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Canada Shielded Residents from Winter's Natural Gas Price Spikes

It paid handsomely to live on the Canadian supply side of the natural gas market over the last heating season. In the chief gas-producing province, Alberta, the government disclosed spending of C$650 million (US$552 million) to shield residents against the worst effects of spiking prices and still had cash left over for other benefits.

The shield, titled the Natural Gas Rebate Program, subsidizes residential and small-business bills from October through March. The scheme kicks in when prices exceed C$5.50 per gigajoule (US$4.90 per MMBtu), and a graduated scale of subsidies caps rates for most Alberta consumers at C$8.75 per gj (US$7.80 per MMBtu).

Average Alberta monthly household gas bills, after the rebates, peaked at C$280 (US$238) in January. The shield program kept Alberta consumer rates about 20% below the national Canadian average throughout the heating season, the provincial energy department estimated. Heating-season savings on gas bills by Alberta households averaged about C$400 (US$340) a piece.

Canadian markets tracked the United States during the heating season, with variations owed to local conditions. As effects of hurricanes in the Gulf of Mexico and spells of chilly weather spread north across the border then receded, monthly average Canadian commodity prices went from C$7.33 per gigajoule (US$6.54 per MMBtu) in August to C$9.13/gj (US$8.15) in September, C$10.54 (US$9.40) in October, C$13.02 (US$11.62) in November, C$10.11 (US$9.02) in December, C$11.48 (US$10.25) in January, C$8.02 (US$7.16) in February and C$6.87 (US$6.13) in March.

For purposes of preparing April bills under a formula maintained by the Alberta Energy and Utilities Board, local distributors forecast the Canadian market will average C$6.39/gj (US$5.70) in April. The AEUB enters the picture because the vast majority of Albertans continue to use an option to stay with regulated gas pricing, to pay rates that change every month but are tightly policed, rather than bet on long-term supply contracts sold on the parallel deregulated retail market. The rebate program covers both the regulated and deregulated markets, to the considerable annoyance of retailers trying to sell consumers on switching.

Since the Alberta rebate program's introduction in 2003, the government estimates it has cost about C$1.1 billion (US$935 million), including C$650 million (US$552 million) in the 2005-06 heating season, C$283 million (US$240 million) in 2004-05 and C$203 million (US$172 million) in 2003-04.

But the costs of the scheme are officially regarded as reasonable by standards of benefits the province reaps from high gas prices. Provincial royalties on gas production, which mostly comes from Crown or government-owned mineral rights, run as high as 30% depending on prices and the vintage and costs of production.

In the government's 2005-06 fiscal year that ended March 31 alone, the province's new budget for '06-07 estimates that gas royalties were C$8.2 billion (US$7 billion). The royalty numbers underestimate the benefits of being Canada's chief producing region because gas-targeted drilling also generates most of the province's sales of mineral rights leases. Twice-monthly auctions fetched a record C$3.4 billion (US$2.9 billion) in 2005-06.

The gas revenue gusher has enabled the province to repay all its debts, run a growing budget at a surplus and send every resident of the province a "prosperity dividend" check for C$400 (US$340). The new budget said the bonus will be repeated if the province keeps on ringing up big surpluses, under a share-the-wealth policy compared to a tax cut with the added political bonus of not having to raise taxes back again if gas prices and revenues drop.

Alarm bells have been ringing in political circles -- especially in the Liberal and New Democratic Party opposition but also enough in the Conservative government to trigger an internal review -- because the provincial royalty share of total net after-expenses oil and gas production has been slipping.

The provincial share has dropped to 19%, a notch below the government target range of 20-25%, over the past two years. Part of the slippage is blamed on a royalty deferral granted to oilsands projects, which are replacing conventional production and pay only a nominal 1% rate until construction costs are covered.

But the Canadian Association of Petroleum Producers also speculates that some of the royalty erosion is also owed to the replacement of conventional gas output by mass shallow drilling of low-volume wells, especially in Alberta's budding coalbed methane fields. Low-volume wells pay reduced royalties under a long-standing incentive regime originally intended to keep aging fields producing until all possible production has been extracted.

CAPP has urged the government not to be hasty about raising the royalty on low-volume wells, saying that coal gas needs the break especially in the specialty's early stages and that a recent revival of deeper drilling for larger targets is liable to restore the provincial revenue share automatically. CAPP has also urged the government to take drilling rights sales into account in deciding whether the province reaps a fair share of industry revenues. Despite at times heated opposition pressure, there is no imminent prospect of royalty increases by a Tory government that is also being criticized for literally having more money than it knows what to do with -- that is, for lacking fully articulated savings and investment plans for its revenue surplus.

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