What hath markets wrought ?

September 17, 2012

One of the big stories of 2012 is natural gas prices. They have declined over the course of the past year and the shock waves continue to reverberate throughout the economy.

Late in 2011, Canada’s National Energy Board released a long term energy price forecast to year 2035. It predicted gradually rising natural gas prices from $4.00 /MMBtu in 2010 to $8.00 in a base case or $6.40 in a low case. Instead of $4.25 natural gas, as expected by Fall 2012, it’s $2.83/MMBtu (Henry Hub). Multi-stage hydraulic fracturing technology (fracking) and horizontal drilling techniques have meant that previously untapped shale and tight natural gas resources have been developed.

Consider a few of the many impacts of now much cheaper natural gas:

• TransCanada’s is considering a plan to convert parts of its Mainline gas pipeline that goes from western Canada to Ontario into an oil pipeline, providing a new channel for Alberta’s growing oil sands production at a time of continuing uncertainty for pipelines planned to the United States and Asia.
• The United States may soon be exporting natural gas to eastern Canada due to discoveries in the mid-west.
• The government of British Columbia, holder of Canada’s top natural gas reserves, slashed government spending, froze salaries for public sector management (including government, Crown corporation, health authorities, universities and colleges), implemented a hiring freeze and is reviewing the bargaining mandate to cope with a collapse in natural gas revenue so severe it’s down to almost nothing.
• Three companies are planning large diameter natural gas pipelines to Prince Rupert and Kitimat BC to export LNG to Asia. The combined capacity of the three pipelines would be 6.9 billion cubic feet of natural gas/day. The three projects are Pacific Trail, Coastal GasLink and Spectra-BG. The pipeline costs are each in the $6-8 B price range. None are under construction. The price of gas in Asia is about 5-7 times the North American price.
• Natural gas is the fuel of choice for new power plants most of the time in most of North America.
• Truck, taxi and bus fleets throughout North America are being converted to natural gas as the economics become more and more attractive.

Commentary

• The decline in gas prices has been unexpected. It has fallen by $1 in the past year, shaking the energy market and increased the attractiveness of natural gas as an energy source.
• The prognosis for a Mackenzie gas pipeline is not good when gas in North America sells for around $3 MMBtu.

Sources

• a)http://www.neb-one.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/nrgyftr/2011/nrgsppldmndprjctn2035-eng.html#s5



• b)http://business.financialpost.com/2012/09/14/natural-gas-producers-get-chance-to-speak-out-on-pricing-pain/



• c)Brent Jang and Nathan Vanderklippe, "A big bet in the race to B.C.'s coast", Globe and Mail, 11-Sep-2012, p.B1.