INDEPTH: ENERGY
The unnatural price of natural gas
CBC News Online | Jan. 3, 2006
Millions of Canadians who heat their homes with natural gas are feeling the pain of higher prices this winter. Each bill seems to be higher than the last one.
How big are the increases? Try an extra $257 a year for the average Enbridge Gas Distribution customer in Ontario, effective Jan. 1, 2006. That's what Enbridge has told its 1,700,000 customers to expect.
Union Gas has told its more than 1 million Ontario customers to expect their annual bills will rise by $250 in southwestern Ontario and by $300 in eastern and northern parts of the province. Gas companies in Ontario adjust their rates every three months.
CANADIAN NATURAL GAS SUPPLIES
Estimated natural gas resources in Canada:
450 trillion cubic feet
Length of time they'll last:
74 years
Source: National Energy Board
In Manitoba, Centra Gas adjusted rates four times in 2005, boosting the annual bill of a typical residential customer by $201. Natural gas bills are heading up in every province where gas is consumed.
Soaring gas bills are driving Canadians to distraction and utility companies have been deluged with complaints. How can this happen in a country that has so much natural gas that we export huge volumes of it to the United States?
In short, blame the free market.
Why are gas prices rising so much?
Since 1985, natural gas commodity prices in Canada have been established on the free market (thanks to an agreement between the federal government and the three main gas-producing provinces of British Columbia, Alberta, and Saskatchewan). Canada is now part of a continent-wide natural gas market.
Many consumers think gas prices are completely regulated. But that's only partly true. Your gas bill is made up of three components, and only two are tightly regulated (the pipeline transportation cost and local distribution cost). Interprovincial pipeline rates are regulated by the National Energy Board; local distribution rates are regulated by provincial authorities. Those regulated transportation costs don't vary all that much.
The actual commodity cost, on the other hand, is unregulated and varies wildly according to market conditions. And don't think that your gas company is making out like a bandit because of high natural gas prices. Local gas distribution companies are not allowed to mark up the prices they pay for gas; they must pass it along to residential consumers at their cost.
Depending on the province and the regulatory framework, customers in different provinces will pay different rates for their gas depending on the contracts local distribution companies are able to negotiate with gas suppliers. But the bottom line is much the same – expect to pay 20 to 50 per cent more for natural gas this winter, according to the Canadian Gas Association.
(Note: It's the same story in the United States. The U.S. Energy Department is warning Americans to brace for natural gas bills this winter to be, on average, 38 per cent higher than last year's).
As with any other commodity, supply and demand drives the price of natural gas. That makes gas prices extremely volatile. And this winter, prices have been driven by higher demand and tighter supplies.
Hurricanes Katrina and Rita that hit the U.S. Gulf coast in the late summer of 2005 led to the shutdown of most of the gas production in the Gulf of Mexico. Many production platforms, undersea pipelines, and natural-gas processing plants suffered extensive storm damage. By December of 2005, 29 per cent of gas production in the Gulf was still shut down.
There is limited storage capacity for natural gas because it is usually kept in pipelines or empty salt mines and any sudden rise in demand runs down stocks.
There's also the weather factor. Even at the best of times, gas prices tend to rise in winter along with the rising demand for residential space heating.
On top of that, there's been rising demand for natural gas for years. Despite the price increases, it's still cheaper in most parts of the country to heat with natural gas than with oil or electricity. Also, many people are switching from oil or electricity to gas. And there's still plenty of upside for natural gas demand to grow: only half of Canadian and U.S. homes currently heat with gas. Many industries are also choosing gas over oil as crude prices soar past $60 US a barrel and utilities are increasingly using natural gas to generate power.
Add to that, the fact that natural gas is available in more communities as pipeline networks expand and you have the makings of a classic supply/demand crunch.
What's the forecast?
Natural gas futures suggest there will be the normal easing of prices once winter comes to an end. But how much they'll fall will depend on how cold the rest of the winter is and how fast Gulf Coast production can recover.
As for the supply side of the equation, companies are busy drilling for more gas, but it takes time to bring new supplies to market.
For the longer term, some are hoping imported liquefied natural gas (LNG) can help ease any supply shortages. LNG is natural gas that has been liquefied by super-cooling it. This reduces its volume to less than one per cent of its gaseous state and allows it to be transported by ship. So gas can be sent from overseas markets to Canadian markets, where it can be "re-gasified" and then sent to Canadian and U.S. markets by pipeline.
The problem is that proposed new LNG terminals in Canada aren't expected to be operational until 2008 at the earliest.
Where's the relief?
Faced with angry consumers with rapidly-escalating gas bills, a number of governments are offering energy rebates to help ease the pain.
Gas-rich Alberta is sending out tax-free $400 resource rebate cheques to every resident in January 2006. The province has also provided natural gas rebates whenever the commodity price rises above a trigger point (and it's far above that trigger point now).
Many provinces, often in partnership with the federal government, also offer rebates for purchases of energy-efficient furnaces and appliances or to upgrade insulation or to buy a programmable thermostat.
Saskatchewan is spending $130 million to cap increases on Crown-owned SaskEnergy natural gas bills at 10 per cent this winter.
The federal government has also announced an Energy Cost Benefit program, which provides rebates of $125 to $250 to lower-income Canadians to help them with higher energy costs. Those rebates will be sent in January 2006.
Consumers may want to take advantage of the equal-billing payment option that most gas companies offer, where the estimated annual cost of gas usage is averaged equally over all 12 months, instead of charging for current usage (leading to breathtakingly-high winter gas bills).
For most residential gas users, though, the most realistic alternative may be to cut their gas consumption and improve energy efficiency. Virtually all gas utilities have energy-saving tips on their websites.
And then there are the lucky Canadians who decided in the last couple of years to sign long-term supply agreements with independent natural gas brokers or marketers. They locked in for up to five years at prices that may have looked high at the time, but are a bargain now. For them, the recent natural gas commodity spikes won't be reflected on their gas bills.
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