How is Natural Gas Marketed?

Natural gas pricing is based on supply and demand. Supply is dependent upon production, which in turn depends upon the natural decline of producing gas reservoirs and the amount of gas from newly developed reservoirs being brought on stream. Pipeline capacity is also a factor that affects supply. Because residential heating is a large market for natural gas, seasonal temperatures have a significant impact on pricing. As well, the prices of competing energy sources such as oil, coal and electricity affect pricing of natural gas.

The evolution of regulation

Natural gas regulations cover production, export and pricing of this commodity. Regulation began in Western Canada. In 1938, the Alberta government became the first jurisdiction in the country to establish a regulatory body for the crude oil and natural gas industry. Called the Natural Resources Conservation Board (now known as the Energy Resources Conservation Board (ERCB)), its regulations did not take effect until after the Second World War because of wartime need for Turner Valley petroleum.

In 1948, Alberta appointed a Natural Gas Commission to determine how much natural gas was surplus to Alberta’s needs. After much debate, the Commission said the province might be justified in refusing gas export licenses until the province had secured a 50-year supply for its own use. Alberta then gave authority to the Alberta Oil and Gas Conservation Board to decide what levels of reserves were necessary for energy security and to use that information to regulate exports. The Board set 25-year inventories (“reserves”) of gas as a pre-requisite for obtaining export licenses.

Price regulation

Prior to 1985, federal and provincial regulators were involved in establishing natural gas prices and in deciding how much gas could be exported. Regulators must still approve export licenses, but a 1985 agreement between the federal government and the producing provinces determined that the market should set prices. This agreement on natural gas markets and prices enables the National Energy Board (NEB), a federal regulatory body, to allow the free market system to determine prices. The NEB’s application of this policy provides producers with sufficient incentive to ensure adequate supplies of gas and yields the best possible price for consumers. However, provincial authorities ensure that local distribution companies pass their natural gas costs on to consumers without marking them up, and that they buy gas prudently on behalf of consumers.

Production regulation

Today, the ERCB regulates exploration, production, processing, transmission and distribution of natural gas within Alberta. In addition, the ERCB and Alberta Environment jointly manage environmental matters related to the industry. In most other provinces, public utility and energy boards like British Columbia’s Oil and Gas Commission and the Ontario Energy Board oversee local distribution companies while provincial energy ministries or other governmental agencies oversee exploration and production.

In Canada’s territories and offshore areas, the NEB is the main regulatory authority. Established in 1959, the Board consults with other federal, provincial, territorial or local authorities. The NEB also regulates the construction and operation of interprovincial and international pipelines, tolls and tariffs of pipelines under its jurisdiction and the import and export of natural gas. In addition, the Canada-Nova Scotia Offshore Petroleum Board (C-NSOPB) regulates exploration and development off Nova Scotia, while the Canada-Newfoundland Offshore Petroleum Board (C-NOPB) provides a similar function for Canada’s most easterly offshore reaches.

Competitive pricing and greater choice

The change to market-determined pricing of natural gas created greater competition, especially in the 1990s. The most striking example of this change comes from Ontario where 40 per cent of the province’s gas customers (residential, commercial, industrial and institutional) now obtain their supplies through direct purchases from agents, brokers and marketers.

Competition in the gas industry has also been aided by legislation such as Ontario’s Energy Competition Act (1998), which laid the foundation for competition in the electricity market. The Act established that the Ontario Energy Board would regulate electricity distribution and transmission, the monopolistic components of the industry. In effect, this legislation has had a profound impact on energy marketing. It encouraged the creation of companies that offer their customers one-stop shopping for natural gas and electricity, and thereby changed the way conventional energy companies do business.

The idea behind such deregulation is simple. If competition increases at the retail level, residential and commercial energy consumers will benefit through competitive prices and services and greater choice. This approach illustrates a major trend in North America: there is more competition for the energy consumer’s dollar as increasingly sophisticated companies begin marketing energy (not just natural gas) to consumers. As the Ontario example suggests, much of this competition reflects a commitment by provincial governments to eliminate a portion of the monopoly power over markets historically held by utilities.

The continental natural gas marketplace

Because an intricate network of pipelines makes it quite easy to ship natural gas from buyer to buyer, natural gas is a widely-traded commodity in North American markets. Those markets are becoming increasingly more integrated as gas supplies from several large producing regions compete with each other for buyers. Consequently, the commodity price of natural gas (before transportation costs) is essentially the same everywhere in North America.

Price differences still exist to some degree, reflecting the fact that certain fixed costs vary by region. Costs related to production, shipment by pipeline, storage, distribution, and consumer taxes can all make a difference. Pipeline transportation is a significant cost for natural gas – much more than for liquids such as oil and gasoline.

How is natural gas distributed?

Natural gas is delivered to Canadian consumers by provincially regulated utilities called local distribution companies. These companies construct, own and operate the pipelines that carry the gas from the city gate to the end user. They charge only for the cost of delivery and do not profit from the gas they deliver.

Local distribution companies operate more than 237,000 kilometres of pipelines in Canada. Rural Alberta gas co-operatives operate another 66,000 kilometres. These pipelines range from high-pressure main distribution lines up to 61 centimetres in diameter to low-pressure, 2.5-centimetre steel or plastic tubing used in residential service lines.