An email notification popped up reading “Worried about high natural gas prices this winter? Learn how the Alberta Rebate Program can help!”. Shortly thereafter, I was startled by a notification screeching “utility prices are to increase by 100% during the winter months”, and no sooner did this notification disappear, than a news headline crept across the screen warning “Canadian home energy costs to spike up to 100 per cent on average this winter.” Yikes!
Those who heat their homes with natural gas and/or electricity can expect their heating cost to increase between 50%-100% this winter. In fact, some natural gas consumers should brace themselves for increases as high as 300%, depending on which province they reside in. Even those that heat their homes with electricity can expect a hike in their heating costs since approximately 8.5% of Canada’s electricity is generated from Natural Gas.
Figure 1. Primary Heating Source (% of Canadian Households) by author
Source: Data from Statistics Canada (2019)
Over the past few months, the cost of natural gas has been driven up by a variety of things: supply reduction in Europe, seasonal demand, and long-term cyclical fluctuation of gas prices.
Setting the scene – Natural Gas Supply Issues
The stage was set when Russia made the decision to cut Europe’s natural gas supply. With winter approaching, Russia’s actions were an attempt to sway European support away from Ukraine during the Russian invasion, which in Russian must be referred by the euphemism “special operation.”
There are two main natural gas pipelines originating from Russia; starting on the coast near St. Petersburg and running under the Baltic Sea to north-eastern Germany. Both the Nord Stream 1 and Nord Stream 2 have been closed indefinitely.
The Nord Stream 1 pipeline is a 1,200km (745 miles) underwater pipeline that has been operating since 2011. Nord Stream 1 has the capacity to deliver 170 million m3/day (6 billion cu ft/d) of natural gas from Russia to Germany. Nord Stream 1 is owned and operated by Nord Stream AG, and the majority shareholder of Nord Stream AG is the Russian state-owned company Gazprom. Nord Stream 2 is a newer natural gas line that runs parallel to Nord Stream 1 and was to come online this year; however, the German government postponed granting an operating license due to Russia’s invasion of Ukraine. So Nord Stream 2 never commenced operations.
The Russians had been choking off the flow of Nord Stream 1 for several months leading up to its closure in August 2022. In June, Russia cut deliveries through the pipeline by 75% from 170 million m3/day (6 billion cu ft/day) to 40 million m3/day (1.4 billion cu ft/day). By July, Russia shut down Nord Stream 1 for 10 days, claiming it “needed” maintenance, after which they reopened but the flow reduced to 20 million m3/day (0.706 billion cu ft/day). By the end of August, Russia shut down Nord Stream 1 entirely. Both Nord 1 and Nord 2 remain closed.
Europe, particularly Germany, has become reliant on Russian natural gas to meet its energy needs. The closing of Nord Stream 1, needless to say, has had a significant impact on the European states and has spilled over into the United Kingdom and countries worldwide, setting the international natural gas market into a frenzy.
Canadian Natural Gas
It is estimated Canada has approximately 38.4 trillion m3 (1,373 trillion cu ft) of natural gas. This translates into over 200 years worth of natural gas based on 2021 annual demand levels.
In 2021 Canada’s domestic and foreign demand totaled 189.7 billion m3 (6.7 trillion cu ft) of which domestic demand is made up of approximately ⅔ of all Canadians (7.4 million customer locations), and burned 113.2 billion m3 (4 trillion cu ft). Canadian exports totaled 76.7 billion m3 (2.7 trillion cu ft) which goes to the United States.
Canada is the sixth-largest natural gas producer in the world, producing approximately 438.9 million m3/day (15.5 billion cu ft/day). 98% of Canada’s production comes from Alberta and B.C. while the provinces of Saskatchewan, New Brunswick, Ontario, and Northwest Territories contribute much smaller amounts.
Table 1. Natural Gas Production (2020) – billion cubic feet per day (bcf) by author
Source: Data from Canada Energy Regulator
Canadian natural gas in general flows from production areas in western Canada to higher demand markets in central Canada and the U.S. The primary natural pipeline in Canada is TC Energy’s Canadian Mainline. This pipeline runs from the Alberta/Saskatchewan border across Saskatchewan, Manitoba, and Ontario and through a portion of Quebec. There are also several other interprovincial and international pipelines that transport Canadian natural gas to both domestic and the United States markets. These include Alliance, Westcoast, Foothills, Trans-Quebec and Maritimes, Maritimes and Northeast, and Emera Brunswick.
Canada has approximately 26.8 billion m3 (949 billion cu ft) of underground natural gas storage. The majority of this capacity, 15.5 billion m3 (548 billion cu ft), is spread out across Alberta. Ontario’s capacity of 7 billion m3 (248 billion cu ft) is located near Dawn, Ontario. BCs largest facility is in Fort St. John with approximately 2.7 billion m3 (95 billion cu ft). There are also smaller amounts of underground storage present in Saskatchewan and Quebec.
Total stocks in Canada during the winter months over the last 5 years have ranged between 40 and 70 days of demand. These storage volumes can be drawn down upon very short notice when needed. In the event of a domestic gas supply disruption, Canada could import additional quantities of natural gas via pipeline from the United States.
Natural Gas Price
It was thirty-seven years ago, on 31 October 1985, that the federal government signed the Agreement on Natural Gas Markets and Prices with British Columbia, Alberta, and Saskatchewan dubbed the Halloween Agreement. The agreement deregulated the energy market in Alberta, allowing the open market, subject to the laws of supply and demand, to set the prices of natural gas. In the 1990s, the deregulation of the natural gas market led to major increases in natural gas production and increases in exports from western provinces causing significant decreases in prices, particularly in Alberta and British Columbia. Regulated markets tend to produce gas shortages or excesses resulting in unnecessarily high gas prices.
The average annual price of (AECO-C) natural gas in 2021 was $3.37 CAD/GJ, an increase of 60% from the previous year. In May 2022, the Alberta Energy Regulator forecasted that the AECO-C ‘base price’ would increase 5% to $3.55 CAD/GJ in 2022 and then decline 10% in 2023 to $3.19 CAD/GJ and continue to decline in 2024 by 4% to $3.06 CAD/GJ. From 2025 onwards, they forecast that natural gas prices could reach as high as $3.59 CAD/GJ by 2031. They have provided low-price and high-price scenarios in their forecast.
The low-price scenario would see AECO-C ‘low price’ drop to $1.85 CAD/GJ and is based on a slow economic recovery with low demand due to recurring COVID-19 variants. Natural gas production in North America will grow faster than expected, and there will be delayed or canceled pipeline expansion and LNG projects.
The high-price scenario would see AECO-C ‘high price’ reach $6.96 CAD/GJ and is based on a rapid recovery of the economy and an increase in demand from the oil and gas industry and electricity sectors. Natural gas production would have slower than expected growth and LNG capacity would rise in North America.
Figure 2. AECO-C Natural Gas Price Forecast by Alberta Energy Regulator (May 2022)
However, considering the Alberta Energy Regulator’s forecast was published in May, it was unlikely that the forecast considered that between June and August 2022, Russia would stop supplying 170 million m3/day (6 billion cu ft/day ~ 6.3 million GJ) to Europe.
Certainly, one can anticipate natural gas prices to follow more closely the ‘high price’ scenario, however, historically, natural gas in Alberta and other parts of Canada have spiked to higher levels. In 2001, the California Energy Crisis was brought on by increased demand and years of declining production. Prices spiked again in 2005 following hurricanes Rita and Katrina, that cut supplies from the Gulf of Mexico. Prices rose again in 2008 after hurricanes Gustav and Ike caused production interruptions in the Gulf of Mexico and Louisiana, along with further market volatility.
Figure 3. Historical Natural Gas Prices (1998-2021) by Alberta Economic Dashboard
While natural gas prices vary across the country, it is common to experience higher prices if you are located in a regulated market area that is further away from the area of production. For example, during the 2000s, the lowest average price in the country was $11.42 CAD/GJ in Calgary, AB, while the highest average price was $21.23 CAD/GJ in Halifax, NS.
What is waiting around the corner?
According to the Farmers Almanac’s 2022–2023 Canadian Winter Forecast, winter is coming early this year, with cold temperatures spreading out from the Yukon and northern Alberta and settling in across the prairies and southern Ontario and southwestern Quebec. Expect freezing temperatures to settle in starting in mid-to-late November, with temperatures on average 7°C below normal in these areas. Several major snowstorms are in the cards for southern Quebec, Atlantic Canada, and Ontario,
Figure 4. Canadian Winter Forecast (2022-2023) by Almanac, Saturday, October 15, 2022.
The rest of Canada can expect closer to normal winter weather, while the southern portions of the Prairies and the majority of BC are expected to have less snow but more freezing rain than usual.
So this Halloween, as the cold weather creeps in, heating costs float up, an economic recession looms, and as inflation and interest rates crawl up, you might find yourself reaching for your thermostat asking … is it cold in here or is this a nightmare?