Natural gas exports take a hit
Scott Simpson
Vancouver Sun
Thursday, November 08, 2007
Increasing dollar hurts producers, provincial and federal governments
One of British Columbia's biggest cash generators, its natural gas exports, are taking a substantial hit from the increasing value of the Canadian dollar.
Greg Stringham, vice-president of markets and fiscal policy at the Canadian Association of Petroleum Producers, said in an interview Wednesday that the declining U.S. dollar hurts gas producers as well as provincial governments and the federal government in Canada, with "billions" of dollars lost across the country.
The situation is exacerbated by declining gas prices -- Stringham noted a recent National Energy Board report that said the average market price for Canadian natural gas was actually lower than the production cost in 2006.
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Oil, by contrast, is providing strong returns because increasing prices are offsetting the lower value of U.S. dollar-valued oil sale revenues.
"Natural gas probably gets hit the hardest out of all of them. Oil has gone up from $68 to $96 and the rise of the Canadian dollar has pretty well offset that. We're getting about the same amount of Canadian dollars back as we did when there were lower oil prices," Stringham said.
"But in natural gas we've had the opposite thing happening."
In October it got down as low as $4 US -- compared to spot prices that reached above $15 just two years ago in the wake of hurricanes in the U.S. Gulf of Mexico gas-production region.
Mild summer and winter weather since those events has cut into demand to the point that North American gas in storage is at a near-record volume.
"The rising exchange rate nails that even harder. Canadian natural gas essentially becomes more expensive for the Americans because they are now paying in $1.07-dollars versus 88-cent dollars.
"The people that take the brunt of that [Canadian dollar] rise are the ones who are converting that U.S. dollar sale back into Canadian dollars, and that happens to be the Canadian companies and the governments -- all the producers -- and the governments because of course they realize their royalties in U.S. dollars as well.
"You are getting less Canadian dollars back."
Stringham noted the effects are already being felt in northeast British Columbia, the province's natural-gas production hub.
"Activity in northeast B.C. has just plummeted. It has already been happening because of the lower price, but if you throw on top of that the exchange rate it just makes it even harder to get back out of that hole.
"Even gas produced and consumed in Canada is affected because it's priced in U.S. dollars."
The best scenario for Canada would see demand go up -- but even if it did, it could be six months before the volume of gas in storage drops enough to push prices up, Stringham said.
But in another energy sector, hydroelectricity, the impact of the rising Canadian dollar is much harder to measure.
BC Hydro says there is no simple way to calculate the impact changing currency values have on its bottom line, but overall the situation is working to Canada's benefit.
British Columbia has a natural hedge against a stronger Canadian dollar in the electricity realm due to its position as a net importer of electricity from the U.S.
The stronger our dollar versus U.S. currency, the fewer dollars Hydro dispenses in order to buy power from U.S. producers.
© The Vancouver Sun 2007
Posted by Arthur Caldicott on 08 Nov 2007