By: Yvan Masse
This winter the Canadian market will have adequate energy supplies as a result of relatively high levels of gas production combined with ample inventories. This means that we can expect electricity prices to remain the same as last winter with natural gas prices predicted to be slightly lower than last year.
Natural Gas Market Overview
The US Energy Information Administration (EIA) reported that as of December 10, 2010, natural gas inventories in the US were 3,561 Bcf and 68% of working capacity. Current inventory levels are 1.5% below last year’s level and 9.8% above the 5‐year average. Thus, inventories are ample for the current winter heating season.
The EIA projects that natural gas production will increase by 3.5% in 2010. The increased production is largely due to unexpectedly high US production for 2010, with September coming in at 60.3 Bcf/day. This is the first time natural gas production has been over 60 Bcf/day. Production has actually increased by 7.5% over the past 12 months, over which time natural gas prices have been at lows not seen since 2001. US gas producers are not showing any intention of pulling back on drilling activities as the gas rig count declined only marginally over the last couple of weeks. The number of active drilling rigs would have to decline to 750, from the current 948, in order to restore equilibrium between supply and demand.
Trans Canada Pipeline’s (TCPL) Mainline between Western Canada and the Eastern Canadian markets is in a difficult position whereby rapidly increasing shale gas production in the US and declining production of Canadian conventional gas has resulted in a decrease of 70% in long‐haul contracted volumes over the last 5 years. As a result, the tolls to Eastern Canada have risen by 75% during the last 5 years, to the current $1.64/GJ. TCPL has submitted an application to the National Energy Board (NEB) to make significant changes to the current tolling methodology in order to reduce the long‐haul toll to $1.35/GJ, and increase the short‐haul tolls. TCPL indicated to the NEB that if the current methodology continues to be utilized it would result in a toll of $2.91/GJ to Eastern Canada in 2011. The NEB will decide, by year end, on an interim toll for 2011, with the final toll decision expected a few months later. As a result of the unresolved tolls decision, transportation spreads particularly the CDA and EDA have pulled away from other Eastern points, such as Dawn. The prices are not sustainable, and the spread should contract once the NEB has made its final decision on the tolls.
Deregulated Electricity Market Overview
The latest 18-Month Outlook report from the Independent Electricity System Operator (IESO) predicts that Ontario energy consumption will remain flat, increasing 0.3% in 2011 and 0.6% in 2012. Meanwhile, wind and solar energy are becoming increasingly important contributors to Ontario’s supply mix, with a significant number of projects slated for completion beyond the timeframe of this report. Almost 1,000 megawatts (MW) of the 1,700 MW of new generation expected to come online from December 2010 until May 2012 are comprised of renewable resources, and Ontario has set a goal of 10,700 MW of clean, renewable energy from wind, solar and bio-energy by 2018.
Alberta’s power market has been depressed by the low natural gas prices. However, the NEB’s Annual Winter Outlook predicts that demand from new oilsands projects could help to pump up electricity prices in Alberta this winter.
Yvan has over 30 years of experience in the energy industry and is the Vice President of Energy Procurement at Energy Advantage Inc.