Interview: Steve Baker
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
IBR: As Canada’s second largest natural gas utility, can you describe Union Gas’s role in connecting natural gas exploration to the Ontario consumer?
Steve: Union Gas contracts for natural gas supply from all over North America, including Western Canada, the US Gulf Coast, and most recently from the Marcellus and Utica shale basins in Pennsylvania and Ohio. Union Gas contracts for pipeline transportation capacity on various third party pipelines to move that gas to Ontario where it then connects onto our network. Once that gas gets to Ontario and into our pipeline system, we move it either into our underground storage facilities if it’s not needed at that point in time, or we transmit and distribute that gas all across Ontario to various residential, commercial, and industrial customers.
IBR: How does Union Gas decide how much to charge consumers for natural gas?
Steve: We do not make that decision. The rates that Union Gas charges customers is regulated by the Ontario Energy Board (OEB). The price of the natural gas commodity itself is unregulated in North America. When Union Gas buys natural gas for customers that we serve directly, we pass that cost on to consumers at our cost with no mark-up. Union Gas makes money based on the rates charged on the assets we use to distribute, transmit, and store natural gas, which are regulated by the OEB. The OEB determines the overall capital structure and return on equity that we can get on our assets as well as the costs we incur to provide service to customers. This is what determines what customers pay for natural gas service.
IBR: If Unions Gas’s return is regulated, how does the company grow against its competitors, if they are also regulated to similar returns?
Steve: The way we grow is by developing and expanding our system where it makes economic sense. As an example, we are currently in the process of completing some major expansions on our large transmission pipeline system that extends from Sarnia to Toronto, to connect the new Marcellus and Utica shale gas to our customers. Even though our return is fixed and regulated, the way we grow our business and grow our revenues is to expand our system in order to meet customer demand for additional or new service from our company.
IBR: If I live in your service area, do I have to buy gas from you?
Steve: You do not have to buy gas from our company, as the natural gas market is unregulated. Consumers in Ontario can buy the gas commodity from Union Gas, where we pass the commodity cost through to consumers at cost with no mark-up. Alternatively, customers can also buy gas themselves, or through a third party energy marketing company. Typically, most of our large commercial and industrial customers in Ontario buy their own gas, either directly or through a marketer, while most residential customers buy gas through our company.
IBR: How does Union Gas manage the range between the winter and summer seasons?
Steve: Ontario is blessed with good geology. We have many old, depleted natural gas fields which make great underground storage facilities. Ontario actually used to produce a lot more natural gas than it does today. Once those gas fields were fully produced, we redeveloped them for natural gas storage. In the summer, when consumer gas consumption is the lowest, we take gas that comes into our system and we inject that gas underground into our storage facilities. In the winter, when demand is higher, we take that gas out of storage, put it into our pipeline system, and distribute it to customers.
Storage of natural gas is also crucial as the province moves toward renewable energy generation like wind and solar, where natural gas can act to balance the electricity supply in Ontario. Natural gas can be taken out of storage to fuel gas fired power plants when renewable energy generation is down. Then when renewable generation is on, we can take that gas and put it back into storage. Storage serves a lot of purposes and provides significant flexibility to the province to meet overall energy demands.
IBR: Given discussion on fracking, and the dangers of pumping fluids back into the earth, is this a safe practice?
Steve: Underground natural gas storage is very safe. Union Gas has been storing natural gas this way for over 50 years. Our storage is all naturally occurring, and we’re simply putting gas back where it was originally stored for millions of years. All of the storage pools we operate have a very thick and strong cap rock on the top of the reservoir. We monitor the storage wells to ensure we don’t overpressure a pool and damage the reservoir, pressurizing it to a maximum of approximately 70% of historical pressure levels. That gives us the confidence that we can manage that pool and maintain integrity.
IBR: What does Union Gas do to keep its pipelines from leaking or exploding?
Steve: When Union Gas constructs new facilities, they meet very high standards. Our number one area of focus when we build new facilities is to meet all required codes and standards, and we often choose to go well beyond the minimum standard. Once the facilities are in the ground, we inspect those pipelines approximately every seven to eight years. Through the use of pipeline inspection tools and X-Rays, we look for damage like corrosion and pipeline thickness erosion. We also periodically dig up sections of the pipeline and visibly inspect it in order to assess the overall condition of the pipe. If we run into any issues, the pipe is repaired or replaced.
IBR: What is a typical life cycle of a natural gas pipe?
Steve: There is no single answer. The lifecycle of a pipeline really varies based on various factors, including the vintage of the pipe itself and the ground conditions in which the pipe is located. Through our pipeline integrity program, we’re consistently monitoring our pipelines and we’re very proactive with checking pipelines susceptible to hazardous environments. Most of the pipelines that we build will have at least a 40-50 year life cycle.
IBR: Traditionally, Union Gas has procured its supply from far away places like Western Canada and the Gulf Coast. Do you see this changing given the rise of shale gas?
Steve: As a natural gas utility, Union Gas focuses on having a diverse portfolio of gas supplies. These supplies are obtained from across North America and delivered on many different pipelines. This helps us to provide our customers with a more diverse and stable commodity price. We are very supportive of supply diversity and will continue to keep buying our supply from various locations.
IBR: Union Gas has been vocal in its opposition to the TransCanada Energy East pipeline. Given the increase in cheap supply from Pennsylvania, why would Union Gas oppose removing sections of the underutilized main line from service?
Steve: Firstly, Union Gas is not opposed to the Energy East Pipeline project. The Energy East project involves TransCanada wanting to convert about 3,000 km of its “Mainline” gas pipeline to oil service from Alberta to Ottawa. For 90% of the project, from Alberta to North Bay, that existing natural gas pipeline system is underutilized today. Union Gas is not opposed to finding better uses for underutilized pipeline capacity. Our issue is with the 300 km section from North Bay to Ottawa. That pipeline is fully utilized today and is critical for meeting the market demand in Ontario, Quebec and the US Northeast, regardless of whether the gas is sourced from Western Canada or the Marcellus. The Energy East project would have that line be converted to oil transportation with a new replacement gas line built in its place. We believe the proposed replacement natural gas pipeline is too small to meet the gas market requirements.
Further, if TransCanada has to build a new replacement pipeline as a result of converting the existing North Bay – Ottawa line from gas to oil, our view is that the higher capital cost and related capital risks relative to the existing line being converted to oil transportation should be borne by the Energy East project and its shippers, not by Eastern Canada’s gas consumers. All Union Gas, Enbridge Gas Distribution and Gaz Metro are looking for is to be left cost and capacity neutral.
IBR: Do you see that your concerns are being recognized?
Steve: TransCanada has now filed its Energy East application with the National Energy Board, which is currently reviewing the application. We expect them to make a decision as to whether the application is complete sometime this spring. Assuming the application is deemed complete, the NEB would commence the hearing process where we will voice our concerns.
It should be noted that all three major gas utilities in Eastern Canada – Union Gas, Enbridge Gas Distribution in Ontario, and Gaz Métro in Quebec – have raised our concerns with TransCanada directly. Our preference is always to negotiate a settlement and reach agreement outside of the formal regulatory process. In this case, we did not reach an agreement and will be going down the regulatory path.
IBR: Has Union Gas considered signing up for capacity on one of your parent companies’ pipelines to supply your Eastern Ontario Customers?
Steve: Yes. Our parent company is planning a new project to move Marcellus and Utica gas to Ontario – the pipeline is called the NEXUS Gas Transmission project. We have signed an agreement for capacity to move Marcellus and Utica gas on that pipeline to Ontario. Given the significant natural gas supplies being produced in the Marcellus and Utica shale plays, we feel that it is critical to get that supply physically connected into Ontario. The pipeline still has to go through regulatory approval process in the US, but it’s clearly a project we think is good for Ontario and our consumers.
IBR: What opportunities do you see for Union Gas to grow given the relatively mature nature of the market in Ontario?
Steve: Even though the natural gas market in Ontario is mature, we continue to see a lot of opportunities to grow the company. One, there are still a lot of communities in Ontario that still don’t have access to natural gas and instead use other forms of energy and we are working to connect these communities to our system. Further, we are currently going through a number of major expansions to our transmission system to expand natural gas deliveries to Toronto, Eastern Ontario, and Quebec. Additionally, with the competitive price of natural gas relative to other fuels, we believe there are opportunities in compressed natural gas (CNG) and liquefied natural gas (LNG) in the transportation sector.
IBR: Do you think there is substantial market potential for LNG in transportation and what steps need to be taken to convert those vehicles to use LNG instead of diesel?
Steve: The LNG market for transportation is currently in a bit of a chicken-egg dilemma. When we approach transportation companies to discuss the potential of converting their diesel vehicles to natural gas or to consider purchasing LNG vehicles, they ask ‘where am I going to fill up?’ If we build the infrastructure, we then ask the question of whether there will be enough demand to support this new infrastructure. It’s a tough market to get going initially. However, the federal government has recently announced some tax incentives in the form of enhanced capital cost allowance for LNG facilities. Those incentives will apply to both LNG facilities that will be used to export natural gas from the West Coast as well as LNG facilities that help fuel the domestic transportation sector. That is a very positive step and could help overcome some of the initial inertia in terms of moving the LNG transportation sector forward.
IBR: Given Canada’s aging workforce, what challenges or opportunities do you think this poses for Union Gas?
Steve: Clearly we’re seeing the impact of the aging workforce, particularly if we look at our field personnel, where the average age is mid-fifties. However, I definitely think that leads to many opportunities in the sector. As an example, we are actively recruiting and training new employees, putting them side-by-side with experienced employees so they are ready to step in and replace them when they choose to retire. In addition, we are actively looking to expand our workforce by recruiting directly from colleges and universities in order to support our growth plans. Currently, we provide opportunities for engineers to get their P. Eng designation and accountants to get their Certified Accounting designations while working at Union Gas. These new employees are the future leaders of the company and we are proactively planning for the future.
IBR: Do you think we can rely on the Canadian government to help impose programs to improve energy literacy through the education system? If not, what do energy companies need to do to encourage proper discussion?
Steve: I don’t think we can rely solely on government to do all that education for us. I think the government can play a role through partnering with industry and academic institutions to develop a better curriculum that can be extended into our school system at various grades. However, it will be the responsibility of the industry to facilitate that discussion. It starts by having our employees educating their kids about the energy sector and how energy is used to produce many of the products that we use and are part of our everyday lives, how energy is used and what the energy sector means for jobs and economic opportunities, I think those are all things that we should do more of.
