Changing Commodity Costs: the Impact on Canadian Markets

Low natural gas prices are aiding in a shift in Canada’s economy from coast to coast to coast as both large and small consumers take advantage of the impact of abundant natural gas supply and new pipeline infrastructure.

Although producers in western Canada are facing a financial impact from the rapidly increasing shale gas supplies in the United States, residential consumers, manufacturers and even some heavy hitters in the oil patch are benefiting. Natural gas prices have retreated from the volatility seen over the last decade when they fluctuated between $1.80 per gigajoule and $12 per GJ, rising on threat of short supply. Ample volumes from new, conveniently located basins now have analysts1 forecasting prices around $2.64 per GJ this year and slowly rising to around $(US)$3.50. per GJ by the end of the decade.

New pipeline infrastructure

New pipeline infrastructure

The drop in prices has been a boon for many, particularly the central Canada manufacturing base which has seen lower input costs, notes Trevor McLeod, director of the Center for Natural Resources Policy of the Canada West Foundation.

“It’s a structural shift in the economy, one that we weren’t expecting,” he said. “Natural gas prices were going to be high because gas was going to be scarce for a long time. Now we think prices will be low and natural gas will be plentiful for a long time.”

“We think prices will be low and natural gas will be plentiful for a long time.”

In 2000, concerns about declining natural gas reserves sparked consideration of dozens of liquefied natural gas (LNG) import projects along the east, west and Gulf coasts in the United States and in Canada. Natural gas prices more than quadrupled, and hit a record high of $12.72 per GJ in 2008. All forecasts were for natural gas to average at least $5.69 per GJ, and up to $9.48 per GJ, in a fuel-constrained future.

Then the use of multi-staged fracking and horizontal drilling unleashed previously untapped reserves of shale gas into North America, pumping up supply in a land-locked market. The market responded and prices dropped, which resulted in gloom from natural gas producers but cheer in other regions.

“Low gas prices should help with diversifying the economy.”

“Low gas prices should help with diversifying the economy.”

“Low gas prices should help with diversifying the economy in the manufacturing and industrial side. It will make us more competitive as a jurisdiction and globally because while natural gas prices are low in North America, they are relatively high elsewhere,” McLeod said.

Industry represents approximately 33 per cent of Canada’s natural gas consumption. The current price scenario has definitely proven beneficial for the Canadian fertilizer industry, which is among the largest in the world and consumes about six per cent of all natural gas in Canada.

Tractor applying fertilizer to a field

Tractor applying fertilizer to a field

“Natural gas represents 70 to 90 per cent of the total input costs for nitrogen fertilizer and 20 to 25 per cent for potash production”, said Clyde Graham, acting president of the Canadian Fertilizer Institute.

“Natural gas is an input essential to fertilizer manufacturing, and other value-added industries,” Graham said. “In addition to being a critical feedstock, manufacturing nitrogen fertilizer with natural gas inputs, versus coal, has significantly reduced the fertilizer industry`s environmental footprint.”

“Natural gas is an input essential to fertilizer manufacturing, and other value-added industries.”

He noted reducing costs by using cheaper natural gas increases the possibility for reinvestment into the industry, fomenting economic growth and employment.

Average consumers also benefit from the lower natural gas prices. In fact, according to the Canadian Gas Association the average Canadian residential and commercial customers save between $2,000 (residential) and $15,000 (medium commercial) per year on their energy costs by using natural gas.

“Average consumers benefit from the lower natural gas prices”

“Average consumers benefit from the lower natural gas prices”

The oil sands industry represents another big consumer of natural gas, using 10 per cent of Canadian production, or just under 1.5 billion cubic feet per day in its thermal and mining operations. Approximately 50 per cent of the operating cost for Canada’s oil sands industry is tied up in energy, and 20 per cent of that is natural gas.

Lower gas prices are of “huge benefit to the oil sands industry because of the lower input energy, and on the back end of oil prices plummeting, it softens the blow,” said Peter Howard, president emeritus of the Canadian Energy Research Institute (CERI).

Demand for natural gas by the industry is expected to double to 3.2 bcf per day by 2048, CERI projected. “The other side of the equation is that activity in the field is a direct relation to the prices,” Howard added.

In February, the traditional peak of the drilling season, well licencing in Alberta fell to a five-year low. The drop reflected how western producers are being displaced in their traditional markets of Ontario and Quebec by cheaper natural gas from the United States Marcellus play (lower transportation fees). Lower prices mean no incentive to produce natural gas, loss of jobs and lower royalties for some provincial governments.

Pipelines in the Marcellus Shale region

Pipelines in the Marcellus Shale region

Natural gas prices likely will continue to soften this year on lower exports to the United States and more competition with Marcellus, Gulf and Rockies gas, said Martin King, analyst with First Energy Capital Corp., but pick up in late 2015, early 2016 as winter heating demand kicks in.

“There’s a lot of gas in the system, there is a lot of potential supply growth. We know the demand growth is just not there to match that supply growth yet and I think we need lower prices to get that demand growth to stand up to all that supply growth,” he said.

King expects to see more of the lower price impact this year in the United States, where the use of natural gas over coal in power generation has grown. Outside of the oil sands for industrial use there will be virtually no impact in Canada because the structural growth of gas consumption in the industrial section here has been flat to declining for years, King said.

CEA Devin McCarthy, Director of Generation and Environment for the Canadian Electricity Association noted it was difficult to single out the impact of lower prices on the power generation market. Factors such as the lifespan of existing power plants, demand and supply play strong roles, he said. “Over the longer term, if lower gas prices are projected to be the norm, utilities may focus investment on natural gas generation facilities to meet load growth or replacement needs.”

Dina O’Meara is former business writer with the Calgary Herald and is now a communications consultant.

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