Canada Boggled by gas bills? Look south for culprit

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-------------------------------------------------------------------------------- Boggled by gas bills? Look south for culprit

The Vancouver Sun

Chad Skelton Vancouver Sun

If you're wondering why, in a province that produces about twice as much natural gas as it burns, your gas bill continues to skyrocket, you've basically got three culprits to blame: California, Mother Nature and Bill Gates -- in roughly that order.

Just as Lower Mainland residents were adjusting to the 33-per-cent gas hike they got stuck with last summer, word came earlier this month that BC Gas is seeking another 30-per-cent increase to ring in the New Year.

And if you think you've got it bad, industrial gas purchasers like greenhouses that buy their natural gas on the open market have been stuck this month with a price five to six times higher than they were paying just one year ago.

What's to blame for this sudden price surge?

Experts are quick to tell us it's all a question of supply and demand -- too much demand for gas, not enough new supply.

But wait a minute.

Last year, B.C. pumped 21.3 million cubic metres of gas out of the ground and only burned off 8.2 billion. On the face of it, we're swimming in the stuff.

But this is a North American market now, we're told. Gas producers sell off their product to the highest bidder -- whether in Surrey or San Jose.

And the white-hot U.S. economy has a huge appetite for natural gas right now.

So it doesn't matter much that B.C. has more gas than it needs -- North America as a whole does not.

But if we're a North American market, prices should be more or less the same across the continent. And, until recently, they were.

In December 1999, a million British thermal units (BTUs) -- the standard measure for gas -- cost $2.25 US in Alberta, $2.28 in B.C. and $2.20 in Chicago. A few cents here or there, but basically the same price.

And now?

That same amount of BTUs costs you $13.69 in B.C. -- 21Ú2 times the $5.35 you'd pay in Alberta.

In fact, B.C. pays more for natural gas than anyone else on the continent.

Well, almost anyone.

The same amount of BTUs that costs $13.69 here costs $14.45 in California.

BLAME CALIFORNIA

To begin to make sense of why B.C.'s gas prices have gone so haywire, you have to understand one thing: While B.C. is, in theory, part of one huge North American market, the reality is a bit more complicated.

And the confusion comes down to one thing: transportation.

Most products -- like computers or CD players or chocolate -- are mobile.

So if the price of computers in California shoots through the roof, all the computer makers in North America will ship their products there -- by air, by land, by rail -- and the price of computers will steadily rise everywhere.

Natural gas isn't like that.

It's lighter than air and explosive -- meaning the only way to ship it safely and efficiently is by pipeline.

A few years ago, when U.S. demand for natural gas was still pretty tame, there was plenty of pipeline to go around.

Gas flowed all across the continent with room to spare. Alberta could sell its gas to California as easily as B.C. could -- and so prices were the same everywhere.

In the space of a year, that's all changed.

Demand for natural gas has increased so rapidly that pipelines all across North America have been pushed to the limit -- dramatically increasing the cost of transporting gas.

Where just a year ago, Alberta could ship its gas to California with ease -- now it can't find enough space on its pipelines to feed the state's voracious market.

As much as Albertans would love to sell all their gas for top dollar in California, they can't.

"Choke points" in North America's pipeline system mean some markets are more exposed to the California effect than others.

And, unfortunately for B.C., we're on the wrong side of the choke point this time.

So while Albertans are bidding against people in the Midwest for the same pool of gas, British Columbians are going up against California -- the biggest gas guzzler on the planet.

"People that might sell to us can sell to California," said Mark Jaccard, a professor of resource management at Simon Fraser University and former head of the B.C. Utilities Commission.

"And California is demanding a lot of natural gas at a very high price."

Or as John Barnes, head of the Lower Mainland Large Gas Users Association, puts it: "B.C. is a speedbump on the energy highway to California."

For Canadians who rely on natural gas to heat their homes through chilly winters, sunny California's sudden hunger for the stuff may seem puzzling.

And, indeed, the demand isn't really for natural gas.

What Californians are really desperate for is electricity.

But, for a number of reasons, electricity now means natural gas in California.

BLAME MOTHER NATURE

If you're hoping for a break on your gas bill next year, pray for rain.

The dry fall and early winter in the Pacific Northwest this year means there hasn't been as much rainwater seeping into waterways.

Less water in the rivers means hydroelectric turbines that usually convert raging rapids into power have been spinning a lot slower this season.

Picking up the slack? Natural gas-fired power plants.

While only about one-fifth of the electricity produced in the U.S. is generated by natural gas, 30 per cent of California's electricity is gas-powered (a figure expected to rise to 38 per cent by 2009).

And with the power available from hydroelectric power dropping over the past year, natural-gas turbines have been running overtime.

California's reliance on natural gas for its power is due in large part to the environmental movement.

Californians have become increasingly uneasy about the dangers of nuclear power.

Burning dirty fossil fuels -- like coal or diesel -- won't fly in a state already choking on one of the worst smog problems in the world.

And even hydroelectric power, once the green choice for power, has become increasingly unpopular with environmental activists in the Pacific Northwest, who argue that flooding and dam-building destroy the habitat of dozens of species, especially salmon.

So, with wind and solar power still not practical on a large scale, natural gas is the obvious option: A clean-burning and, until recently, cheap way to make electricity.

But the increasing use of natural gas in power generation has completely changed the gas market.

Where once gas prices would rise during a particularly cold winter, now they are as likely to hit their peak during a sweltering California summer, as people crank up their air conditioners.

And global warming hasn't helped. The last two years have been much hotter than normal in California, leading to power brownouts in the state.

California's growing economy is also partly to blame. Energy consumption has always been tightly linked to economic growth -- more energy is needed to power plants and air-condition offices.

But the type of economic growth taking place in California and Washington State is particularly taxing on the electrical grid.

BLAME BILL GATES

They're called "server farms" and they lie at the heart of the information economy.

Room after room of raw computing power that lies behind all the Web sites, software and high-tech gadgetry powering the U.S. economic boom.

Most of them are in California's Silicon Valley and Microsoft's headquarters in Redmond, Wash.

"They are energy pigs," says Cam Avery, a spokesman with BC Gas.

Some economists predict that, in the long run, the information revolution will be good for the environment.

People will download music from the Internet instead of buying an over-packaged CD that's shipped from thousands of kilometres away.

And electronic mail will reduce the need for emission-belching mail trucks.

But it hasn't happened yet. For the most part, online commerce has been added to all the the things we already do -- rather than replacing them. And even if the information revolution eventually does save gas or trees, it seems pretty clear one commodity it won't conserve is electricity.

"In the new electronic economies of California and Washington state, everything is computerized," said Avery.

"It's more energy-intensive growth, so the demand for electricity is surging."

OTHER SUSPECTS

Of the many reasons the price of natural gas is so high right now, one of the less obvious is that the price was so low for so long.

Just as the price of gas is shooting through the roof now, it was falling through the floor just five years ago. In the span of just a year and a half, the price of natural gas dropped by more than 60 per cent.

It hit bottom in the winter of 1995, when the price of a million BTUs of natural gas -- going for $13 or more today -- was about 80 cents.

Dirt-cheap gas did two things.

It encouraged more companies to jump into natural gas as a way of making electricity.

And it brought almost all new gas exploration to a halt -- since gas was worth so little, it wasn't worth looking for.

Now that gas prices have started to rise again, the industry hasn't been able to respond quickly to increased demand by providing more supply.

The physical equipment used to get gas out of the ground -- the rigs and drills -- is hard to find, many of them in disrepair after being left unused for years.

And the skilled men and women who know how to find the gas -- like university-trained geologists -- are scarce, since many were laid off in the mid-'90s and found work in other industries.

Drilling has still increased in response to higher prices -- but the response has lagged.

And there are hints soaring gas prices are not just due to simply laws of supply and demand.

There may also be some shady deals involved, too.

Earlier this fall, California's Public Utilities Commission complained to federal regulators about a natural-gas contract between a major energy company and one of its subsidiaries.

The commission charged that the company, El Paso Energy, basically drove up the price of natural gas by selling it to itself at an inflated price.

"There's no arm's-length relationship between the gas and electric companies," Harvey Morris, an attorney with the commission, said at the time the complaint was filed. A decision is still pending.

Most observers of natural gas markets predict the price will eventually come down from its current heights.

But many of the factors that pushed the prices up in the first place are unlikely to disappear anytime soon -- which means we may never see dirt-cheap natural gas again.

"The prices will come back down. But it could take years," Jaccard said. "And they probably won't come down to previous levels." http://www.vancouversun.com/newsite/news/5025874.html

-- Martin Thompson (mthom1927@aol.com), December 16, 2000


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