Backgrounder: The unnatural price of natural gas

Tom McFeat
CBC News Online
January 1, 2001

Every day now, it seems there’s another story about the soaring cost of natural gas.

Millions of Canadians who heat their homes with gas are facing a severe case of sticker shock this winter. Each bill seems to be 10, 20, even 50 per cent higher than the last one.

How big are the increases in natural gas? Try an extra $420 a year for the average customer of Enbridge Consumers Gas in Ontario. That’s what Enbridge has told its 1,500,000 customers to expect.

Union Gas, which has more than a million natural gas customers in Ontario, has written to each one, warning about the latest increases which it anticipates will add an average of $400 a year to the gas bills of its customers.

It’s not just happening in Ontario. In British Columbia, natural gas prices went up 27 per cent on New Year’s Day. The average family in the lower mainland will pay an extra $300 a year, while northerners will pay about $430 more.

In Alberta, ATCO Gas, which supplies 85 per cent of the province’s consumers, businesses, and farms, applied in December for an increase that would add $200 to $250 a month to the average bill of its customers this winter.

Centra Gas in Manitoba applied this month for a whopping 32 per cent increase in its rates, which would mean the average Manitoban gas consumer would pay about $350 more each year.

(Note: It’s even worse in the United States. This week, the U.S. Energy Department warned Americans to expect natural gas bills 70 per cent higher than last year’s).

Soaring gas bills are driving Canadians to distraction, and utility companies have been deluged with complaints. How can this happen in a country that has so much natural gas that we export huge volumes of it to the United States?

In short, blame the free market.

Why are gas prices rising so much?

Since 1985, natural gas commodity prices in Canada have been deregulated (thanks to an agreement between the federal government and the three main gas-producing provinces of British Columbia, Alberta, and Saskatchewan).

Canada is now part of a continent-wide natural gas market. So strong demand in the States (which there currently is) will drive up prices in Canada too.

Many consumers think gas prices are tightly regulated. But that’s only partly true. Your gas bill is made up of three components, and only two are regulated (the pipeline transportation cost and local distribution cost). The actual commodity cost is unregulated and varies according to market conditions.

“Because it is a commodity,” Union Gas president Robert Reid wrote in a letter to each of Union’s customers recently, “Union Gas has no control over the price of natural gas. The price we charge you is the same as the price we pay.”

And as with any other commodity, supply and demand drives the price of natural gas. And the free market has driven prices through the roof.

The production of natural gas was low in 2000 because there was very little drilling for oil and gas in 1999. Oil and gas prices were so low that year, many exploration companies in Canada and the United States closed up shop. That hurt supply.

In fact, the U.S. government announced this week that supplies of natural gas fell to the lowest level since 1976.

There’s also the weather. It was unseasonably cold in November and December in many parts of Canada and the U.S. That boosted demand further.

On top of that, there’s been rising demand for natural gas for years. Despite all the price increases, it’s still cheaper in most parts of the country to heat with natural gas than with oil or electricity. Also, many people are switching from oil or electricity to gas.

Add to that, the fact that natural gas is available in more communities as pipeline networks are expanded, and you have the makings of a classic supply/demand crunch.

So where’s the relief?

There’s no immediate sign of much lower natural gas prices (or lower oil prices either). Indeed, natural gas analyst Peter Linder told CBC’s The National this week that gas prices are likely to remain high for quite a while.

“I don’t believe these high natural gas prices are a temporary phenomenon,” he said. “I believe for the next two or three years at least, we’re going to see very high natural gas prices in North America until we get a reasonable supply.”

Faced with angry consumers with rapidly-escalating gas bills, a number of governments are now offering energy rebates to help ease the pain.

The Alberta government (whose coffers have been swollen by rising energy royalty payments) has led the way in providing energy rebates to its residents.

It’s offering $50 a month for each of the first four months of the year to all natural gas users. It’s also giving a $40 per month rebate for all residential electricity customers that will last all of 2001. Every Albertan over the age of 16 also gets a $300 Energy Tax Refund ($150 went out in November, the other $150 will come at the end of April).

B.C. Premier Ujjal Dosanjh said this week he hopes to announce help soon for people hit hard by rising natural gas prices.

Pressure is building in other provinces to offer similar help.

The feds have gotten into the act too. In its mini-budget in October, the federal government announced a $125 fuel rebate ($250 per family maximum). It’s available for 11 million low and moderate income earners (anyone who qualifies for the GST credit).

What are the alternatives?

Faced with huge gas bills and no assurances that they’ll shrink any time soon, some gas users are wondering if they should switch to another type of fuel.

Some fireplace distributors in Calgary have reported business is up 20 per cent, as some people think they’ll save money if they switch to wood heat. If they don’t pay for their wood, that would obviously be true. But experts say wood delivered from a commercial supplier can still cost more than gas. And since wood too is a commodity, if there’s more demand for it, the price will rise.

In the Yukon, where one in five residents already heat their homes with wood, more and more are joining them. The price of propane (a derivative of natural gas) has increased eight times in just the past month. It’s now four times more expensive for Yukoners to heat with propane than wood.

In lower B.C., dozens of big users of natural gas have switched to heating oil, which in the lower mainland is now half the price of gas. BC Gas says 75 of its business customers have drastically reduced their purchases from the utility or stopped them altogether as they turn to dirtier fuels like heating oil or diesel for their heating needs. Several hospitals and Simon Fraser University are among the ex-gas users who’ve made the switch.

In parts of Manitoba, electricity can now be cheaper than natural gas. While it’s expensive to convert an existing natural gas furnace to electricity (electric furnaces need 200 amp service), there’s a window of opportunity for people who may be buying a new furnace. Manitoba’s Centra Gas says a conventional natural gas furnace will cost the average homeowner $1,291 a year. That’s more than the $1,000 it would cost to heat using electricity. But a mid-efficiency gas furnace costs $968 a year to run, and a high-efficiency gas furnace would cost $842 a year to operate.

Most gas utilities also offer equal billing payment options, where the estimated annual cost of gas usage is averaged equally over all 12 months, instead of charging for current usage (leading to breathtakingly-high winter gas bills).

For most residential gas users, though, the most realistic alternative may be to cut their gas consumption and improve energy efficiency. Virtually all gas utilities have energy saving tips on their Web sites.

And then there are the lucky Canadians who decided in the last couple of years to sign long-term supply agreements from independent natural gas suppliers. They locked in fixed prices for five years that were considered high at the time, but are a bargain now. For them, the natural gas spikes won’t be reflected on their gas bills.

For the rest of us, the good news is that things won’t stay this bad forever. Natural gas prices are cyclical. If this winter warms up, prices may retreat as supplies increase. And with oil and gas prices now so high, more companies are exploring and drilling.

That will also increase supply, so Canadians can look forward to a possible moderation in prices . . . but not in the near future.


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