Business

Double Whammy

The oilpatch rejoices, but consumers are facing steeper prices for natural gas and gasoline

Brian Bergman August 23 1999
Business

Double Whammy

The oilpatch rejoices, but consumers are facing steeper prices for natural gas and gasoline

Brian Bergman August 23 1999

Double Whammy

Business

The oilpatch rejoices, but consumers are facing steeper prices for natural gas and gasoline

Brian Bergman

If there’s a certain bounce in the step of Calgary’s oil and gas barons these days, it’s with good reason. After enduring a free fall that sent crude oil prices tumbling to a low of $10.72 (U.S.) per barrel late last year, the industry breathed a collective sigh of relief as the price climbed back up in recent months to a healthy $21 per barrel. Better yet, natural gas prices, which remained steady even during the oil slump, have suddenly taken flight. The one-two punch in energy prices has the oilpatch abuzz with talk of a vigorous—and potentially lucrative—winter drilling season. “It’s quite unusual to have oil and gas prices moving up at the same time,” says Peter Linder, a senior oil and gas analyst with CIBC World Markets Inc. in Calgary. “This is a real bonanza for the industry, the Alberta economy and investors in Canadian oil and gas stocks.”

For Canadian consumers, though, it’s quite a different story. Across the country this summer drivers have grumbled mightily about steep hikes in the price

of gasoline, including increases of as much as 15 cents per litre in some regions. Normally, consumers could expea some relief, with prices falling back again as summer gasoline consumption abates. But because of OPEC’s decision in March to boost oil prices by cutting production, gasoline prices may well remain high into the winter.

Now, for the nearly six million Canadian households that depend on natural gas for heating comes what amounts to a double whammy on the energypricing front. Already, the average residential heating bill in Alberta has increased by up to $5 per month—or $60 annually—due to the recent jumps in natural gas prices. But the real pinch could be felt this winter—particularly if it’s a severe one. In that event, some oil industry analysts are prediaing that natural gas prices may jump by another 50 per cent or more—adding up to $20 per month to the average home heating bill. It is a prospect that makes many consumers nervous. “I expect our

heating bills will be atrocious this winter,” says Jack Fitzsimonds, a retired Edmonton auto mechanic who, like the vast majority of Alberta homeowners, relies on natural gas. “I don’t like it, but I don’t know what a person is supposed to do about it.”

In some ways, the recent spike in natural gas prices marks the culmination of some dramatic shifts that have taken place in the gas industry over the past 15 years. Until the mid1980s, governments required that gas producers maintain a 25-year supply of natural gas before they could export any of the commodity out of the country. A fixed export price was also strictly enforced. Deregulation of the gas industry, beginning in 1985, was supposed to allow traditional supply and demand market forces to more fairly determine the pace of drilling and the price paid to producers. But it didn’t always work that way.

For many years, gas supplies in Western Canada far exceeded the capacity of existing pipelines to deliver the resource to market. The resulting gas glut served to depress prices to the benefit of consumers. But recent major pipeline expansions are helping to change all that. Additions completed last winter to the Foothills-Northern Border pipeline, which runs from Alberta to Chicago, as well as to the TransCanada pipeline, have increased Western Canadas export capacity by 1.1 billion cubic feet per day. The massive $4-billion Alliance pipeline, running from northeastern British Columbia through Alberta to Chicago, will add another 1.3 billion cubic feet when construction is completed next year.

The improved ability to take the gas to market coincides with escalating demand for Canadian natural gas in the United States, where it is becoming the fuel of choice for both residential users and for new gas-fired electric generation plants. Those plants power the air conditioners that have been pressed into round-the-clock service this summer by the heat wave gripping much of the United States—another factor that has helped drive up demand at a time of year when gas consumption is typically low.

While demand is on the upswing, the amount of gas being stored in Canada and the United States for this winter’s peak heating period is down because of reduced drilling activity earlier this year. The combination of tighter supplies, increased demand and greater pipeline capacity is what has pushed Canadian gas prices up from $2 per thousand cubic feet last August to the current level of about $3.25—the highest summertime prices since deregulation took effect.

What happens next, analysts say, depends largely upon the weather. Linder predicts that if the coming winter in North America is mild, the current price for natural gas could drop by up to 50 per cent. On the other hand, he says, a very cold winter may mean further price hikes of 50 per cent or more.

Others, such as Rick Roberge, an energy analyst with PricewaterhouseCoopers, are more conservative. Roberge says a more likely scenario is for the price to remain for the foreseeable future between $2.75 and $3 per thousand cubic feet—a level that would still mean much heftier heating bills this winter.

One of the companies benefiting from the buoyant gas market is Calgary-based Anderson Exploration Ltd., which has seen its share prices increase by about 65 per cent since March. Company founder J. C. Anderson, a veteran of more than 30 years of the oil and gas trade, has seen his share of troughs and triumphs. Anderson told Macleans he believes higher gas prices will now be the norm “because the fundamentals have changed.” Canadian production is capturing a growing share of the large U.S. market. The American demand for natural gas continues to grow at a rate faster than indigenous production. And, says Anderson, recent pipeline expansions mean “we finally have the transportation capacity to get the gas out of here.”

Like many in the oilpatch, Anderson has paper-thin patience with complaints about how higher prices affect those who rely on natural gas. “If the price of milk goes up, consumers bitch—and so do I,” says Anderson. “But the fact is that gas prices have been pretty damned favourable for the past 15 years.” It is a sentiment echoed by many oilpatch analysts. “I believe the residential natural gas consumer has enjoyed a huge discount in recent years,” says Linder. “He’ll now have to pay a fair market price. There is no price gouging, no collusion here. Just a basic supply and demand situation.”

Not surprisingly, such market arguments fail to impress many everyday natural gas users, including Fitzsimonds. “It’s Alberta’s natural gas,” he says. “At one time, we used to talk about those eastern fellows freezing in the dark. Now, the industry seems to be saying to us, ‘Pay your dollars and cents or we’ll sell it all to somebody else.’ ”

Albertans like Fitzsimonds can at least take comfort in knowing that some of the extra money they shell out in heating costs may not leave the province. According to provincial budget estimates tabled this spring, every 10-cent increase in the price of natural gas pours another $ 167 million a year into the Alberta treasury, while every $1 per barrel hike in crude oil prices translates into another $135 million in annual royalty revenues. Residents of other provinces don’t have a similar cushion—or much choice but to ante up. As Jenny Hillard, a vice-president with the Ottawa-based Consumers’ Association of Canada, points out: “In a country like Canada, it’s not a question of whether you can can afford to pay for heat—you simply have to.” As winter approaches, many beleaguered consumers may feel they have little option but to pray for a green Christmas. EE

Natural gas heats up The price of natural gas has been climbing sharply. CIBC World Markets predicts it will reach $3.75 per thousand cubic feet in the first quarter of 2000, up from an average of $2.26

$4 mmm/4 The monthly closing Albeita Spot Price for natural gas at Price per thousand cubic feet A SO N D J F M A I J J A S 0 D J FM 1998 1999 2000