Canada’s Union Gas: LDC That Acts as a Market Center

Lynn Edwards

n January and February of 1994, during last I year’s record-breaking winter temperatures, Union not only met its firm obligations of 1.7 billion cubic feet a day, but also delivered volumes of gas to customers in Alberta, Manitoba, and across the northern United States, in excess of 500 million cubic feet a day. Over the last five years, the volume of transactional services on Union’s system has grown from 10 to 388 million cubic feet a day (Exhibit 1). This article will look at the factors that enabled that growth and reliability.

. . . volume of transactional services on Union’s system bas grown from 10 to 388

million cubic feet a day. . .

Impact of Deregulation- Canadian Markets Opened Up Mid-1980s

While deregulation in the U.S. marketplace was implemented incrementally over a ten-year period, not fully taking effect until 1993, com- plete deregulation of the natural gas industry in Canada moved swiftly, creating a market for unbundled, transactional services as early as 1985. The dismantling of administered pricing began with what has become known as the “Halloween Agreement” between the Canadian federal government and the governments of the major oil and gas producing provinces, Alberta and Saskatchewan. Effective November 1,1985, this accord allowed for a one-year transition toward a full-fledged market responsive system.

As in the Lynn Edwards Is manager of Stof- United age & transportation, Union G8S the goal of Limited, Chatham, Ontarlo. deregulation

was to enhance access to supplies for buyers and to markets for sellers and, as in the United States, rules changed for the traditional provid- ers of natural gas storage and transportation.

The company supported the move to more market-sensitive pricing and direct purchase as early as 1983, when it supported the concept during the Ontario “Feedstock Hearings.” These hearings were held for the energy-intensive industrial customers who needed to explore options that would reduce their energy costs, in order to remain competitive. Union did its own first direct purchase deal in 1984, arranging to buy gas directly from a western Canadian source. In addition, in 1984 Union moved ahead with two of its largest customers to initiate direct purchase to enhance their operations.

The first buy-sell direct purchase arrangement in Canadian history was completed January 1986 between Union Gas and one of its large industrial customers. Through marketing research and other means of learning the requirements of its custom- ers, the company has developed capabilities beyond that expected from most LDCs.

As in the United S?ates, t h e goal of deregulation was to enhance access to supplies for buyers - . -

More Than an LDC Union Gas has never been a “typical” LDC.

Situated in southwestern Ontario, between the Great Lakes, Union, since the mid-l950s, has interconnected with TransCanada PipeLines (TCPL), just west ofToronto (Exhibit 2). TCPL’s southern loop, through Great Lakes Gas Trans-

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mission (GLGT), moves south of Lakes Superior and Huron and joins Union Gas's system at Dawn, where 126 billion cubic feet of working gas storage is located, near Samia, Ontario. Union's system then links GLGT to TCPL at Parkway for further transportation to eastern Canadian markets and at a sepa- rate interconnect to serve Niagara ex- port markets. TCPL also moves gas from Alberta to eastern Canada, through its line north of the Great Lakes, and on to Montreal through the TQ&M pipeline.

Hence, prior to being able to fully access the U.S. marketplace, Union Gas was already a major link in the overall east-west transportation of gas in Canada. In 1988 for example, Union handled half of the gas moved east of Alberta and

1 Exhibit 1. Union Gas Transactional Growth

400

300

200

100

0 F90 F9 1 F'92 F'93 F'94

stored gas for all major eastern Canadian LDCs. As deregulation took effect in Canada, Union reacti- vated its interconnect with Panhandle Eastern and brought on a compressor, bringing in si@icant Gulf and Midcontinent supplies for the Canadian marketplace, providing customers with strategic alternatives.

In 1993, Union became a fully owned sub- sidiary of Westcoast Energy Inc., a major Cana- dian corporation in the natural gas industry with core assets in pipelines, processing plants, and distribution systems. In addition to its base of residential and commer- cial customers, Union brought to Westcoast sub- stantial business in major industrial and ex-fran- chise Canadian markets. The company also brought the potential for significant growth in the highly competitive U.S. marketplace and a strate- gic plan designed to achieve that growth.

Strategic Plan for New Markets

During the 1994 fis- cal year, Union estab- lished a marketing func- tion for storage and transportation markets.

Markets were defined to include the ex-fran- chise sales and transportation customers as well as in-franchise industrial customers. The change in organizational structure came in response to growth in the customer base as well as the pursuit of new growth opportunities as directed in its strategic plan.

Approaching all sales and transportation (S&T) and industrial markets on a segmented basis, customers with similar buying processes or economic circumstances were grouped for

MARCH 1995 NATURAL GAS 0 1995 John Wiley & Sons, Inc.

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customer service and sales purposes. Sales staff have been assigned total sales and service responsibility for these “like customers.“ For the S&T Marketing and Sales group, the customer segments were defined as Canadian, Producers & Marketers, U.S. Midwest, U.S. Mid-Atlantic, and U.S. Northeast. For in-franchise industrial customers, sales and services were allocated on the basis of natural gas usage and industry type.

Although Union Gas was handling 45 per- cent of all gas that moves to eastern Canadian markets, it was handling less than 4 percent of gas consumed in the areas adjacent to south- western Ontario. Market research suggests that adjacent markets provide substantial opportuni- ties for growth. A 1-percent share of all volumes handled or stored for adjacent U.S. markets constitutes approximately 70 billion cubic feet of transportation and 30 billion cubic feet of storage. The strategic plan calls for Union to gain a modest share of these markets through the sale of services using available capacity.

Understanding potential customers and de- veloping services that are responsive to their needs are essential for Union to be competitive in the sale of services to industrial customers and gas buyers throughout North America. In pursuit of such knowledge, Union established a small mar- keting research and communications group to proactively investigate customer requirements and assist sales staFf in the development of effective customer communication programs.

Acts as a Service Hub Union has been a “service hub” for years,

long before the terminology was created. With Canadian deregulation came the opportunity to use the company’s substantial asset base and create services to meet specific transactional needs. Union’s ability to bring forward ex- panded services when customers needed them, and to successfully deliver these services, has resulted in substantial growth.

. . . commitment to growth and service flexibility

r e q u i r e d the maximum use of all its assets.

Union handles over 620 billion cubic feet of transport, using its 126 billion cubic feet of

storage more than once. It has LDC sales in excess of 290 billion cubic feet, with a customer base of over 680,000. The company’s key pipe- line interconnects, beyond the aforementioned TCPL at Parkway and GLGT at Dawn, include the connection to TCPL at Kirkwall, which feeds the Niagara Peninsula and is a major export point for Canadian gas into the U.S. Northeast, through Tennessee Gas and Empire State Pipe- lines. Further, Union ties in with Panhandle at Ojibway, near Detroit, and its St. Clair point meets MichCon, another storage-intensive LDC. ‘Within the last two months Union has negoti- ated a second interconnect into Michigan to tie into the proposed Grands Lacs Market Centre.

. . .considerable flexibiliiy derives f rom the

number of pools and the diversity in the

operational c h a r a c t e r i s t i c s - - -

Union Gas operates a 4.5-billion-cubic-feet- a-day system that is unique because each of its three major transport lines physically can, and does, flow gas in both directions. Not a case of backhaul or displacement, this is a physical capability.

The company’s commitment to growth and service flexibility required the maximum use of all its assets. Union recognized the strength of its geographic location; proximity to large markets; access to major supply basins, pipelines, and storage; and the assets that attach to it by virtue of Union’s role as an LDC (gas supply, for example). These characteristics are what now make up many of the recognized and industry- accepted criteria for a successful market center or hub. Since Union established its service hub years ago, it has focused on maximizing the efficiencies. Union manages its hub itself, be- lieving that it best knows its assets and system.

Storage and Loans The heart of Union’s system is the Dawn

storage facility. This is where its storage pools are located. Union Gas has either complete ownership or working interest in 16 storage pools with a working capacity in excess of 126 billion cubic feet. This storage is pinnacle reef formation, similar to Michigan storage, but not

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as deep. Union’s considerable flexibility derives from the number of pools and the diversity in the operational charac- teristics of the pools. About 30 billion cubic feet of the company’s storage behaves similar to salt and can handle extremely high withdrawal and injec- tion rates, an extremely desirable char- acteristic in a weather-sensitive market area. While Union’s storage is fully contracted on a summer/winter basis (i.e., the basic, 100-day, traditional stor- age with summer injection and winter withdrawal), also available are addi- tional firm and interruptible services, falling outside the base offering.

The company offers off-peak stor- age, or “parking.” As firm winter gas is sent to market, or before the space is filled in the summer with gas for the winter, the available space is turned over. The only time a customer could be curtailed operationally would possibly be towards late February and early March when working storage levels become low. Even then, this could only happen on the coldest days. During the winter of 1993-94, the coldest in several decades, Union Gas did not interrupt at all. It was during temperatures of -13 degrees F before wind chill that the system proved its capabilities, meeting both firm and incremental needs and interruptible withdrawals at Dawn of up to 500 million cubic feet a day (Exhibit 3).

At some point, you have to actually move the molecules.

With the introduction of Order 636 and all i ts implications, Union has seen storage used in increasingly creative ways. Storage has been used for parking, marketing opportunities, mitigation, back-stopping, and cycling. To meet the increas- ing demand, storage is pushed fuller every season. November 1994 saw storage injection records broken twice to 99.4 percent of working capacity. Displacement, such as cycling, stays notional only so far with market area storage. At some point, you have to actually move the molecules. Every year Union gains more experience doing this, testing and expanding its capabilities. Union takes care of its system, maintaining its integrity in order to continue to offer customers maximum

efficiency and flexibility. Storage, and the gas in it, gives Union the

ability to loan gas. While not a particularly attractive offering through the November ’94- January ’95 “heat wave,” during the same period in 1994, when everyone was scrambling for supply, Union S&T Services was able to loan almost 500 million cubic feet under its ten-day “Ioan turn-around” or “balancing service.” This loan was beyond the 4 billion cubic feet already loaned under special arrangements for return in the summer.

Because of the diversity of operations and large volumes of gas handled through storage operations, Union has the flexibility to offer peaking service, as well as the important “erratic delivery pattern service” to either parked or loaned volumes. This value-added service has been marketed in the summer to power genera- tors, and in the winter to markets, primarily LDCs, that needle peak with extreme weather.

. . . allows a power g e n e r a t o r , f o r example, to p r i c e into the

g r i d at a known p r i c e - - -

Peaking service allows the customer to call, on demand, at frequently erratic rates of take, “what they need, when they need it,” while returning it on a smooth profile or having negotiated to prepark. This service allows a power generator, for example, to price into the grid at a known price and allows the gas

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controllers at the “needle peaky” LDC a wid- ened comfort zone.

Transportation and Exchanges Returning to Union’s core assets, the company

operates three major transport lines with storage at Dawn as the point of commonality. Union has learned to work its interruptible or “wheeling service” and “exchanges” as “deliver to a point on the system, and we’ll redeliver it to you, where you want it,” either to Union’s storage facility, one of the company’s other four pipeline interconnects, or to any third party pipeline interconnect Union has transport access to.

Union can offer a very high level of reliabil- ity because of its operating balancing agree- ments with interconnecting pipelines. This in- terface again makes storage very important. The bulk of variation on the Canadian system is handled by swings in the firm service tendered (FST) supply: an annual firm supply that has daily deliveries that swing from zero to 350 million cubic feet. Storage handles it and other nominations are held whole.

Union believes it has an excellent wheeling service. The main line from Dawn to Parkway can be viewed as a large “storage line.” The bulk of volumes transported come from storage and go to highly peak-sensitive markets. Thus, Union can provide customers with an enhanced, high- quality intermptible service on a 4.5 billion cubic feet transport system that is sold out on a peak basis. During the infamous winter of 1993- 94, interruptible service on the main line was only interrupted seven days. Historically, four days of interruption is the norm.

Union believes it has an excellent wheeling service.

Service Hub Offering Union’s S&T Services differentiates between

two levels of services offered at its hub, Basic Services and Enhanced Services. Because of Union’s unique system capabilities, the com- pany believes that its Enhanced Services are of a higher quality than what is generally offered by other market-area hubs.

The Basic Services are all interruptible and include:

Transport or wheeling, Exchanges, Balancing, and Redirects or name-changes.

These services have all been assigned stan- dard operating parameters and have been in- cluded in one all-inclusive Interruptible Service Hub Contract. While only the price is negotiable for the transportation and exchange service components, Union is committed to service parameters and prices that are market respon- sive. With the contract in place, there are no last- minute telephone calls to initiate paperwork. Customers know they have access to Union’s standard service whenever they have the need. A nomination is all that is required.

. . - services have ail been assigned standard

operating parameters.. .

Union’s Enhanced Services, which are gen- erally short-terrdtransactional in nature, use limited resources and are very much in demand.

These Enhanced Services include:

Peak and off-peak storage; Gas loans with variable terms, including winter to summer; Firm and limited firm transport; Longer-term and operational balancing; and Ability to complement storage or loans with firm withdrawal a n d o r injection either at peaking or turnover rates.

Affiliated Pipelines The beneficial interaction between Union

Gas and its Westcoast Energy affiliates pre- sents opportunities to further service both Canadian and U.S. market demands. Union’s affiliate, St. Clair Pipelines, has forged partner- ships throughout North America. St. Clair is involved in the development of such projects as High Deliverability Salt Cavern Storage, both at the supply source (Empress, Alberta) and in the market area, at Cayuta on the CNG system, offering needle peaking services to U.S. North- east LDCs.

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