Calgary — The dramatic decline in Alberta's natural gas production has created another problem for the hard-hit sector: a surge in pipeline costs.
TransCanada Corp., which moves most of the province's gas, is warning that its transportation tolls will rise by nearly 50 per cent on its Canadian mainline system next year as it works to maintain profitability in the face of dwindling natural gas production. Based on current prices, the increase will eat away about 10 per cent of revenues for companies who transport gas out of Alberta to Eastern Canada.
The higher costs come as the latest in a long series of punches to the bottom line for Alberta's suffering gas sector. Production in the province fell by about 6 per cent last year, due to the freefall in gas prices, the emergence of new competition in U.S. shale gas reservoirs and changes to Alberta's royalty regime.
“We can only take so many hits,” said Darren Gee, chief executive officer of Peyto Energy Trust, which is focused solely on the production of natural gas and natural gas liquids.
“It's one more thing that the Alberta gas producer has to get by in order to be competitive. … The margins can only be squeezed so far before things all come to a grinding halt.”
For many producers, that has already happened. Some have, this year at least, stopped investing in natural gas altogether; others have turned off taps on some wells in hopes that gas prices will recover enough to make that production profitable. Alberta produced 12.4 billion cubic feet per day of marketable natural gas in 2008, a daily drop of 775 million cubic feet from 2007.
This year, TransCanada said, output has tumbled another one billion to 1.5 billion cubic feet. The company changes its tolls in order to maintain a federally regulated rate of return of just under 9 per cent. As a result, it is looking at a dramatic increase next year.
“Our 2010 tolls will rise considerably,” said Russ Girling, the company's chief operating officer. “We'll try to mitigate it as much as possible.”
TransCanada's tolls are expected to reach between $1.65 and $1.90 per gigajoule (about 1,000 cubic feet of gas) in 2010. The company currently charges $1.19. The increase will cut companies' gas revenues by about 55 cents per thousand cubic feet, from current gas prices of around $5.
The soaring tolls were “expected, but that doesn't mean it's pleasant,” said Greg Stringham, a vice-president with the Canadian Association of Petroleum Producers.
To ease the blow, TransCanada is looking to decrease its own costs, and may spread out the toll hike over several years. The additional toll will not directly affect home heating bills, whose natural gas rates are based on broader market trading.
It remains unclear, however, how long the toll pain will last, and whether it will accelerate the downward spiral in Alberta gas production. Transportation typically represents a relatively small percentage of a company's costs. Mr. Gee, for example, does not expect to decrease Petyo's output as a result of the price hike.
And TransCanada says it hopes the increase will be temporary. Growing production from areas of northeastern British Columbia rich in natural gas should bring pipeline volumes back to normal by 2011 or 2012, Mr. Girling said.
“We see that volume coming on and offsetting the decline … in Alberta,” he said.
The TransCanada mainline transports roughly half of Alberta's natural gas exports. Alliance Pipeline LP, which is 50 per cent owned by Enbridge Inc., also moves Alberta gas. However, since the majority of its volumes are secured, declines in natural gas production tend to leave empty space primarily on the TransCanada mainline, which has 14,101 kilometres of pipe extending from Alberta to Quebec.
“Because TransCanada doesn't have long-term contracts on most of its volumes, people pull off that one first,” said Bob Hastings, an analyst with Canaccord Adams.
Gas producers shipping on the Alliance pipeline will see a small rise in tolls for 2010, although that is a standard annual increase rather than the volume-related hike being considered by TransCanada, Enbridge chief financial officer Richard Bird said in an interview.
Wednesday, TransCanada reported a 22-per-cent drop in third-quarter earnings to $335-million, or 49 cents per share. Net income fell by 25 per cent to $345-million, or 50 cents per share, down from $390 million or 67 cents in the same period of 2008. Revenue for the quarter rose by 5 per cent to $2.25-billion, from $2.14-billion.