Canadian perspective on North American natural gas prices

greenspun.com : LUSENET : Unk's Wild Wild West : One Thread

http://www.theglobeandmail.com/servlet/RTGAMArticleHTMLTemplate/D,D/20001207/wmath1?tf=RT/fullstory_Bus.html&cf=RT/config-neutral&slug=wmath1&date=20001207&archive=RTGAM&site=Business

POSTED AT 2:57 PM Thursday, December 07

Natural gas prices more than just a seasonal blip

By MATHEW INGRAM

Globe and Mail Update

Kind of makes you wish you had bought natural gas stocks about six months ago, doesn't it? Just as many industry watchers said they might, natural gas prices have skyrocketed into record territory -- soaring by more than 75 per cent in the past month alone -- and that means homeowners who use gas will be getting a nasty shock. Investors who were smart enough to move into oil and gas stocks, however, are trying hard not to smile.

Natural gas prices almost always spike up when there's a big cold snap, the kind currently gripping most of North America, resulting from what weather watchers for some reason choose to call a "polar pig" coming down from the Arctic. But this is more than just the usual seasonal blip -- it is the inevitable outcome of a chain of events that has been taking place in both Canada and the U.S. for the past five or six years, and one which is still going on today.

The bottom line is that prices are likely to remain high for at least the next few years. Not as high as they are now, perhaps, but still far higher than in previous years -- prices are more than three times as high as they were a year ago, and might retract to the point where they are only twice as high as they have been historically, but are unlikely to go much farther. In fact, eventually the prices from yesteryear will be the ones that look odd by comparison.

Unlike the crude oil business, searching for the reasons behind the natural gas price rise doesn't involve trying to analyze the complicated inner workings of a secretive cartel such as OPEC. The current prices for natural gas are almost purely a function of that age-old one-two punch of supply and demand, although some of the factors that produced this spike started taking place several years ago and are only now making themselves felt.

In the larger sense, the issue is this: the United States needs more and more gas and has been producing less and less, leaving Canada to fill in the gaps. But Canadian producers haven't been producing as much as they might have, a result in part of lower prices for crude oil in 1998 and 1999. That has put the North American industry into an extremely tight supply situation, one that it is going to take some time to work out of.

In the not-too-distant past, Canadian gas prices were far lower than U.S. prices -- as much as $2 per thousand cubic feet (mcf) or 60 per cent lower -- because there wasn't enough pipeline capacity to take the gas from Alberta and B.C. to the United States, where the demand was. That meant gas backed up in Alberta and created a glut, driving prices down.

Then along came the Alliance pipeline, started by a group of producers who were tired of waiting for Nova Corp. and TransCanada PipeLines to provide more routes to the U.S. After more than four years of planning, the $4.7-billion pipeline finally opened for business last month -- but there still isn't enough natural gas being produced to fill it.

Part of the problem is that crude oil prices tend to subsidize natural gas drilling to some extent, and when crude was in the tank in 1998 and much of 1999, there wasn't a whole lot of drilling going on. Since an entire industry can't start on a dime when things turn around, there's an inevitable time delay before more supply can appear on the scene.

That's about where things stand now: U.S. producers haven't kept up their production either for the past few years, which means that inventories are at extremely low levels. Demand, however, has been steadily rising, thanks in part to an ongoing move away from heating oil and coal to natural gas for things such as electrical power plants.

In California, for example, power generators are required by law to switch to gas -- which helps explain why the price of natural gas in that state is about $37 per million British Thermal Units (one mmBTU is roughly equivalent to a thousand cubic feet or mcf). That's more than four times what prices are in other states, where gas is averaging $8.50 per mmBTU, and more than 16 times what they were last year at this time.

Some analysts expect that natural gas prices will go through $10 at some point this winter, and that while they may retreat to the $4.50 or $5 level once the winter is over, they will probably stay at that level for the next couple of years -- about twice what they were last year. In other words, don't feel too badly because you missed the initial runup in natural gas stocks: the big spike may have come and gone, but there's plenty of juice left to keep them healthy for the foreseeable future.



-- (rising@prices.eh?), December 08, 2000

Answers

New Gas Pipeline Planned in Alaska

-- (in@energy.news), December 08, 2000.

Moderation questions? read the FAQ