NGI The Weekly Gas Market Report
The chairman of Canada’s National Energy Board, Ken Vollman, hasfired a shot across the bows of the international natural gascommunity, urging it to do more than count the profits from today’shigh prices.
In an address to a capacity crowd at a Calgary conferenceattended by delegates from 38 countries, Vollman urged the industryto ask itself the same questions beginning to trouble consumers andpoliticians — and try coming up with answers for its own good. Hewondered aloud: Are current high prices just another spike? Havemarkets climbed to new plateaus? Are supplies reliable? Are theprices danger signs? Should actions be taken to make sure ofreliability, such as switching back to long term contracts?
Vollman raised the questions in an address to the 2000International Pipeline Conference and Technology Exposition. TheNEB chairman urged the crowd to think about whether the industry israpidly entering an entirely new era requiring fresh adaptations toa changed market environment.
Vollman urged the industry to ask itself if the time for relyingon markets dominated by short and spot sales to generate all theanswers is ending. “Energy prices have more than doubled in ashort period,” and “price-cap proposals” are proliferating, the NEBchairman pointed out. “It is becoming increasingly difficult inthis environment to arrive at negotiated solutions.”
“It may take a few years to write a new heading” that definesthe changed era oil and gas now seem to be entering. He stressedthat the industry still has a chance to engineer favorablecharacteristics for its next phase, as long as it can avoiddisorder that alarms the buying side of energy markets.
In an interview, Vollman said he and the NEB have not concludedthat current high prices are more than another brief event in the”market-oriented” era’s recurring spikes. But he said this peak hasbeen so dramatic that he has to send the industry a message.”People are just assuming the environment they’re operating in willcontinue.” The NEB chairman’s message is simple and direct: “Thinkabout it.”
Vollman predicted “the next year or two will determine what wewrite into the box (describing the new historical era). How will wehave reliable supplies at acceptable prices? If there aredisruptions this winter, there is going to be increased pressure onpoliticians to do something….. perhaps intervene.” Theforthcoming heating seasons will be a test of free markets.”Governments are committed to free trade and deregulation. Thatwill continue as long as it serves the public interest well.”
The industry needs to think about whether using “marketinstruments” such as longer contracts are needed to encouragesupply development as well as inject an element of stability intoperiods of tightness. He said the industry’s reliance on short-termtrading of natural gas is becoming an issue as efforts get underway to tap new supply basins in Alaska and the Canadian Arctic.”Can we bring these into being with short-term market instruments?”
Vollman’s message, while delivered in politely reservedlanguage, was stern stuff for a Canadian gas community that hasviewed the new prices as a long-awaited break from hard timesbrought on by deregulation amid excess supplies and shortages ofpipeline capacity in the 1980s. At Canada’s top gas producer,Alberta Energy Co., AEC Oil & Gas president Randy Eresman hastold stockholders that the promised land has been reached at lastand the industry has a right to stay. In this brighter world forCanadian producers, there is no more “trapped gas” backed up behindlimited pipeline capacity.
With Alliance Pipeline being completed on top of expansions bythe Foothills and Northern Border systems, shipping capacity hasbeen raised to the point where it is being transformed into acommodity – and one more likely to have its price discounted thanthe gas moving in the lines. “That’s a change Canadian producershave been waiting over 30 years for,” Eresman said. AEC had much todo with the change, as a founding sponsor of the Alliance project,which also contributed its first president, Dennis Cornelson.
Vollman’s address amounted to a warning to the gas supply sideto think about the headaches proliferating on the buying end of theindustry. They start in the Alberta home-base of the Canadianindustry, where distributor Atco Gas has applied for a winter rateincrease of about 16% to pass through current market prices ofabout C$6.50 per gigajoule (US$4.40 per MMBtu). The increase comeson top of earlier hikes that, coupled with high oil prices, alreadyprompted Alberta’s Conservative government to tap a treasury flushwith royalty revenues for a once-only citizens’ energy rebate worthC$300 (US$206) per taxpayer. Similar rate increases are being feltacross Canada, although only Alberta has the gas-royalty revenuesto offset them with a political plum.
Atco executive vice-president Jerome Engler said “the price weare now paying for natural gas certainly reflects what is happeningto energy prices throughout North America. The proliferation ofpipeline capacity means Canadian consumers wind up paying as muchas American counterparts. Canadian deregulation policy pledges theNEB not to interfere with exports unless domestic consumers canprove they are unable to obtain supplies on terms competitive withpurchases by U.S. buyers.”
Gordon Jaremko, Calgary
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