“Kindly let me help you or you’ll drown,” said the monkey, putting the fish safely up in a tree.
Maybe TransCanada has been worn down by the demented pipeline approvals process. Maybe they’re an $80 billion dollar company that sees things differently than when Western Canada was of significance. Maybe they’re down in Phoenix, so calloused by the Energy East and Keystone fights they can’t hear anymore.
They sure aren’t in Calgary in any conscious way, because if they were they’d be a little more concerned with the mood among local natural gas producers these days. A confluence of factors have all headed south at the same time, and the player at the center of it, the conduit/life line of much of the west’s production, is like a gentle oaf trying to free a bird from a net and ripping off its wings in the process. That’s all one can logically conclude from their recent public musings.
Natural gas producers are hurting, and badly. Forward natural gas prices for the next 5 years are below almost anyone’s break even point, with liquids production offering only the slightest glimmer of hope. Any dry gas producer tied to the AECO index is going to be fighting for their life if those forward prices turn into reality.
What is perplexing then is the attitude of TransCanada (TCPL) with regards to expansion plans and market outlook. In their recent year-end conference call, company executives offered up a range of responses that demonstrated quite clearly that they’re on a different planet than producers.
How else is there to explain this sequence of quotes from president Russ Girling during the call: “…we remain bullish on the Western Canadian Sedimentary Basin’s ability to continue to grow and gain market share. Connecting that new growing production from those emerging shale plays from wellhead to market will require additional infrastructure.”
No problems there, but the next paragraph is a groin kick to many a producer: “…we announced that we intend to invest an additional $2.4 billion in a 2021 expansion of the NGTL system. It will allow us to connect incremental supply of about 620 million cubic feet per day to the system…”
Another executive later on comments that limiting supply is not the solution, and that if TCPL doesn’t connect the North Montney volumes someone else will and TCPL customers will pay higher tolls. Such a view is only possible for the owner of a near monopoly on gas transport, because any producer would trade those higher tolls for access to better markets.
There cannot be a person out there who thinks gas is not bottlenecked in Alberta, and the expansion plans include…tying in new supply from NE BC/NW Alberta? The gas needs to get out of Alberta, not have easier access getting in. What is needed is a comprehensive plan to debottleneck the whole system, within a reasonable timeframe.
The company views things very simplistically, as is probably necessary for such an industrial behemoth. Here’s Girling again discussing the North Montney: “We don’t know yet how low the price can go and then still recover your full cycle decent returns on investment, but appears to be something sub-$3 and maybe lower as they continue to improve out and get better and better at what they do.”
Then in the next breath the bizarre attitude pops up again: “The creditworthiness of these counterparties is improving… they have multibillion balance sheets today with great provisions for future growth.”
TCPL acknowledges the basic problem with all the fire and enthusiasm of a flight attendant reciting the safety procedures for the 5,000th time: “Looking forward, we continue to work with the industry on options to connect additional growing supply to markets across North America, including the potential restoration of capacity on the Canadian mainline.”
Later in the call, Karl Johannson, President of Canada and Mexico Natural Gas Pipelines and Energy (whose very title hints at the corporation’s view of such piffle as Canadian bottlenecks), pulls open the wound and gets out the salt shaker when talking about how difficult it will be to increase capacity on the bottlenecked Mainline: “Reactivating capacity that right now, so to speak dormant capacity there, but it isn’t ready to be used. It generally just requires some maintenance, it requires some compressor work…some integrity work. So that is…relatively cheap as I said it’s maintenance.”
Those factors in isolation might be understandable, but frustration with Alberta’s gas egress issues has been building for years. Since 2015, companies have been intermittently reporting reduced production results due to pipeline curtailments. Of course, you can hear TCPL explain that has nothing to do with additional capacity issues. But it does, if they have any capability whatsoever to see the world through the eyes of producers.
The company seems oblivious to the impacts these are having. Maybe they sleep well at night after having checked in with two or three of the biggest shippers, and hearing reassuring noises back. But a curtailment or bottleneck has a somewhat different impact on Shell than it does on a 10 or 20 or 50 thousand barrel per day producer.
It wouldn’t hurt to see some vision from the National Energy Board either. As regulator of interprovincial pipelines, there is plenty of room for them to show leadership here and a more grand vision of what needs to be done system-wide. It is a big problem, and approvals done piecemeal without consideration of the whole may do far more harm that good.
The whole situation should be of significance to every taxpayer in Alberta, BC, and Canada for that matter. Every gigajoule sold at a crappy AECO price is a direct hit on the royalty cheques paid to governments. A lack of infrastructure is a lack of infrastructure, whether to the west coast, the east coast, or to better markets in the US.
TCPL is expanding systems, but isn’t addressing the right bottlenecks. The intra-Alberta NGTL system needs a massive upgrade, not marginal, and before tying in new remote volumes, not after. Capital markets have picked up on this rather swiftly. AECO prices for the foreseeable future, that is, what you can lock in, are creating a flight of capital from Western Canada. The best, lowest cost producers have seen their share prices halved. Natural gas talk excites no one, and the solution gas of the liquids rich plays is a solution now but won’t be forever.
Canada does not have a sustainable natural gas industry at today’s spot or future prices. Liquids rich gas producers are keeping their heads above water, but that won’t last forever. For producers who have committed to long-term growing take-or-pay gas processing agreements, trouble is coming if they are more or less forced to continue growing supply even if it craters prices. TCPL can point to this as a producer created issue, which is true, but the fact remains that natural gas cannot escape the province as it should, and TCPL and should be doing far more to make sure that happens particularly before tying in new gas volumes that will only make things worse.
TCPL shouldn’t underestimate the groundswell of frustration they are creating. Publicly musing about just how low natural gas prices can go while still filling their pipelines is frankly bizarre, when not one word indicates that they understand or care at all the predicament many high quality gas producers are in. Twenty years ago a similar “what are you all crying about?” mentality led to the creation of the Alliance pipeline system, taking gas directly to Chicago.
We might possibly see a similar uprising again, if the survivors can afford to do anything about it.
Read more insightful analysis from Terry Etam here. To reach Terry, click here