As Marcellus and Utica production has grown tremendously over a few short years, the story in the region has been one of displacement: the Northeast has changed from a net importer of natural gas, to a net exporter, pushing out imports from Canada as well as other US regions such as the Gulf Coast. This is set to continue as proposed pipelines come online, and a key corridor for expansion is into the Midwest and the Dawn Hub market with the Rover and Nexus projects. However, with TransCanada formally putting out an open season proposing reduced tolls on TransCanada’s existing Mainline, Canadian producers are poised to push back on Northeast production into the Midwest and Canada.
The map below shows major pipelines, existing and proposed, around the Dawn hub, a major storage hub that serves the Great Lakes and eastern Canadian demand market, including Toronto. To access the Dawn hub, production from Western Canada can flow through Mainline or via Great Lakes through Michigan. Other US pipelines ANR, Panhandle, and Trunkline have also traditionally moved gas production from the south into the Midwest market. The new Rover pipeline, backed by Northeast producers, will transport gas through Ohio, connecting with Vector pipeline which flows to Dawn hub. Nexus, backed by LDCs, will serve demand in Ohio and Michigan, and connect with a DTE pipeline in Michigan, which also feeds Vector. The combined capacity of the two projects is 4.75 Bcf/d, which would be enough to displace supply flowing into Michigan on a cold winter day. As Northeast production is a low cost/competitive source of supply, it has been successful in pushing out other higher cost supply sources.
TransCanada has been in discussions with Western Canadian producers to reduce the toll on Mainline in order to maintain market share in this premium demand market and recently released an open season to formally capture interest. The proposed tariff would reduce the firm transportation toll on Mainline from Empress to the Dawn hub by half from $1.33/MMBtu to $0.66/MMBtu, and the new tariff includes fees such as abandonment and delivery pressure, as summarized in the figure below. The proposed term is for 10 years, and TransCanada is looking for a total for about 1.5 bcf/d of commitments. Note the proposed rate is also materially below the proposed maximum reservation rates for Rover and Nexus, both over $1/MMBtu.
Looking at the historical prices, the spread between Dawn and AECO has been too to low cover the existing cost of firm transportation, which is also the current toll for interruptible service. The proposed reduced toll makes this route more attractive, and would cover the cost of FT at current prices. If Nexus and Rover both get built, the risk Canadian producers have in signing up for FT on Mainline is the Dawn market may become oversupplied, depressing pricing at the Dawn hub and reducing the value of the firm transportation, or even putting it out of the money. Further, if all projects go forward and TransCanada reduces its toll, the competition will be driven by the variable transportation cost for the different pipes, potentially tightening the spreads between AECO, Dawn, and Dominion South.
However, there are few outlets for Canadian gas, and this gives Canadian producers an advantage to protect market share in an important demand market, as the targeted in-service date for the new toll is November 1, 2017, similar to when Rover and Nexus are slated to come online in Dawn. There is also real risk that one or both Nexus or Rover are delayed, caught in pipeline purgatory or canceled, which would improve the supply dynamic at Dawn Hub. The deadline for the open season is November 10, 2016, which is after the scheduled date that Rover is due to receive its FERC approval of October 27, 2016. The outcome of the Rover approval may either provide or erode confidence for Canadian producers on how this may play out and over what timeline.
If the TransCanada open season is successful, this puts Northeast production in a potential shoving match – being forced to compete with a supply source that is less likely to be dislodged. Further, given Nexus is currently about 60% subscribed, a successful TransCanada open season may hamper the outlook for further subscriptions on Nexus. For continuing views on the dynamics of the Northeast natural gas market, check out the Northeast Gas Quarterly (no longer just a quarterly), or the Upstream Outlook.