BUSINESS

Fuel for a fight

A dispute over gas prices hurts Alberta producers

ROSS LAVER October 14 1991
BUSINESS

Fuel for a fight

A dispute over gas prices hurts Alberta producers

ROSS LAVER October 14 1991

Fuel for a fight

A dispute over gas prices hurts Alberta producers

BUSINESS

Veteran Calgary oilman Hilton Westmore shakes his head in dismay as he reviews a series of monthly financial statements from a natural-gas well 15 km north of Medicine Hat, Alta. Westmore’s company, Enchant Resources Ltd., owns minority stakes in eight natural-gas properties across the province. But because prices for gas have fallen over the past four years, he said, “Some of those wells are at the point when it is scarcely worthwhile to operate them.” Westmore’s dilemma is widely shared in Alberta’s energy industry, which has been battered by a North America-wide gas surplus. Now, many gas producers fear that their incomes will be squeezed even further as a result of a dispute over gas prices between Alberta and California, which buys $1 billion worth of natural gas from the province each year. Said Westmore: “The problem is that Californians can get the gas elsewhere if we don’t sell it to them.” The current controversy is rooted in the 1950s. At the time, San Francisco-based Pacific Gas & Electric Co., which distributes gas to residential and industrial consumers throughout northern California, was anxious to find a secure supplier to help meet the region’s rapidly growing demand for energy. To solve its problem, the

company built a 42-inch-wide pipeline to Alberta and signed exclusive, long-term contracts with a large pool of Calgary-based energy firms, known collectively as Alberta & Southern Gas Co. Over the years, the arrangement has yielded large profits for Alberta producers by protecting them from sharp fluctuations in gas prices. Moreover, the Alberta industry reaped a windfall after an Arab-led oil embargo drove up oil prices in the early 1970s and led to forecasts of a worldwide energy shortfall. Fearing a disruption in gas shipments from Canada, Pacific Gas agreed to renegotiate its contracts at substantially higher prices.

In recent years, however, the relationship between buyers and sellers of natural gas has shifted dramatically. Using advanced exploration equipment, drillers have located large reserves of natural gas in both Canada and the United States. That has driven down prices and allayed consumers’ concerns about the security of energy supplies. Indeed, a Calgary-based energy consulting firm said last week that average prices for shipments of natural gas from Alberta to Eastern Canada are now at a 15-year low. According to Ziff Energy Group, the average price for 1,000 cubic feet of gas last July was 99 cents. In July, 1985, that

amount cost almost $2.50.

The 7.5 million Californians who rely on Alberta gas have grown increasingly resentful towards the 30-yearold price-setting system. During a visit to Calgary last July, the president of the California Public Utilities Commission, Patricia Eckert, described the arrangement as obsolete and out of step with the current trend towards deregulation and freer trade. Eckert’s organization, a state-funded consumer advocate agency, is currently urging California’s utilities to stop paying price premiums for long-term Canadian gas supplies. Instead, the commission wants utilities to purchase gas on the open market at the lowest price.

Those complaints have clearly had an adverse impact 1 on producers. In August, the z 190 companies that sell gas < to Alberta and Southern Gas x Co. agreed to cut their prices ^ by about 15 per cent. They will now collect an average of $1.74 for every 1,000 cubic feet, compared with approximately $2.01 a year ago. Meanwhile, the price for Alberta gas in Eastern Canada has also dropped. Utilities in Ontario, which consumes 27 per cent of Western Canada’s production, will pay $1.91 per 1,000 cubic feet beginning on Nov. 1, down 11 cents from current prices. (In Central Canada, a typical home heated with natural gas consumes about 96,000 cubic feet a year.)

The dispute is also causing problems for Alberta’s governing Conservatives. The province’s energy minister, Richard Orman, says that he favors a free market in gas exports. Currently, however, royalties from energy production account for about 25 per cent of the province’s $12.6 billion in total annual revenues. As a result, any further decrease in gas export prices would strain the province’s balanced budget. In an apparent effort to prop up prices, Orman has said that Alberta may decide not to grant an export permit to one of two new gas pipeline proposals, one by Pacific Gas & Electric and the other by the Houston-based Altamont Gas Transmission Corp.

Westmore, however, is philosophical about the current dispute. He adds that he does not blame the California Public Utilities Commission for trying to drive a harder bargain with Alberta’s natural-gas producers. “It is a matter of supply and demand,” he said. “When we had them over a barrel 10 years ago, we upped the price. Now the pigeons are coming home to roost.” And like his colleagues in the energy industry, Westmore knows that there is precious little that he can do about it.

ROSS LAVER

JOHN HOWSE