Basis Trends

September 2014

• Over the past year, we have seen increased bases in several key markets, in particular those bases that have a downstream location east of Parkway.
• Sustained high basis implies a persistent constraint that is preventing more gas from flowing into a market, or making it more expensive to do so.
• There is a physical pipeline constraint in transporting gas to points east of Parkway. TransCanada and Enbridge are in the process of addressing this issue with new infrastructure. Another aspect of the increase in basis prices relates to TransCanada’s full discretion in setting the minimum tolls for Interruptible Transportation and Short Term Firm Transportation. This discretion is being challenged.
• But for the 2014/15 winter, and possibly the following winter, basis prices are likely to remain high.

What is a “basis"? Basis is the difference in market value of gas between two locations. For example, a Henry Hub/AECO basis is the difference in the market value of gas at Henry Hub in Louisiana minus the market value of gas at AECO in Alberta. Similarly, a Dawn/AECO basis is the difference in market value of gas at Dawn, Ontario versus AECO.

When the basis widens (increases in value), it means prices in the downstream market have risen more than prices in the upstream market.

Over the past year, we have seen increased bases in several key markets, in particular those bases that have a downstream location east of Parkway. Enbridge CDA (Central Delivery Area) is one such point. Prior to July 2013, the AECO/Enbridge CDA one-year basis traded in the range of $1.10 to $1.20/GJ. Since then the basis has steadily increased to today where a one-year AECO/Enbridge CDA basis is trading in the $2.40 to $3.00/GJ range. If one had purchased an AECO/Enbridge CDA basis month to month last winter, one would have paid anywhere between $3.40 and $6.50/GJ.

So what has caused this rapid increase in basis prices? Normally, a rise in the price in one market area relative to other markets would tend to draw more gas into that market. Sustained high basis implies a persistent constraint that is preventing more gas from flowing into that market, or making it more expensive to do so.

In fact, there is a physical pipeline constraint in transporting gas to points east of Parkway. TransCanada PipeLines and Enbridge Gas Distribution are in the process of addressing this issue with the proposed construction of new pipeline infrastructure slated to come into service late in 2015. The completion of these projects would allow up to 2,000 TJ/d of additional gas to be moved from Parkway to points east of Maple, Ontario on the TCPL system.

Another aspect of this recent increase in basis prices relates to TCPL’s full discretion in setting the minimum tolls for discretionary service; Interruptible Transportation (IT) and Short Term Firm Transportation (STFT). In the past, some suppliers relied on these services to provide delivered gas to a customer’s delivery area since the minimum toll for IT was 110% of the Firm Transportation toll and the minimum STFT toll equalled the FT toll. Since July 2013, TCPL has been setting these minimum tolls four to 10 times higher than in the past. Suppliers are now reluctant to contract for these services to an illiquid market like Enbridge CDA for fear of not being able to recover their costs.

Going forward, will this trend continue? There are certain interest groups that plan to challenge TCPL’s right to continue to have full discretion in setting minimum tolls for IT and STFT, before the National Energy Board. If they are successful, and if more pipeline capacity becomes available, then this may allow basis prices to return to historical levels. But for the 2014/15 winter, and possibly the following winter, basis prices are likely to remain high.

Uncertainty Surrounding TransCanada Continues Read more »