TransCanada Corp. grapples with fate of its Mainline
As throughput drops, pipeline's future as a continental energy connector is in doubt
TransCanada Corp.’s Mainline is a methane superhighway. It is a network of buried steel running across prairie and Canadian Shield, connecting Alberta’s vast underground natural gas reserves with the seemingly limitless energy appetite of central and eastern Canada. Gas from the Mainline feeds New York City. The line itself, which runs five pipes wide in some places, measures 14,101 kilometers in total, the distance from Calgary to Antarctica.
It is without doubt one of Canada’s most important pieces of infrastructure. Without it, factories in Ontario and Quebec would go dark, homes would freeze and, on the other end, Alberta would go poor.
At least, that’s the way it was until the troubles – some call it “the death spiral” – hit. Now, the country’s energy establishment is mired in a lengthy attempt to free the Mainline from the weeds, an effort that began last September when TransCanada recommended a radical restructuring intended to save the Mainline.
TransCanada wants to shift Mainline costs onto other pipes. Its critics, in particular those now looking at a one-third rise in their fees to move natural gas through Alberta, for example, are firing back. They are calling on TransCanada itself to accept deep losses to preserve the pipe. It’s so messy and so complicated that the National Energy Board (NEB) is not expected to rule on the matter until early 2013 – and even then, many expect the Mainline will continue to serve as a battleground for Canada’s gas producers and users for years to come.
What’s clear is that right now, the Mainline, TransCanada’s founding asset, is being bled dry. Once a Canadian lifeline, it finds itself grasping for life. In late spring this year, it regularly ran two-thirds empty. This past winter, the season when it is usually most full, it was nearly 40 per cent empty on its busiest day.
The Mainline has been besieged by the turbulence surrounding the cleanest burning fossil fuel in North America, where so much shale gas has been found that prices have tumbled amid expectations that the continent faces a supply glut that could extend for decades. Low prices have hurt the West, whose gas output has fallen 17 per cent since 2006. At the same time, huge new supplies have been found in Pennsylvania and other states whose proximity to eastern Canadian markets makes them a more natural supplier.
Adding to the misery, the pursuit of new liquefied natural gas export terminals on the British Columbia coast stands to point molecules west that might once have flowed east. Though it’s highly unlikely they will all get built, some 10 billion cubic feet a day of export projects are being contemplated, nearly 70 per cent of Canada’s current output. Taken together, and it’s a miserable situation for a pipeline system.
And yet, not a single of the corporate powerhouses arrayed around the Mainline – not Alberta’s gas companies, not Ontario’s manufacturers, certainly not TransCanada – wish the pipe any ill will. The Mainline, a nationally-important project first built in the 1950s that has often been compared to the construction of the Canadian Pacific Railway, continues to be almost universally considered critical to the country.
How, then, will the Mainline survive?
That is the thorny question facing the NEB, which in early June began a lengthy examination of a series of competing proposals to revive the Mainline. The board, which will hold hearings in Calgary, Toronto and Montreal and is expected to render a decision in early 2013, will attempt to mediate between the huge array of warring factions. More than 400 have an interest in the pipe.
At its heart, this is a question about who pays to keep the Mainline going, and how much they pay. It’s not going to be easy to answer. “There’s no question that this is a unique case in NEB regulatory history,” says Nick Schultz, general counsel for the Canadian Association of Petroleum Producers. “It’s not often you get a case where there’s a pipeline, particularly a major pipeline of this size, that has volumes that have fallen off so significantly.”
TransCanada’s proposal goes far beyond the Mainline, sweeping in the 23,095-kilometer Alberta system, a spiderweb of pipe that carries gas across the province, and the similar network of pipe that brings gas to customers on the other side of the country. To save costs on the Mainline, TransCanada proposes shifting some of its costs to those other systems – and in fact, subsuming some of the Saskatchewan portion of the Mainline into the Alberta system, further offloading costs there.
It also proposes lengthening some depreciation windows, since as a regulated pipeline, much of the Mainline’s annual revenue comes from TransCanada’s ability to recover the remaining $5.5 billion in capital costs on the line.
Add in expectations that the pipe will get busier in coming years, which allows the company to defer collection of some fees until later, and TransCanada’s proposal would drop cross-Canada tolls from $2.08 per gigajoule this year to $1.41 next year, a 32 per cent drop. The company is also seeking to boost its baseload rates by up to 160 per cent in periods of peak demand, raising revenues in busy times so it can make up for slower months.
If the NEB adopts its proposal, “the Western Canadian Sedimentary Basin is going to be more economically viable,” says Karl Johannson, a senior vice-president at TransCanada who will testify for the company at the NEB’s Mainline hearings. “We do believe a lower toll is pretty important.”
Yet very little of the TransCanada proposal is without controversy. For one, projections of growth have raised questions. Though TransCanada’s forecasts have traditionally been treated with great respect, they have been optimistic in the past few years, have not been borne out so far in 2012, and have produced skepticism among those convinced the Mainline will struggle to fill back up. The cost-shifting has also proven contentious. Those shipping gas in Alberta will see their costs shoot up by 36 per cent, while in Ontario some routes will rise 17 per cent, at a time when prices are so low that many are flirting with losses on every gigajoule they sell.
“Personally, I think it’s a bit of a joke,” says Darren Gee, CEO at Peyto Exploration & Development Corp., an Alberta gas producer. He pointed to the regulated system that has effectively guaranteed TransCanada certain profit levels on its pipeline, while gas producers struggle. “They’re busy trying to somehow make more money off of the industry at a time when obviously it’s challenging,” Gee says. “We’re taking it on the chin with gas prices. So should they.”
So producers and users of the gas – those paying the tolls, in other words – are firing back. A total of four counter-proposals have been filed with the NEB. Two, from the Canadian Association of Petroleum Producers and the Market Area Shippers, a consortium of Enbridge Gas Distribution Inc., Gaz Metro Limited Partnership and Union Gas Ltd. that together pays 58 per cent of the Mainline’s tolls, suggest tweaking the Mainline proposal. The Market Area Shippers, for example, suggest TransCanada should eat the costs of running the northern Ontario section of the pipe, which runs to $427 million over nine years.
Two others, proposed by the Industrial Gas Users Association (IGUA) and the Association of Power Producers of Ontario (APPrO), suggest far more fundamental changes that involve “securitizing,” or using debt to pay off parts of the pipe. The IGUA proposal would issue TransCanada a hit of some $852-million; APPrO is seeking a $250-million drop in Mainline revenues over five years.
TransCanada’s view: every single one of those ideas should be tossed out. Each proposal breaches “the regulatory compact” that has allowed TransCanada to recoup the cost of building and operating the Mainline since its inception. More to the point, “all propose reallocation of costs to anyone else but them,” the company told the NEB.
Besides, TransCanada says, those who use the Mainline can stomach some toll pain. IGUA, for example, has argued that since 2007, the rise in tolls has cost a large user an extra $12 million a year – enough that it’s attacking Canada’s competitiveness. TransCanada’s response is that same user has seen the price of the gas itself fall from an average of US$8.86 per million British thermal units in 2008 to US$4 last year, and less in 2012. In other words, tolls may be going up, but industry can afford it. “The delivered cost of gas for eastern consumers hasn’t been this low in a generation,” Johannson says. That leaves them “lots of ability” to “support our infrastructure.”
TransCanada has also raised the specter of Ontario and Quebec markets running out of gas to argue that the entire Mainline – falling throughputs and all – is still critical. The Calgary pipeline giant says that if some of its pipe is shut down – an event that would likely leave the company with a large writedown, a prospect it has categorically rejected – a cold winter will have devastating consequences in Ontario and Quebec.
Others, however, call that argument wrong-headed. Murray Newton, an independent consultant who has worked for IGUA, says by that logic, the Mainline becomes a “very expensive insurance policy.” And, he notes, “I don’t think the markets or the producers would want to pay for that.” There are other ways to prepare for a cold winter, he says, including storing gas, finding alternative supplies and using other fuels, like coal or oil.
Plus, TransCanada has effectively suggested that the entire line isn’t needed, publicly discussing plans to pump oil through part of the Mainline system. That possibility remains distant enough that TransCanada doesn’t think it should affect the current toll debate.
But it certainly muddies the waters in a fight that is already extraordinarily opaque. There is little question that the NEB faces a monumental task in attempting to decide the future of the Mainline – and that it will be impossible to satisfy everyone, or even a majority, of those interested.
Perhaps the only thing that is clear is that tomorrow’s Mainline is unlikely to look like today’s. The rise of shale gas has caused an upheaval that stands to take decades to sort out, and to fundamentally change the complexion of an asset that continues to be a pillar of Canada’s energy economy. It’s a reality TransCanada itself acknowledges. “Our system will never go back to being a 365-day a year baseload system, where it’s full every day of the year,” Johannson says. “It’s not going to happen. There’s too much choice – too much alternative.”