The transaction, which was announced on Friday, October 7, saw Enbridge obtain a 57.6 per cent interest in the first two phases of the development from Encana, who initiated construction of the facility with plans to eventually sell their share. The deal is worth about $220 million. It should be completed in December, 2011.
Enbridge already has a strong presence in the midstream business in the United States, but this is their first foray into that sector in Canada.
"Given the fundamentals are so strong in Western Canada now, in the gas business and in the NGL (natural gas liquids) business, we thought it was an ideal time to enter the business in the way we did," said Al Monaco, President of Gas Pipelines, Green Energy and International for Enbridge. "And this is a pretty good first step."
It may also be good timing.
On September 19, British Columbia Premier Christy Clark announced her government's commitment to building the liquefied natural gas (LNG) industry in the province. Ziff Energy Group released a report in late August stating that natural gas demand for oil sands operations is expected to grow considerably over the next decade.
Cabin could be central to both applications for Horn River gas.
"The plant itself is critical to ensuring that ... the Horn River Basin reserves are monetized," said Monaco.
The first phase of the plant, which is seventy per cent complete at the time of the transaction, will be processing up to 400 million cubic feet (mmcf) of gas by the third quarter of 2012. Phase two should double that capacity. At that point, Enbridge's investment will total approximately $900 million.
"It's a very good source of gas for both purposes," said Monaco, referring to the LNG industry and oil sands demand for natural gas.
"Exporting gas to Asia, ultimately," he continued, discussing LNG specifically. "We think that's likely going to be after 2015, but it makes a lot of sense as a source of supply for exporting gas off the West Coast."
Monaco considers Cabin a good way for Enbridge to get in on the ground floor.
"Certainly, being involved in Northeast B.C. gets us in on what will be ... the growing part of western Canadian production," he said. "This is where it's at for many years to come. So, I think it's a good ground floor opportunity. Ultimately, the objective would be to participate in the LNG infrastructure. So, that could mean the pipelining and perhaps the LNG facility itself on the coast."
However, Monaco doesn't see this deal as Enbridge hedging their bets with LNG - considering all the obstacles still facing their proposed Northern Gateway pipeline, which would transport Alberta oil to the coast for export to Asia if approved.
"I think we are equally keen on both," he said. "They're not mutually exclusive at all in our view. We think the Gateway project is very solid. And so we're really not looking at it as a hedge."
Enbridge is also enthusiastic about oil sands demand for natural gas if oil prices remain high and oil sands developments continue to grow.
"I would say that, from our perspective, we're very bullish on the gas story in Western Canada," said Monaco. "And if you look at where that growth is going to come from, certainly it's Northeast B.C."
Additionally, Monaco remarked that shale gas is bringing a new level of stability to the industry simply because of its abundance.
"Historically, users of natural gas in North America have been concerned about the volatility of price," he explained. "But with the advent of shales and the surplus of supply, that provides good stability for gas users going forward."
Enbridge has been interested in acquiring a share in Cabin for about a year.
"For us, this really fit well because ... we've got a lot of experience in the United States in this kind of business," said Monaco. "We have 25 plants that we operate ... in the Texas area. And so this allows us to take that experience and apply it to something that we're looking to move into in Canada. So, from that perspective, it's good.
"The other part of it, which is probably just as important, is that we've always focused on trying to make the Western Canadian Sedimentary Basin more competitive with other basins. We've done a great job of that on the oil side with the oil sands infrastructure that we bring to bear. But we're able to do this now, as well, by bringing our low cost of capital to bear on something like this.
"And producers are very focused nowadays on making sure they have the lowest cost. Because the Northeast B.C. area is very remote. So, in order to become competitive with other basins, producers are looking for low cost infrastructure, which is something we think we can bring to the table."
"The nice thing about this investment is it does come with what I like to call 'embedded' growth," he continued, noting that Enbridge is open to acquiring a larger stake in the facility. "So, if there is the need to expand the facility in the future, phases three to six, then we'll have an opportunity to do that as well. That's what's quite attractive about this."