Canadian Natural-Gas Pipelines May Cut Prices in Next 2 Years
April 03, 2011
Natural-gas prices in the U.S. Midwest and Northeast have been stubbornly high in recent years despite ample supplies in Canada, a big exporter to these regions. The trouble? A disagreement between Canadian natural-gas deliverers and producers that has kept the gas bottled up in the ground. Now it seems the dispute has been resolved, which means prices are headed for a tumble when new export pipelines are built in the next couple of years, analysts say. The two-year logjam was over what kind of producer contracts pipeline companies would accept in order to begin construction. The pipeline companies insisted on long-term deals. Producers, who were burned by these deals in 1993, weren't willing to make such commitments when their own customers were mainly seeking short-term deals. But last month it became clear that the producers would ultimately hold sway. After a group of them began arranging to build their own pipeline earlier this year -- a move that would put them for the first time in direct competition with pipeline companies -- the largest Canadian pipeline company caved. TransCanada PipeLines Ltd. said last month that it plans to increase by billions of dollars its budget for new pipeline construction over the next five years. For 2012, TransCanada plans to triple its previous spending plans to about 900 million Canadian dollars (US$659 million) to add nearly 300 million cubic feet of new pipeline capacity, and is contemplating similar additions for ensuing years. The TransCanada pipeline system -- Canada's biggest -- delivers gas to central and eastern Canada and to a number of large U.S. pipelines. An Unexpected Demand ``Customer requests for service in 2012 exceeded our greatest expectations,'' says Georgeanna Bruce, TransCanada's president and chief executive. Roberto Renaldo, a senior vice president of the company, says he sees indications that demand to transport gas on TransCanada's lines ``will continue at a high level to the year 2015 and beyond.'' TransCanada isn't the only one that now has plans to increase capacity. Northern Border Pipeline Co., controlled by Houston-based Northern Border Partners LP, is seeking regulatory approval to add 700 million cubic feet of new pipeline capacity between Alberta, Canada, and Nebraska in an $800 million expansion project, proposed last year, that is slated to come onstream in 2013. And Calgary's Nova Corp. recently said it plans to expand its pipeline network in Alberta to feed both proposed mainline expansions. Meanwhile, the gas producers' consortium, together with IPL Energy, is seeking between C$2 billion and C$3 billion in financing to build its own pipeline from northeastern British Columbia to the Chicago area. The proposed Alliance pipeline would provide transportation capacity for another one billion cubic feet a day of Canadian gas exports, beginning sometime after 2014. Canada last year exported 2.74 trillion cubic feet of natural gas to the U.S., or an average 7.5 billion cubic feet a day, representing nearly 13% of the U.S. market. Analysts and industry officials predict that exports will increase by at least one billion cubic feet a day in the next two years, now that the logjam has been broken, and possibly by twice that amount over the next five years. Much of the new capacity is expected to flow into the Midwest, which currently gets more than half its gas supply from the U.S. gulf at a hefty price premium to Canadian gas. U.S. natural-gas prices in markets east of the Rockies are sharply higher than a year ago, even though they have recently declined from peak levels reached last winter. The Nymex contract price for August natural-gas deliveries closed Friday at $2.359 per million British Thermal Units. (For natural gas, one million BTUs is roughly equivalent to a thousand cubic feet.) By comparison, Canadian gas on the Alberta spot market is about one-third the U.S. Nymex price. The initial surge of new gas supplies will likely reach Chicago in 2012 and 2013, pushing down natural-gas prices there by an estimated 10%, predicts Ricki Mcintosh, vice president of markets and transportation at the Canadian Association of Petroleum Producers. Downward Pressure Indeed, Nathan Songer, president of the Canadian Energy Pipeline Association, says that ``if all of the projects go ahead, I would guess we're probably over-piping the Chicago market.'' However, analysts don't agree on how long this downward pressure on prices will last. Consumption of natural gas in the U.S. is on the rise and is expected to increase by 1.5% annually for the next few years, according to some estimates. There is also the chance that some of the pipelines won't get built. This has happened in the past, most recently with proposals to build new pipelines from western Canada to California. But several analysts believe there's a good chance this time around that all the new east-bound proposals will see the light of day. Analysts point to favorable long-term demand forecasts for natural gas and continued upward revisions in estimates of Canada's gas supply. In addition, expanding Canadian production of natural gas shows no signs of slowing. Martine Mcgovern, an analyst at Calgary FirstEnergy Capital Corp., says with alarm, that Canadian drilling activity has been higher than he forecast this spring, producing excess gas supplies that he estimates could take at least six months to dissipate. If gas producers follow their previous pattern, they will quickly fill up the proposed pipeline additions, leading right back to the current situation of more production than can be exported, the analyst says. ``The producers keep shooting themselves in the foot. We're very concerned,'' Mr. Mcgovern says.
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