Natural Gas Pipeline Infrastructure Developments

February 2013

• In eastern North America, the development of pipeline infrastructure to link shale gas supplies to demand is gaining momentum.
• The hubs at Parkway and Dawn figure prominently in the changes in gas flows and the required infrastructure.
• For large consumers of natural gas, infrastructure developments in southern Ontario raise new considerations for supply procurement.

As the development of shale gas deposits close to the high-consuming areas in eastern North America continues, the development of pipeline infrastructure to link this supply with demand is gaining momentum.

The traditional scenario is that natural gas found in the Gulf of Mexico and in Alberta has been linked via pipelines to high-demand areas in the eastern US and Canada. Production in these traditional supply areas has been declining over the last decade, and recently the decline has been more than offset by the large-scale extraction of gas from shale rock formations in the eastern US, such as the Marcellus formation. Natural gas consumers in Ontario stand to benefit from the growth of these production areas – the problem of declining supply is alleviated, there is an increased diversity of supply and given the proximity of the new supply to demand, lower transportation costs are likely.

The hubs at Parkway near Toronto and Dawn near Sarnia figure prominently in these changes in gas flows and the required infrastructure. The Union Gas Parkway West Project involves expansion of facilities at Parkway to handle greater volumes of gas expected to be imported from the US through Niagara Falls, as well as to improve reliability of deliveries to southern Ontario. At Niagara Falls, JP Morgan has agreed to market incoming shale gas extracted through a joint venture of Chesapeake Energy and StatOil for the next 10 years. At the other end of Lake Erie, NEXUS Gas Transmission has proposed to build a pipeline following the western shores of the lake, which would connect Dawn with supply from the Marcellus formation in western Pennsylvania. Dawn may become an important destination for shale gas and coal-bed methane in the Rocky Mountains, with the Vector Pipeline that connects Chicago with Dawn being the means for this gas to become available for customers in southern Ontario.

For large consumers of natural gas, these infrastructure developments in southern Ontario raise new considerations for procurement. As more gas is able to flow relatively cheaply to Dawn and Parkway, the liquidity at these points should increase and there should be downward pressure on local natural gas prices relative to areas less accessible by these growing supplies. As a consequence, having contractual obligations for delivery at Dawn or Parkway (and perhaps franchise areas in eastern Ontario such as Union EDA) may become preferred over having such obligations at AECO or Empress in Alberta since these latter points would involve payment of relatively high TransCanada PipeLines tolls.

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