Evolving gas supply picture calls for attention to basis risk

October 2015

• There are a number of projects being developed which will change the paths for delivering gas into Ontario.
• The traditional path of transporting gas easterly from Empress will be replaced by transporting gas from the Marcellus and Utica basins into Ontario at Dawn, Niagara and potentially Iroquois.
• During the transition, transportation constraints may arise as the network adapts to moving supply to market from new supply zones. This means Ontario gas buyers need to manage transportation or “basis” risk.

Dramatic changes are happening to the way natural gas is transported to Ontario. With the focus on new production from the massive Marcellus and Utica shale reserves, natural gas utilities and large end-users are seeking ways to alter their transportation portfolios in order to take advantage of these new supply sources. As this transition unfolds, Ontario gas buyers need to be mindful of transportation or “basis” risk within their buying program.

In the past, natural gas utilities and end-users in Ontario contracted for TransCanada transportation services from the Western Canadian Sedimentary Basin in Alberta and British Columbia to delivery areas in northern, southern, central and eastern Ontario. A small amount of gas was, and still is, being transported into southwestern Ontario from supply basins in the US. In 2000, the Alliance and Vector pipelines came into service and while providing another transportation path to deliver western Canadian gas to Ontario, it also introduced Chicago supply to the province. During this period, natural gas primarily was transported from west to east.

Starting in November 2012, the Niagara export point became an import point, albeit in small quantities. TransCanada has recently received approval from the National Energy Board to make modifications to their system that will allow it to import an additional 1 PJ/day of gas into Ontario from the Marcellus basin.

Over the next couple of years, Union Gas and Enbridge Gas Distribution plan on shifting the receipt point for some of their system supply from Empress to Dawn and allowing their direct purchase customers to do the same. Gaz Metropolitan in Quebec is also shifting its primary supply point to Dawn. In addition, as early as this November Enbridge will be bringing in 200 TJ/day of supply into Ontario through Niagara. The utilities are wanting to contract for transportation capacity that allows them to obtain supply from the closest liquid trading point to their markets as well as obtaining access to Marcellus and Utica shale gas.

Union and Enbridge have indicated that in order to satisfy the shift from Empress to Dawn more supply needs to be delivered to Dawn. To address this requirement, the two utilities have entered into long-term precedent agreements with Nexus Gas Transmission pipeline to bring primarily Utica shale gas from Kensington, Ohio westerly and then north to Willow Run, Michigan where it will interconnect with the DTE system. While the two utilities plan to take different paths from Willow Run, both will ultimately deliver gas to Dawn totalling 274 TJ/day. Enbridge and Union are currently seeking OEB pre-approval of the cost consequences of their Nexus contracts.

Another proposed pipeline project, Rover Pipeline, is expected to bring in additional Utica supply to Dawn by November 2017. If both the Nexus and Rover projects proceed, then an incremental 300 TJ/day of pipeline capacity will be available to Dawn.

The Constitution Pipeline project is being developed to transport natural gas from the Marcellus basin eastward to the existing Iroquois Pipeline in New York State. With the completion of this project, gas could eventually flow from New York State into eastern Ontario, either by displacement or physically, to serve markets in eastern Ontario and Quebec.

With the development of these new projects, the paths for delivering gas into Ontario will be changing significantly. The traditional path of transporting gas easterly from Empress to Ontario will be replaced by transporting gas from the Marcellus and Utica basins into Ontario at Dawn, Niagara and potentially Iroquois. During this transition period, transportation constraints may arise during periods of high demand, as the network is not yet fully adapted to the needs of moving supply to market from new supply zones. Ontario gas buyers need to manage transportation or “basis” risk as a distinct component of their gas procurement strategy.

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