Natural gas prospects

We usually think about oil, specifically fuel for road vehicles, when the spectre of energy shortages is raised. Today, our supply of natural gas is more vulnerable to early price increases. In energy terms, Ontario uses about as much natural gas as oil (see Figure 1), but the use of natural gas is spread across more sectors (see Table 1) and may for that reason be less conspicuous.

It's easy to take comfort in a recent report by the U.S. Energy Information Administration that points to a bountiful supply of natural gas worldwide.15 Another such report is that of the International Energy Agency, which said that "Reserves of coal and natural gas are particularly abundant, while there is no lack of uranium for nuclear power production."16

Close reading of these reports reveals that markets for natural gas are essentially continental. It is difficult to move natural gas across oceans. It can be liquefied, shipped as liquefied natural gas (LPG), and "regassed," but this process is energy-consuming, expensive, and potentially dangerous. (Indeed, one of the reports suggests that the NIMBY challenges in siting a further LPG-receiving terminal in the U.S. may be "insurmountable.")17

At present, the U.S. and Canada are responsible for about 35% of natural gas consumption worldwide but have only about 4% of reserves. (Mexico is a net natural gas importer--from the U.S.--and is likely to remain so.) Moreover, North American demand, i.e., potential consumption, is set to grow by 50% by 2020, largely because of expansion of natural-gas-fuelled electricity generation in the U.S. Much of the increase in natural gas supply is projected to come from Canada, which currently uses more than half its production to provide for about 20% of U.S. consumption in an integrated market. LPG imports from outside North America are not expected to provide more than a few percent of 2020 demand.18

The problem with the above demand projection is that there seems to be little potential for increasing North American natural gas production. The Canadian situation has been charted by the Alberta Energy and Utilities Board. It envisages production there gradually declining after 2003.19 The Canadian Gas Potential Committee--a group of senior geoscientists from industry and government--has noted that supplies from the Scotia Shelf and Mackenzie Delta together could not amount to more than about 15% of present production.20 The Committee's report concluded that "the era of low-cost gas supplies has now effectively ended."

The situation in the U.S. is, if anything, bleaker. It was set out in testimony to the U.S. Congress in July 2002 by Matthew Simmons, a banker specializing in energy investments and a member of the U.S. National Petroleum Council, an oil and natural gas advisory committee to the Secretary of Energy. Mr. Simmons said that natural gas supply "continues to stay flat in the U.S. as it has done for the past eight years, despite a natural gas drilling boom of historic proportion in both the U.S. and Canada. ... The precarious supply/demand imbalance of 15 months ago is now headed towards a colossal mismatch between a need for demand to soar while supply drops."21

Figure 7. Monthly wholesale natural gas prices

The "imbalance of 15 months ago" referred to a time when natural gas prices in North America reached historic high real values. This peak is shown in Figure 7, which charts wholesale prices for the period January 1999 to July 2003, with anticipated prices to January 2004.22 The imbalance resulted in a more than threefold increase in wholesale prices in January 2001 over the previous year. The period of extreme prices was short-lived but the general result was a 50%-plus increase natural gas bills in the 2000-2001 season in the Central Ontario Zone compared with a year earlier.

Prices returned to quite low levels during the winter of 2001-200223 before entering what may be the beginning of the "colossal mismatch" anticipated by Mr. Simmons. Figure 7 shows a further price peak during the winter of 2002-2003, without the subsequent decline to relatively low levels. The likely impact on next winter's retail prices in the Central Ontario Zone is hard to predict. A reasonable guess may be that they will rise to above $0.40 per cubic metre, i.e., to more than 50% above prices at the start of the winter of 2002-2003, and they continue to rise.

It's the longer term that may be the real problem. The Canadian Gas Potential Committee anticipates declines in production of more than 50% by 2020.24 Given the potential demand for natural gas--including plans to convert Ontario's coal-fired generating plants--the discrepancies between North America supply and North American demand will be huge. Real retail prices of natural gas could increase by a factor of several times, enough to cause changes in how and where we live and work.

15. The EIA report is International Energy Outlook 2002, Energy Information Administration, United States Department of Energy, Washington DC (March 2002), available at the URL below Accessed October 6, 2002
16. The quote is from Page 29 of World Energy Outlook 2002, International Energy Agency, Paris, France (2002).
17. See Page 48 of the report detailed in Footnote 15.
18. The information in this paragraph comes from the source detailed in Footnote 15.
19. See Alberta's Reserves 2000 and Supply/Demand Outlook 2001-2010, Alberta Energy and Utilities Board, Calgary (June 2001). A backgrounder on this expensive report is available at the URL below. Accessed October 6, 2002.
20. See Woronuk RH, Canadian Natural Gas Resources, Canadian Gas Potential Committee (January 2002), available at the first URL below. See also Riva JP, Canadian gas, our ace in the hole? Hubbert Center Newsletter, Colorado School of Mines (April 2002), available at the second URL below. See also the quote in Footnote 10. Accessed October 6, 2002. Accessed October 22, 2002.
21. Matthew Simmons' July 16, 2002, testimony to the Subcommittee on Energy and Mineral Resources of the Committee on Resources of the U.S. House of Representatives is available at the URL below. Accessed October 6, 2002.
22. Wholesale natural gas prices represented in Figure 7 are those posted by Centrepoint Energy Minnegasco at the first URL below. This price is used because of the convenient manner in which the source provides historical prices and futures. The North American natural gas market is mostly integrated, and thus the numerous other sources would shown the same pattern, e.g., the Alberta Gas Reference Price, provided by the Alberta Department of Energy at the second URL below. Accessed July 15, 2003. Accessed July 14, 2003.
23. The January 2001 peak in natural gas prices (see Figure 7) may have been enhanced by a deliberate short-term withholding of supply from the market designed to affect electricity prices in California (McNulty S, El Paso price manipulation settlement. Financial Times (London, UK), March 24, 2003; available at the first URL below). Prices during the winter of 2001-2002 may have been low because of lower-than-usual economic activity following the events of September 11, and because of what has been described as irresponsibly rapid depletion of Ladyfern, a major natural gas find that began producing in 2001 and by the end of 2002 was near depletion (Nikiforuk A, Northern greed, Canadian Business, May 12, 2003; available at the second URL below). Accessed July 17, 2003. Accessed July 17, 2003.
24. See the source detailed in Footnote 19, particularly Figure 11 of that source.