Spectra Energy Nexus pipeline to link Ontario with Utica gas

Spectra, Enbridge Inc. and DTE Energy muscle in on TransCanada turf

December 03, 2012

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Illustration Blair Kelly

The operator of Canada’s biggest storage hub is looking south to shale gas formations in the United States to meet growing demand in Ontario and Quebec. Waning exports from Alberta and new demand of as much as 700 million cubic feet a day at Spectra Energy Corp.’s Dawn hub near Sarnia, Ontario, has prompted the Houston-based pipeline operator to propose a pipeline link from Ohio’s Utica shale with partners Enbridge Inc. and DTE Energy.

The system, known as Nexus Gas Transmission, includes a 400-kilometer line that would meet the Vector Pipeline, which would then carry the gas through to Dawn. The project’s cost is estimated at as much as $1.5 billion and will carry at least one billion cubic feet (bcf) a day, according to the companies.

Nexus represents Spectra’s second recent attempt to boost supplies at Dawn, which is operated by its Union Gas Ltd. subsidiary. In December 2011, it shelved the Dawn Gateway project which would have tapped existing supplies from pipelines that terminate in Michigan. The company shifted its focus to shale plays amid the success of the Marcellus in upstate New York and Pennsylvania and the developing Utica play in Ohio. “Gateway was conceived pre-Marcellus even,” says Jim Redford, Union’s director of business development and strategic accounts. “Nexus is really focused on the Utica.”

“Clearly the northeast and utica are huge growth areas for production.”

 

Since natural-gas prices have tumbled in the last two years, explorers working in the Utica shale have been targeting oil and natural gas liquids. Like the Bakken shale in North Dakota, dry gas that’s produced in association with other fuels is considered a byproduct. “I don’t think Utica’s natural gas forecast is near the forecast for Marcellus, but it’s not insignificant,” says Kyle Cooper, managing director of research at energy consulting firm IAF Advisors in Houston.

“From a producing standpoint, with that being mostly associated gas, the economics and the supply of natural gas is not going to be dependent upon natural-gas pricing. It’s going to be dependent upon crude pricing because, literally, the gas is going to be a byproduct. To build a natural gas pipeline that’s not going to be predicated on the price of gas, as it’s just being a byproduct, really makes a lot of sense.”

Tulsa-based explorer Chesapeake Energy Corp. is the biggest landholder in the Utica with 1.3 million acres of land holdings. As of the second quarter, the company had drilled 87 wells in the formation, with the three most promising producing dry gas at 8.7 million cubic feet a day, 5.7 million and 4.2 million respectively, according to company filings.

As drilling in the area ramps up, Spectra and its partners have targeted a 2016 in-service date for the Nexus system, although that could be moved forward if demand among producers is there, Redford notes. “The plan is to get it in service as soon as they need it to meet the market demand,” he says. “If the market needed it in 2015, the plan is to have the project try to meet that timing.”

Demand at Dawn is unlikely to be a problem amid forecasts that supplies from Western Canada will slump as producers slash exploration for new supplies of dry gas and seek higher returns from liquids-rich formations. “If you believe our outlook that we have for Western Canada, we think supply is going to be down another one billion cubic feet a day next year, which is roughly in line with where it’s going to be this year,” says Martin King, director of commodities research at FirstEnergy Capital Corp. in Calgary. “That means it’s likely that less of the fuel is going to be available for consumers in the East.”

Dawn’s daily send-out capacity is about six bcf a day and about 10 bcf is traded daily, making it one of North America’s top-three physically traded hubs, according to Spectra. Its connection to TransCanada Corp.’s Canadian mainline had made it one of the top dispatch points to the U.S. Midwest and Northeast, a position which started to diminish when the Alliance Pipeline started direct service to the U.S. Midwest in 2000.

The TransCanada-controlled Northern Border pipeline system, built as the so-called “bullet line” to the Midwest as part of the proposed Alaska natural-gas pipeline, has also diverted supplies from TransCanada’s mainline. The Calgary-based pipeline company currently has proposals before the National Energy Board that would allow it to keep the mainline viable or eventually shut it down.

“Clearly the Northeast and Utica are huge growth areas for production,” IAF’s Cooper says. “Eastern Canada has a growing need and they want access to gas. What you can do is you displace the gas from Alberta and that puts TransCanada out of business really. That means almost no gas is coming across from Alberta at all.”

 

Adding to pressure on western Canadian supplies is growing demand from oil sands operators and the potential for as many as five liquefied natural gas terminals in British Columbia. “It makes a lot of sense for Eastern Canada to start looking for other sourcing,” Cooper says.

Spectra, which owns the Union Gas Utility in Ontario, is already tapping shale supplies from the northeast. “We’ve already made some changes to our system to accept Marcellus gas. It would come up through Niagara and Chippewa on the Ontario-New York State border,” Redford says.

“It would come into Canada on the TransCanada pipelines and hit the Union system at Kirkwall. Traditionally that path has been an export point for us. It now is more likely to be an import line.”

Spectra started measuring demand for the new Nexus Gas Transmission system in October with an open season, a process where users of the pipeline bid for space. If the open season shows enough demand for the project, the companies will start the long process of gaining regulatory and right-of-way approvals for the system.

Gaining those approvals may be difficult, IAF’s Cooper says. TransCanada’s Keystone XL oil pipeline, which had been expected to be cleared in 2011, still awaits approval from federal regulators after President Barack Obama shelved the project because of environmental concerns. Population density in the Midwest, and environmental concerns over the hydraulic fracturing methods used to extract gas and oil in the region, could prove hurdles for Nexus.

“The biggest knock against it would be locational and the right-of-way variances they would need to acquire,” Cooper says. “That’s probably a very contentious right-of-way that you’re going to have to face. There are a lot of pipes there so hopefully they latch on to some existing rights of way and help alleviate some of those concerns.”

Ensuring adequate supplies for Dawn is a key consideration of the Nexus partners. Enbridge’s gas distribution companies serve about two million customers in Ontario, Quebec and New York. It added about 40,000 customers in 2010. Union Gas serves about 1.4 million customers. Low gas prices have prompted power producers to switch to the fuel from coal, further increasing demand. Even as the pipeline companies plan to tap the Utica shale, they are looking forward to a possible link with the Marcellus, which would boost available supplies, Redford says.

“One of the things that makes Dawn special and such a liquid point is it has a lot of diversity in where supply comes from,” Redford says. “What’s important for the health and liquidity of Dawn is to continue on that path, to make sure it remains a diverse and reliable supply.”

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