Alberta: No quick fix in sight for high gas prices

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Saturday 3 February 2001

No quick fix in sight for high gas prices Low stockpiles will ensure prices stay high for 18 months

Bryant Avery, Journal Business Writer The Edmonton Journal

Growing North American thirst for natural gas ensures Alberta consumers will face sky-high bills well into 2002, say energy experts.

"My view is that gas prices are going to stay high for the next 12 to 18 months," predicted Carol Crowfoot, a senior economist for Gilbert Laustsen Jung Associates in Calgary.

"Through the summer, supply will remain tight and next winter will also be a real challenge," perhaps worse than the current season, agreed Len Coad of the Canadian Energy Research Institute.

The average Alberta (AECO-C) price in 2000 was $4.70 per gigajoule, said Coad. His forecast for 2001 is $7.85.

That matches a spread suggested by Patricia Mohr of Scotia Economics in Toronto. Tracking gas in units of 1,000 cubic feet (slightly less than one gigajoule), the 2000 average was $4.38 and Mohr's forecast for 2001 is $6 or more.

All the analysts say the most unpredictable factor in gas prices is weather, not only in Canada but in the United States where over half of Canada's natural gas goes.

Last year, the Alberta price peaked at $16.90 per gigajoule on Dec. 11, during a period of freezing temperatures and snow storms in the U.S.

But the most reliable index for future prices is natural gas storage levels, which are unusually low, said Ron Gist, a principal of Purvin & Gertz Inc. in Houston.

When winter winds down in two months, there will be less than 500 billion cubic feet of gas in U.S. storage, about half where it should be.

"We've really dug ourselves into a hole for the rest of the year," Gist said. Canada produces about 16 billion cubic feet a day, meaning it would take the equivalent of a month's total Canadian production to get U.S. stockpiles back to an acceptable level.

In Canada there are similar supply problems, Crowfoot said. Western Canadian storage systems are only one-third full. In eastern Canada, the figure is 37 per cent. And there's cold weather yet to come.

Drilling records will be set this year. The Western Canadian industry is anticipating more than 18,000 wells to be dug, 11,000 of them in gas.

But only about 75 per cent of those will actually produce, Crowfoot said. And some require pipelines. It takes from two months to five years to tie in a new well.

Mohr noted that an increasing number of wells are being drilled in expensive territory, such as the Alberta foothills, off the shore of Nova Scotia, or in the northern Mackenzie Valley.

Gone are the days of cheap production costs, she said. In 1998, the average wholesale natural gas price was about $2. In 1999, it was $2.55, reflecting inexpensive drilling rates and constraints on exports.

"You're not going to get Mackenzie Valley gas for those low prices," Mohr said.

Two years ago, TransCanada Pipelines and Northern Borders expanded their export pipeline systems and in 2000 the Alliance line opened, sending 1.3 billion cubic feet per day to Chicago and its more lucrative markets.

The current economic slowdown in the U.S. may dampen demand for a while, said Paul Precht, an Edmonton energy economist.

But in the U.S., 53 per cent of homeowners now have natural gas furnaces, and 16 per cent of U.S. electricity is produced by gas turbines. Canada accounts for 15.9 per cent of U.S. gas, according to Mohr.

And those numbers are growing rapidly, Gist said. In the state of Washington alone, natural gas power plant consumption is expected to increase 147 per cent by 2010.

http://www.edmontonjournal.com/business1/stories/010203/5110077.html

-- Martin Thompson (mthom1927@aol.com), February 04, 2001


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