A natural gas primer -- and where the money goes

Randy Jespersen
Vancouver Sun
03-Oct-2005

Ever since Terasen Gas announced natural gas costs were increasing, we have heard from many of our customers questioning our reasoning.

British Columbia is blessed with large natural gas reserves and I am often asked who makes money from this resource. Why do we allow "our" natural gas to be sold outside B.C. rather than keeping it for ourselves?

The rights to B.C.'s natural gas reserves are owned by the provincial government, which earns a royalty on every gigajoule of gas sold, based on a percentage of the market price. When the market price rises, the government makes more money. According to the latest provincial budget update, Victoria expects to earn $1.8 billion in 2005 from natural gas royalties alone.

The companies exploring for and producing oil and natural gas in B.C. are some of the largest in the world: EnCana, Petro-Canada, Canadian Natural Resources, Talisman (Canadian firms); Imperial Oil and Devon (U.S. firms), and Shell and British Petroleum (European.)

Terasen Gas is not in the exploration or production side of the business, and we don't own or control natural gas reserves or production. We buy gas on behalf of our 875,000 customers here in B.C. and are allowed to only recover our actual cost of gas (i.e. no mark-up), our profit coming from the delivery charges.

Every three months we review commodity rates with the BC Utilities Commission. If we expect to pay more for natural gas than what we are charging, we ask for a rate increase. This occurred in July and September. Likewise, if we expect the gas to cost us less than we are charging, we ask to reduce rates. Rate reductions occurred in January 2004 and January 2002.

Since June 2005, natural gas prices across North America rose more than 30 per cent. But our purchasing strategies, which include hedging and gas storage, have saved our customers more than $270 million this coming winter.

The current rise in prices is the result of increased demand caused by a hot summer, the rising price of crude oil, and disruptions to supply caused by hurricanes in the Texas gulf region. Why do events far from B.C. result in us paying more for natural gas?

The answer lies in the development of the natural gas sector.

In 1985 Canadian governments deregulated natural gas prices to improve access to markets. This caused prices to fall as production increased and producers tried to realize value from the long-term proven reserves they had been required to hold. In the following years, demand grew as natural gas was increasingly used for home heating, fireplaces, manufacturing processes, electricity generation, and as a replacement for diesel fuel.

Over time, a network of pipelines crisscrossing North America was built, allowing natural gas to move to markets where demand is greatest. A competitive market was created where price differences from one side of the continent to the other are typically just the cost of transportation.

Eliminating constraints to market access ensures B.C. gets full value for its gas reserves and because of our location near supply sources, B.C.'s natural gas consumers enjoy lower transportation costs.

Some people are worried that Canada is running out of gas. That's not the case. We are running low on easily accessible, cheap-to-produce natural gas found in prior years. According to the National Energy Board, Canada has 70 to 80 years of natural gas reserves based on current levels of production.

Much like B.C.'s rich heritage of hydro-generation assets, where the costs of producing electricity from a new dam will be higher than from existing facilities, there will be additional costs to find new gas reserves.

But B.C. has many options: The Nechako and Bowser basins, coal bed methane, offshore reserves, and liquefied natural gas imports from terminals being built across Canada, the U.S. and Mexico.

We have ample supplies of natural gas to heat our homes and run our businesses well into the future while continuing to attract major new investment and generate substantial government revenues providing benefits to all British Columbians.

Randy Jespersen is president of Terasen Gas.