The clock is ticking on a time bomb with potential to disrupt the smooth course of free trade in natural gas to which the continental market has become accustomed, a Canadian economic think-tank has warned.

Tight markets and rising prices supplies can still ignite protests against exports of Canadian supplies to the United States — and legislation empowering politicians to take action remains on the books in Ottawa.

The warning surfaced in a paper done by two prominent Canadian economists, Paul Bradley and G. Campbell Watkins, for the C.D. Howe Institute in Toronto. Bradley is an emeritus professor at the University of British Columbia who has served on the B.C. Utilities Commission. Watkins is a former president of the International Association of Energy Economics and a consultant with academic and industry connections.

“The integration of North American energy markets has implications for Canadian policy traditionally imbued with the notion of the country’s exporting only oil and gas surplus to its own requirements,” Bradley and Watkins write in an institute paper titled Canada and the U.S.: A Seamless Energy Border?

The economists were referring to part of the National Energy Board’s founding mandate — to secure supplies for Canadians — that survived the removal of border controls in 1987. The removal was not total. In principle, the protective mandate was not repealed. In practice, traces of the old regime stayed in the form of power for the NEB to deny permits for gas export contracts longer than two years if Canadian consumers show they cannot obtain supplies on comparable terms.

“Market-based procedures have not been properly tested where the clearance of natural gas markets entails markedly higher Canadian prices,” the economists point out. “Nothing in the current regulations ensures Canadian buyers parity of access when short-term exports, the mode under which the majority of exports take place, are up for grabs – a situation that may prove increasingly irksome.”

Bradley and Watkins acknowledge “these ramifications are perhaps only dimly perceived at present.” But they point out the international gas market had a foretaste of trouble last year, when the New Brunswick government asked the NEB to make sure domestic needs were looked after in the Canadian Maritimes before authorizing short or long-term exports of gas from offshore of Nova Scotia. The NEB refused to make formal policy changes, but intensified monitoring of the Atlantic regional market and encouraged the eastern Canadian industry to pay attention to domestic requests for supplies. EnCana Corp. subsequently cited incomplete negotiations with prospective domestic customers among reasons for suspending its Deep Panuke project offshore of Nova Scotia.

Bradley and Watkins point out “consumers like market prices when they are falling or stable. But the outlook for natural gas and electricity seems to be one of rising prices as markets tighten. One result may be calls for re-introduction of government controls — re-regulation has already become a buzz word in some circles. Reintroduction of electricity price controls in Ontario is a pregnant example.”

The economists make no attempts to resolve controversy among industry experts over Canadian supplies, which many including the NEB and TransCanada PipeLines, rate as peaking and about to decline unless new sources such as coalbed methane develop. The outlook remains unsettled even for the source most widely forecast to step into the breach in this decade — the north.

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