December 20, 2018 | Warren Waite
The sourcing of gas supplies within the Midwest is constantly evolving and in recent months the region has increasingly received Appalachian production by way of Rover Pipeline and NEXUS Gas Transmission. This has transformed the Midwest into a battleground, with Michigan on the front line, as Canada, Rockies, lower Midcontinent and the Appalachia gas supplies compete to move into the region. Natural gas sourced from Appalachia now accounts for roughly half of all the gas that crosses the St. Clair River into the Dawn Hub complex.
Two months ago in part 1 of Road Work Ahead, we covered the complex relationships and increasing linkage between Lower Midcon supply, Midwest length and Gulf Coast LNG. The advent of Rover and NEXUS and their use of Vector Pipeline capacity to reach Dawn, Ontario has created a permanent detour of how gas is moved at the Joliet Hub. Moreover, ANR pipeline is adapting with gas flows increasingly going north into parts of Michigan and south from Indiana down to the Gulf Coast.
In this issue of Get the Point we provide an update on the impact Rover and NEXUS are having within Michigan and take and look at the overall supply sourcing needs at Dawn. Exports crossing the Michigan and Ontario border have averaged 5.9 billion cubic feet per day (Bcf/d) since November, a record rate beating the same period in 2017 by 1.6 Bcf/d.
First, let’s address the market forces underway at Dawn. Surplus gas production from Western Canada exits Alberta and travels east along TransCanada’s Mainline system with the option of reaching Dawn through TransCanada’s Great Lakes Gas Transmission, or GLGT, (west side of Dawn) or around the actual Great Lakes to reach Dawn through the Parkway interconnect (east side of Dawn). Union Gas, an Enbridge Company, is the operator of Union Gas Pipeline as well as the Dawn Hub, as detailed in figure 1 below.
A host of other pipeline routes go through Michigan and across the St. Clair River to make it to Dawn. Two of the most recent additions into the effective supply mix has been the advent of Rover Pipeline and NEXUS Gas Transmission.
Source: Union Gas presentation
Dawn is both a physical and virtual hub as well as the largest trading hub in Canada and second most active within North America. Natural gas storage capacity at Dawn totals 278 Bcf.
Late last year, TransCanada lowered its tolling rates to help protect the Mainline’s market share at Dawn. Its goal was to reverse declining eastbound flows, assist Western Canada producers with market liquidity to move their product and also provide eastern Canada utilities with firm and competitive supply. The effect of this change in tolling resulted in the rough equivalent of ~1.4 Bcf/d in long term fixed price (LTFP) tolling agreements for 10 years with a variety of counterparties.
At the same time, eastern Canada utilities are reducing the amount of long-haul volumes they contract from Empress (main receipt point into the Mainline near the Alberta/Saskatchewan border) and increasing their volume commitments from short-haul contracts that originate from Dawn and/or Parkway. There are also US-based utilities in New York and New England, power generators and industrial customers who contract for Dawn supply.
Between 2015-2017, Union Gas employed numerous expansion projects to effectively boost Dawn-Parkway delivery by ~1.2 Bcf/d to reach the current ~5.7 Bcf/d of segment capacity. Union recently underwent a Dawn Parkway open season to increase deliverability by ~0.32 Bcf/d beginning in 2021 and up to ~0.24 Bcf/d beginning in 2022.
The LTFP contracts mentioned earlier, for the most part, began November 1, 2017. The contract mix from Empress during the winter 2017/18 period also consisted of some legacy contracts that had yet to expire, assisting in elevated throughput last year. A lesser number of legacy contracts remain in place this winter.
Since November 1, 2018, Empress flows on the Canadian Mainline have averaged roughly 2.9 Bcf/d, or 0.5 Bcf/d below last year’s levels. Meanwhile, Mainline demand within Ontario and Quebec, including exports to New York and to New England, remains about the same at 5.8 Bcf/d. Making up the shortfall from less long-haul flows from Empress are added interconnect deliveries from Union Gas to the Canadian Mainline at Parkway, averaging 2.5 Bcf/d so far this winter, or a 0.5 Bcf/d increase from the same period last year.
The conditions mentioned above within Canada can be viewed as a permanent detour of supply to meet the needs of Ontario, Quebec and exports into the US.
Getting gas to Dawn from a US perspective consists of six pipeline systems: ANR, Bluewater, GLGT, Panhandle Eastern, DTE-Michcon and Vector Pipeline. Figure 2 below details Dawn area storage, connecting pipelines, and effective January 1, 2019, the Enbridge Gas Distribution system that will unite with Union Gas to form one combined utility. This follows the Enbridge and Spectra Energy (previous owner of Union Gas) merger that took place in early 2017.
Source: Union Gas website
Viewing the supply activity into Dawn and Union Gas alongside its demand and outflows over time identifies several trends. Figure 3 looks at winter-to-date pipeline sourcing of exports from Michigan into Dawn, area demand (Union South Markets), storage activity and the eastern interconnect deliveries at Parkway into the Canadian Mainline, as reported by Union Gas Pipeline.
The stacked shaded areas of Figure 3 represent localized demand connected to Union Gas as well as the interconnect demand at Parkway that the Mainline pulls to satisfy the needs of Ontario and Quebec that is not met by supply sourced from Western Canada. The November 1, 2017 to December 17, 2017 period was on par with 2013, with Parkway deliveries of 1.9-2.0 Bcf/d and Union South Markets consuming 1.3 Bcf/d. By comparison, this winter-to-date utility demand served by Union Gas is up 0.1 Bcf/d, while the demand pull at Parkway has reached 2.5 Bcf/d, up 0.6 Bcf/d year-on-year. Cross-border deliveries from DTE-Michcon and from GLTC have each increased by 0.1 Bcf/d. Vector deliveries into Dawn have averaged 1.5 Bcf/d so far this winter, a 0.5 Bcf/d gain over the same period last winter.
Compared to last year, the supply mix of what feeds into Vector is now overwhelmingly Marcellus and Utica gas versus the historical norm of Canada sourced gas holding the majority. Refer to part 1 for details on the relationships of Alliance Pipeline, the Joliet Hub, Vector, Rover and NEXUS.
As highlighted in Figure 4, by this time in 2017, the Vector supply stack for what ultimately ends up at Dawn consisted primarily of Alliance-Joliet receipts averaging near 650 MMcf/d and Northern Border-Joliet receipts of ~300 MMcf/d and storage withdrawals from Washington 10 averaging 100 MMcf/d. This has changed this year. In 2018, Alliance-Joliet is averaging just 225 MMcf/d, while Northern Border-Joliet is down to ~50 MMcf/d. Inclusive of all supply options from the Joliet Hub, supply is down ~700 MMcf/d year-on-year. Storage withdrawals have increased by less than 100 MMcf/d to help meet elevated demand within Michigan.
New this winter are Rover Pipeline and NEXUS Gas Transmission and their respective leased capacities on Vector. Rover and NEXUS can both get to Dawn, but how that happens is a bit different. Rover can deliver gas to Vector and, in turn, Vector redelivers it to Dawn via its lease line agreement. From a pipeline reporting standpoint, Rover terminates into Vector, but nomination wise, shippers on Rover can seamlessly nominate from Rover to Dawn. Vector reports delivers to St. Clair, a Canadian border point with Union Gas, inclusive of Rover’s interconnect volumes.
This is where it can become complicated. NEXUS reports pipeline flow activity along its Texas Eastern lease meters and its greenfield segment using location names like any other pipeline. For the activity that utilizes subleased capacity on DTE’s distribution system, all location names begin with a "(DTE)" designation. For all activity utilizing its sublease activity on Vector, the flows get a "(VEC)" at the beginning of their location name. This helps tremendously in understanding what is occurring across the NEXUS system
Rover has been utilizing its Vector lease capacity since June 2018, while NEXUS’s leased capacity on Vector began on November 1, 2018. For the current winter, Rover is utilizing all of its 0.925 Bcf/d lease line capacity on Vector (the interconnect is nearly 1.5 Bcf/d), at a daily average of nearly 1.0 Bcf/d.
From a pipeline reporting perspective, NEXUS has three paths to reach Dawn. The first is the direct delivery to Union Gas (light blue stacked bar in Figure 4) that utilized its Vector lease capacity. This has averaged 0.3 Bcf/d since November 1. The second is an interconnect to Vector at Milford Junction (red stacked area in Figure 4) that utilizes its DTE lease capacity, but then moves on Vector to Dawn via capacity not leased by NEXUS or Rover. This pathway has averaged 0.1 Bcf/d. The final path occurs not via Vector Pipeline capacity, but through DTE’s Michcon distribution system.
Michcon has always exported to Union Gas, with supplies originating from ANR Pipeline, Panhandle Eastern, GLTC or storage. Based on pipeline reporting, the overwhelming majority of what exits Michcon to Dawn, now comes from Rover. The (DTE) Union St. Clair Delivery point on the NEXUS system has averaged 0.15 Bcf/d since November 1. Union Gas has reported 0.20 Bcf/d in total receipts from Michcon.
Marcellus and Utica Supply Equates to Half of Michigan Exports
How much Marcellus- and Utica- sourced supply is making it to Dawn this winter? Looking first at Vector, nearly all the supply at Joliet is consumed by utilities and power plants within Illinois and Indiana. Thus, all of the activity into Vector and/or Union Gas can be viewed from Rover and NEXUS can be affirmed as Marcellus and Utica gas that helps supply Dawn.
As previously mentioned, winter-to-date activity from Rover has averaged 1.0 Bcf/d, and the three paths cited from NEXUS total 0.55 Bcf/d. That brings the Marcellus and Utica total to 1.55 Bcf/d, effectively 100% of what Union Gas reports from Vector (inclusive of Rover and NEXUS lease line volumes). Said differently, Marcellus and Utica gas equates to nearly half of all the cross-border activity at the Michigan and Ontario border.
Spreads to Dawn Vary Significantly
Shippers on pipelines pay a monthly demand or reservation rate for a particular path of service across a determined segment of pipe. The fuel reimbursement, commodity and other usage charges are assessed only when actual gas volumes are transported. Utilizing OPIS natural gas price history at AECO, Dawn and TETCO M2 alongside the posted transportation costs for firm transportation service on the Canadian Mainline, Rover and NEXUS allows us to see the various value propositions. Transport can be hedged, actual demand rates can vary by shipper, and other premium or discounts could apply depending on where the supply or delivery is nominated from.
Figure 5 attempts to highlight all of these relationships. We assumed a US$0.075/MMBtu premium over AECO pricing to equate a roughly equivalent value for Empress supply. During the November 1, 2016 to December 1, 2016 period, the Empress-Dawn locational spread averaged US $1.04/MMBtu. It increased in 2017 to $1.28/MMBtu and has jumped to a $2.89/MMBtu spread in 2018. These are the green horizonal lines within Figure 5. The red line represents the TETCO M2 - Dawn locational spread of $0.40/MMBtu in 2018 as a proxy for Rover and NEXUS supply.
The stacked bars are the costs associated with transporting gas to Dawn. Values below the spread line would represent transport that is ‘in the money,’ while bars above the spread line would be ‘out of the money.’
Based on historical spot market assessments, the recent LTFT rates on the Canadian Mainline provide the lowest fully loaded cost transportation path into Dawn. The net spread value for this averaged $0.65/MMBtu during the winter-to-date period in 2017 and $2.27/MMBtu so far this winter. Mainline’s LTFT only variable cost is fuel reimbursement, other usage-based surcharges are exempt.
Variable costs to Dawn via Rover and NEXUS are marginal, averaging less than a nickel. Demand rates for the anchor shippers average near $0.85/MMBtu, and the cash spread between TETCO M2 and Dawn has averaged 40 cents. This pathway still makes sense for a few reasons. The shippers make back a portion of their sunk costs that are attributed to the demand rates they pay. A large portion of the anchor shippers on Rover and NEXUS are producers. Their growing production needs access to new downstream markets such as Dawn. While each shipper has their own rationale for taking out 10-15 year commitments, the recent short-term cash market spreads and net spreads should not be a deterrent for the long-term value and optionality the Marcellus- and Utica- sourced transport provides for producers and utilities alike.
The ability to send gas to Dawn via NEXUS is less than two months old and to send gas via Rover is less than seven months old. Combined, these two pathways now account for nearly half of all the gas exported from Michigan to Ontario. Given the long-term needs of utility, power generators and exports throughout eastern Canada, the need for incremental supply at Dawn is apparent.
As the battle between Appalachia, Midwest, and Canadian supplies rages on into winter 2018/19 and summer 2019, it should become apparent which supply source wins this aspect of the war and weather the change flow dynamics is temporary or a permanent detour? Time will only tell how other pipelines and sourced gas molecules adapt to either gain back market share or give up on it entirely.