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TransCanada revives plan for long-term, fixed-price gas shipments

TransCanada said following weeks of discussions with producers, it has launched a new open season – a period to determine market interest – on a long-term, fixed-price proposal to flow natural gas along its Canadian Mainline pipeline system from Alberta to the Dawn hub in Southern Ontario.

A once-discarded deal between TransCanada Corp. and Western Canadian natural gas producers for lower-cost shipping to access key Ontario, Quebec and U.S. markets has new life.

TransCanada said after weeks of discussions with producers, it has rejigged its Canadian Mainline system proposal and has launched a new open season – or a period to determine market interest. But it's still uncertain whether the offer moves the needle enough to break the impasse.

On offer, once again, is a long-term, fixed-price contract to pipe gas along the Mainline system from Alberta to the Dawn hub in Southern Ontario, for cheaper than the regular shipping rates. TransCanada had halted talks on the proposal last November, citing a lack of interest. The Calgary-based pipeline company and producers had been unable to find agreement on pricing and commitments.

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But TransCanada still wanted long-term pledges on its underused Mainline pipeline system, while natural gas producers in British Columbia and Alberta are still looking for reasonably priced access to Central Canadian and U.S. markets.

There's only so much available pipeline space to transport plentiful Western gas thousands of kilometres to the most populous parts of North America. In recent years, Canadian producers have seen prices drop and their market share decline due to booming shale supplies, especially in northeastern U.S. They will face further competition as new pipeline projects in the U.S. move more natural gas to key markets, such as Dawn – one of the continent's largest trading hubs. Dawn is located 35 kilometres southeast of Sarnia.

Current commodity prices are not high enough to justify the cost of transporting some natural gas supplies without such a deal, said Calgary gas market consultant Bill Gwozd.

"The postage stamp is worth more than the parcel," he explained.

Last fall, TransCanada had been offering a 10-year contract with a rate in the range of 75 cents to 82 cents per gigajoule – about half the regular rate of transport in exchange for the long-term commitment. The lower end of the fee range applied to shippers with the largest volumes.

In a news release on Wednesday, TransCanada said it will still offer firm 10-year contracts, but will offer a "simplified" single tolling rate of 77 cents per gigajoule. The rate applies no matter how much gas is being shipped – which could make it easier for smaller gas producers to sign on.

"Negotiations with customers have been ongoing and we believe that TransCanada likely felt comfortable heading into the open season based on those discussions. As such, we think it is likely that the open season will be successful," Royal Bank of Canada analyst Robert Kwan wrote.

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TransCanada said for the plan to go ahead, it still requires a total subscription of least 1.5 million gigajoules. Stephen Clark, a TransCanada senior vice-president and general manager for Canadian natural gas pipelines, said "while we have held extensive discussions with customers and have received a positive response, it is important that these threshold conditions are met for TransCanada to advance this offering."

The proposal doesn't affect contracts that are already in place on the Mainline system, and the deal is still subject to TransCanada receiving National Energy Board approval – a process Mr. Kwan cautioned won't be a rubber-stamp. The open season will close on March 9, and the targeted in-service date is November.

Both TransCanada and producer Encana Corp., a potential shipper, had hinted at the possibility of a new compromise during their earning calls last week. Encana chief executive Doug Suttles said the conversations between producers and TransCanada never really ended.

"Conversations between the producers and TransCanada have been ongoing ever since the last open season attempt," Mr. Suttles said.

"I can tell you people have been very actively engaged in this conversation right through the holidays and up to today."

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