Alliance pipeline seeks new rate structure

The long-haul Alliance pipeline has asked Canada's National Energy Board (NEB) to approve a new toll structure that would divide the pipeline into three rate zones, a major change that the pipeline said is needed for its long term economic survival.

The new structure would allow some shippers to share the risk of basis changes in the price of gas between western Canada and the Chicago market, which spiked substantially in the winter of 2013-14 as prices at Chicago Citygates peaked at above $42/mmBtu.

The NEB has set a schedule for the rate case and recently released a list of participants in the proceedings. The agency plans to make a final decision in April.

Alliance, a 2,311-mile (3,719km) system, carries liquids-rich natural gas from western Canada and the US midcontinent to the Great Lakes market. It was constructed primarily as a bullet line to ship gas from a single basin to the Aux Sable gas processing and fractionation plant at the pipeline's terminus in Channahon, Illinois. But Alliance also has found itself well-positioned to carry liquids-rich gas from developing unconventional formations such as the Bakken shale, primarily in North Dakota.

The pipeline said that changes in the natural gas market, including declining production in western Canada and increased use of gas in the Alberta oil sands industry, have decreased the overall availability of gas for export.

In addition, growing production from northeast US shale fields, including the Marcellus and the Utica, have greatly increased competition for western Canadian gas, including in the Great Lakes region, Alliance said in its NEB application filed in May.

"The development of both formations has and will continue to impact the overall natural gas supply and demand balance at the Chicago energy hub and in eastern Canada, requiring that Western Canadian Sedimentary Basin producers compete in these markets with Marcellus and Utica shale gas supply," Alliance said.

Alliance is a relatively new pipeline. It has been in commercial service since December 2000. The construction and operation of the Alliance system was supported by 15-year firm service contracts from 37 shippers.

In 2010, the majority of the pipeline's shippers declined to exercise their renewal rights under the transportation contracts. As a result, effective 1 December 2015, about 92pc of previously contracted capacity will become available to the market, Alliance said.

In an effort to attract shippers, the pipeline's new rate structure will offer new services and tolling flexibility, moving from a traditional cost of service model to a "market based model," Alliance said.

Tolling on the Canadian portion of the pipeline will be divided into three zones – two for receipt and one for delivery to the US-Canada border.

Zone 1, the gathering zone in Alberta, includes all receipt points downstream of the Blueberry Hill compressor station near the Alberta-British Columbia border. Zone 2 is the gathering zone in British Columbia, including all points downstream of Blueberry Hill.

Gas received in zones 1 and 2 will be delivered through to the US-Canada border through a new Alliance delivery zone. The three zones can be levied separately for services or added together for service to the US border.

The new toll structure also includes changes to the calculations of certain revenues including depreciation, return on equity and capital structure and a toll proposal that allows shippers to share with Alliance the risk of regional gas price changes.

Under the proposal, shippers agreeing to a minimum 5-year commitment would pay a lower floor toll, plus a risk-sharing mechanism based on a 50pc share of the increase above the toll floor of the western Canada‐Chicago basis.

The spot gas price premium at Chicago Citygates against the NIT/AECO hub in Alberta averaged $2.90/mmBtu during winter 2013-14 as several bouts of extreme cold caused record high prices in the Great Lakes region. Chicago's premium to NIT/AECO peaked at $37.95/mmBtu on 27 January.

The premium has narrowed significantly during the injection season, as mild temperatures and growing inventories put downward pressure on midcontinent prices. Chicago's premium to NIT/AECO from 1 April to 8 October averaged 32¢/mmBtu, down by 67pc from the same period a year earlier.

Alliance is taking on significant risk under the new rate proposal, but has little choice because "they have to attract shippers somehow," said Cameron Gingrich, director of gas services at the Calgary-based consultant group Ziff Energy.

Gingrich said that increasing competition in the Chicago market, including the planned partial reversal of the Rockies Express (Rex) pipeline, leaves little market share for a liquids-rich pipeline such as Alliance.

Several companies have applied to be a part of the rate case proceedings, including BP, which objected to Alliance's original application, saying that it was incomplete.

BP said in a filing to the NEB that the application lacked "solid and detailed evidence of substantial commercial support, such as a negotiated settlement, that demonstrates that the proposed tolls would be just and reasonable."

Other shippers on Alliance, including Noble Americas Gas & Power, Tenaska Marketing Canada, and Canadian Natural Resources filed letters in support of the rate proposal.

The NEB last month issued a list of participants in the proceedings, including BP Canada, TransCanada, Apache, Encana, Shell Canada, Talisman Energy, Aux Sable Liquids Products, the Canadian Association of Petroleum Producers, Canadian Natural Resources, and the Alberta provincial government.

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