old convention was denying producers an overall average of C32 cents/Mcf off their prices by ignoring the value of NGL in gas shipments at the field inlets to the Alberta pipeline system.

Total losses inflicted on producers by the old convention hit an annual C$1 billion last year and continue to grow as NGL prices track oil on its upward path while the gas market spirals downward, TransCanada-Nova say in evidence submitted to the NEB. The old practices are also being held responsible for gas market pains as contributors to traffic losses on Nova and TransCanada pipelines, which have driven up their tolls. Rival Alliance Pipeline’s NGL affiliate, the Aux Sable liquids extraction operation, recognizes and pays for the liquids content of gas entering its route from northeastern BC to Chicago.

Alberta’s chain of 13 major NGL extraction plants is only running at about 57% of capacity. Surplus extraction capacity is in danger of growing because gas producers are seeking to build new sites in order to capture the value of liquid byproducts before their output leaves their fields to enter the pipeline system still ruled by the old practices.

The NEXT proposal seeks to scrap the old convention and replace it with arrangements that recognize the value of NGL in Alberta gas at the inlets to the Nova pipeline grid. The new system would award the value to producers in the form of a new commercial item called ER, short for extraction rights.

The proposal calls for producers to have options to sell ERs to any and all interests that want to buy them, from extraction plants to commodity trading houses.

If NEXT is approved, a new trade in ER certificates is expected to develop on Canada’s NGX digital natural gas exchange. Preliminary work with representatives of Natural Gas Exchange Inc. showed an active market will develop. Not counting marketers and aggregators, 154 potential industry participants including 140 Nova shippers and 14 extraction plants would have gone into the market if ER trading had started in 2010, TransCanada-Nova told the NEB.

The NEXT proposal has emerged as a hotly contested item, supported by the Canadian Association of Petroleum Producers and the Small Explorers and Producers Association of Canada but opposed by beneficiaries of the old regime such as NGL straddle plant owners. The wrangling prompted the NEB to reject gas-producer calls to implement the system as recommended by Alberta’s ERCB without further delay. The federal board has tentatively scheduled hearings on NEXT for the fourth quarter.

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