The hub bub about TransCanada's Alberta Hub

On Monday we posted a piece about rolled in rates, outlining one of several reasons why producers would be reluctant to ship gas in TransCanada's proposed AGIA pipeline.

Another reason why the producers would balk at committing gas is the control TransCanada would be given under AGIA to control the flow of gas. 

Under TransCanada’s AGIA proposal they will be bringing Alaska gas into the Alberta Hub. The Hub is a series of pipelines within Alberta that transfer gas from one part of Alberta to another, where it can go on into existing pipelines to other markets.

Bringing gas into the Hub may make sense if there is existing capacity in the pipelines exiting from the Hub and those pipelines go to the desired market. And gas production from Western Canada has been declining over the past few years, which may free up capacity in existing pipelines.

However, there are reasons it may not make sense to go into the Hub, particularly if there is not capacity in these exiting pipes. With rising gas prices unconventional gas production (shale gas, coal bed methane) has exploded in recent years. In the last 10 years unconventional gas production in the Lower 48 has increased by 3 trillion cubic feet per year. This is 8 bcf/d, or two North Slopes. In the next ten years the Department of Energy forecasts it will increase another 3 trillion cubic feet annually. Basically another two North Slopes.

FERC testified last Monday that money was being invested to find gas in virtually every country on earth except for Iran. And there is no reason to think this won't happen in Western Canada.

The gas shale potential of Western Canada is enormous. Just last month EnCana announced the discovery of 6 tcf of shale gas reserves in British Columbia in the Horn River Basin. The Beaverhill Lake area in Alberta also has enormous potential.

This shale gas could absorb all the existing pipeline capacity. This is one reason why the rosy economics presented by the administration may not be so rosy; additional supplies will drive price down. But in addition, the administration’s modeling assumed all you had to do is get the gas to Alberta.

If, at the end of the day, it makes sense to bypass the Hub completely because there is no existing pipeline capacity out of Alberta to the desired market, the pipeline may need to go all the way to Chicago. In that case the cost will be much more, perhaps $20 billion more, the value of the gas much less, and the administration’s economic modeling has been woefully inadequate.

But wait. There is more.

Again, under TransCanada’s AGIA proposal they bring the gas to the Hub. Why? Because they own the Hub. It cost 20 cents/mmbtu to put gas into the Hub, which devalues the Alaska gas. TransCanada will make lots of money off this. TransCanada also owns the pipes going out of the Hub.

But if, at the end of the day, it makes sense for the producers to bypass the Hub, they cannot under AGIA. 

I'm again reminded of the salient words of FERC last week when they said we could pass all of the restrictions we want (i.e. AGIA) but until you have companies (i.e. the producers) that will spend that first dollar putting a pipe in the ground...it means nothing.