Moving Marcellus Gas into Ontario: A New Purchasing Opportunity

February 2010

• With new extraction techniques, the Marcellus shale formation has become one key area of interest for unconventional gas supply.
• As a result, Canadian and US pipeline companies have been gauging interest in contracting pipeline capacity form the Marcellus formation back to Dawn, Ontario and ultimately into the southern Ontario market.
• The availability of Marcellus gas could impact consumers' purchasing and gas transportation strategies as it will allow them to contract for supply from a basin which is much closer to the consuming regions than other basins.

High natural gas prices through much of the past decade, and the expectation that conventional reserves of natural gas in North America were in long term decline, together spurred gas producers to develop new methods to extract natural gas in areas which were previously inaccessible or unprofitable. New techniques for horizontal drilling and reservoir stimulation have opened up gas production potential in shale gas deposits located in regions that have not been seen traditionally as commercial gas producing areas. These developments have the potential for changing gas economics and the flow of gas to key markets.

The Marcellus shale formation is one key area of interest for unconventional gas supply. It stretches from New York, through Pennsylvania, and into West Virginia, making this emerging gas production area extremely attractive to consumers due to its proximity to major consuming regions in the US northeast and eastern Canada.

Unconventional gas from the Marcellus shale formation in the Appalachian Mountains has only recently been explored and produced. Reports indicate that the Marcellus formation may contain in the range of approximately 500 to 1,300 trillion cubic feet of natural gas. Natural gas does not flow easily through shale deposits and the shale strata themselves are often not very thick. These factors mean that gas wells drilled vertically through a shale deposit are not very prolific. With new extraction techniques such as horizontal and directional drilling and new methods for fracturing the shale deposit to increase gas flow, production capability has increased dramatically. This has Canadian and US pipeline companies scrambling to ensure that some of the Marcellus gas is moved into the southern Ontario marketplace as early as the latter part of 2011.

Union Gas, TransCanada PipeLines, Empire and National Fuel Gas have all recently sought to gauge interest in contracting pipeline capacity that would connect Marcellus production to the Dawn, Ontario market hub and ultimately into the southern Ontario market.

Empire Pipeline conducted an open season in November 2009 for 300,000 dekatherms (Dth)/day (316,500 GigaJoules (GJ)/day) of incremental firm transportation capacity to its existing interconnections, including TransCanada PipeLines' interconnection at Chippawa. Empire also plans to construct a new pipeline from the Marcellus shale producing area in Tioga County, Pennsylvania to Empire's existing system at Corning, New York. Empire may make modifications at its interconnection to the TransCanada PipeLines system to allow for bi-directional flow.

In response to the open season, Empire received a number of service requests that in total could be sufficient to support the project. As of mid-January 2010, Empire had completed negotiations with one shipper for 200,000 Dth/day (211,000 GJ/day) of firm transportation capacity. Negotiations with other potential shippers were continuing.

Similarly, National Fuel Gas in Buffalo, New York has launched its Northern Access project, which will enable up to 450,000 Dth/day (477,500 GJ/day) of Marcellus shale gas to flow north to the TransCanada PipeLines' export point at Niagara Falls. The open season closed on February 17, 2010. On March 19, National Fuel Gas awarded 320,000 Dth/day (337,600 GJ/day) of firm transportation capacity.

On this side of the border, TransCanada PipeLines completed an open season on March 4, 2010 for westerly transportation services between its Chippawa and Niagara Falls interconnection points to the interconnections with the Union Gas system at Kirkwall, Dawn and St Clair.

Utilities and gas marketers, or even large consumers such as power developers in Ontario may participate in these open seasons and obtain capacity. Marcellus gas could theoretically flow westerly and northerly on the Empire and National Fuel Gas systems in the summer months back to the existing TransCanada export points at Chippawa and Niagara Falls and subsequently westerly on the TransCanada system to Kirkwall, and finally southwesterly on the Union Gas system to Dawn for injection into storage.

Given that over 1,000,000 GJ/day is currently contracted to TransCanada's Chippawa and Niagara Falls export points, the initial flows to Ontario consumers would be accomplished through gas displacement. In the future however, if demand for Marcellus gas exceeds the current 1,000,000 GJ/day level, then physically reversing the gas flow would be required.

Marcellus shale gas production has the potential to moderate gas prices significantly in the southern Ontario market. The timing and extent of this impact remains to be seen. The availability of Marcellus gas could impact consumers' purchasing and gas transportation strategies as it will allow them to contract for supply from a basin which is much closer to the consuming regions than other basins, thereby reducing a buyer's demand charge exposure from transportation tolls.

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