Natural gas market dynamics:
Record storage levels and mild weather curb prices in 2006

Natural gas prices have softened significantly since reaching peak levels near the end of 2005 when record prices were triggered by soaring crude oil prices, a tight balance between supply and demand and a major disruption in supply caused by two devastating hurricanes in the Gulf of Mexico.

To some extent, these factors influenced the natural gas market in 2006. In response to the 2005 surge in prices, drilling activity in Western Canada reached new highs early in the year. However, storage surpluses arising from mild winter weather, the resumption of natural gas production from the Gulf of Mexico and the absence of major hurricanes in 2006 set off a significant decline in natural gas prices. According to Natural Resources Canada, average intra-Alberta natural gas prices dropped from nearly $12 Cdn per gigajoule in January to $4.50 Cdn per gigajoule in October – the lowest price since 2002.

Historical perspective

From 1975 to 1984, the price of natural gas was regulated in Canada and companies were required to demonstrate that Canada had a minimum 25-year inventory of reserves as a condition for receiving approval for exports. A 1985 agreement between the Federal government and the provinces of Alberta, British Columbia and Saskatchewan deregulated natural gas prices at the wellhead effective November 1986. Abundant supplies and lack of pipeline transportation capacity from Alberta to other markets resulted in a steep price decline in Alberta that persisted until the late 1990s. Prices rose gradually as existing pipelines were expanded and new networks were built to connect once stranded supplies to new markets.

A similar deregulation process occurred in the United States during the mid-80s, resulting in an open, integrated North American wholesale natural gas market. This structure was further strengthened in 1989 by the Canada-U.S. Free Trade Agreement and the North American Free Trade Agreement in 1994.

“Experience has shown that an open market is a lot more efficient than a regulated market because price signals can directly influence the behaviour of producers and consumers,” explains Paul Mortensen, Technical Leader, Hydrocarbon Resources at the National Energy Board. “If natural gas is in short supply, the price increases, consumers improve efficiency and attempt to conserve. Typically, we also see more upstream drilling and production activity.”

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