When the world’s energy crisis landed on Blake Shaffer’s doorstep, he signed up for a fixed-price natural gas plan because he reckoned prices would remain elevated this winter.
“Having been on a floating price for the probably 10 years I’ve lived here, this is the first time I’ve locked in my gas price,” said the professor of energy economics at the University of Calgary.
Prof. Shaffer made his decision a couple of weeks ago, after watching futures prices surge in natural gas markets in North America.
He predicts that as consumers assess the impact on their heating bills, many of them will do as he did – opt for the certainty of a predetermined commodity price for the duration of the contract.
Prof. Shaffer said the math made sense in Alberta last month. The downside is that if natural gas prices crash, some consumers on fixed-price plans may be left paying the invariably higher contract prices.
Natural gas markets have traditionally been influenced by supply and demand within continents. But the recent spike to record-high spot prices for shipments of liquefied natural gas to Asia has had a ripple effect, contributing to upward pressure on fuel prices in Europe and North America.
A combination of things has led to soaring prices in Canada. But instead of domestic factors alone, as was the case in past rallies, the global energy crunch is playing a significant role this time.
“We’re really being pulled up by the rest of the globe,” Prof. Shaffer said. “That comes all the way back here to lowly Alberta also being pulled up.”
Options vary from province to province when it comes to signing up with natural gas marketers, and consumers need to check the fine print of any contract, such as having the flexibility to go back to variable rates.
Third-party marketers in British Columbia are offering five-year contracts for as little as $4.99 per gigajoule – higher than current variable rates but lower than those of futures markets.
FortisBC, the province’s largest distributor of natural gas to homes, raised its variable rate to about $3.85 per gigajoule, effective Oct. 1, up 35 per cent from the previous quarter. That’s its highest residential rate in seven years, but since the commodity charge is just a third of the total bill, a typical household can expect to pay 9 per cent more.
Jason Wolfe, director of energy solutions at FortisBC, compares the decision to opt for a fixed-price plan to mortgage shopping. “Like a mortgage, you can have a fixed rate or a variable rate. It depends on your risk tolerance,” Mr. Wolfe said. “That’s an individual choice.”
In the United States, natural gas storage levels are 14 per cent lower than a year ago, according to the U.S. Energy Information Administration. Spot prices for natural gas at Henry Hub in Louisiana, the U.S. benchmark, have almost tripled over the past year.
“There’s less supply and more demand for natural gas. And there’s not enough gas in storage to ensure that we have enough of the commodity this winter,” said Jeff Tonken, the chief executive officer at Calgary-based Birchcliff Energy Ltd.
Investors have taken note of Birchcliff as it remains unhedged on natural gas, allowing the producer to ride the commodity rally. Birchcliff’s share price has skyrocketed, increasing sixfold since April, 2020.
But Mr. Tonken cautions that, from a broader economic viewpoint, the transition to renewable energy means fewer institutional investors are willing to stick with oil and gas companies over the long term, and banks are scaling back the size of loans.
The financial squeeze has meant producers can’t easily ramp up drilling to increase supply, and the situation has been exacerbated by a shortage of skilled workers in the field.
“When you have a lack of investment, the energy supply is going to fall and demand is going to go up,” Mr. Tonken said.
While industrial users of natural gas – power plants, the oil sands, petrochemical facilities – are feeling the pinch, he said high commodity prices will increasingly affect household budgets.
“It’s going to raise the cost of keeping your house warm in the winter time,” Mr. Tonken said.
As oil demand rebounds, gasoline prices jump across Canada
A global economic bounce-back and flurry of demand for travel as pandemic restrictions ease has crude prices rebounding from a tumultuous year.
West Texas Intermediate climbed to almost US$80 last week from a low of about US$62 in August, while Western Canadian Select jumped from about US$49 to almost US$67 in the same period.
Both have seen a remarkable recovery since January, with the WTI price up 67 per cent and WCS up 107 per cent. In the first six months of 2021, Canada produced 4.7 million barrels of crude a day, compared with 4.5 million over the same period in 2020, according to the Canada Energy Regulator.
But as people increasingly get out and about, they’re feeling the sting of high prices at the pump. Gasoline price monitoring site gasbuddy.com reported prices rising in every jurisdiction save Prince Edward Island and Nova Scotia last Thursday, including a whopping 45.9-cents-a-litre increase in the Northwest Territories.
Roger McKnight, the chief petroleum analyst with En-Pro International, said it’s not a supply and demand issue that’s causing the bump in gasoline prices; it’s a domino effect caused by the whims of global markets – specifically, the natural gas crisis in Britain and continental Europe.
Mr. McKnight said extremely tight natural gas supplies in Europe have left countries with few options other than importing from places such as Russia or the U.S. or relying on secondary fuels such as diesel for power generation.
“Gasoline demand is creeping up, but it’s nowhere near justifying the prices that we’re seeing right now,” he said. “The real problem is the diesel demand, where you’ve got inventories down 11 per cent but diesel demand up 12 per cent. So something’s got to give.”
In the United States, the federal Energy Information Administration’s statistics show that the average prices of gasoline and diesel are both more than US$1 higher a gallon than they were a year ago. Each crept up a few cents more last week.
The Financial Times reported Wednesday that rising prices at the pump led U.S. Energy Secretary Jennifer Granholm to consider tapping the country’s Strategic Petroleum Reserve to cool the surge.
Mr. McKnight doubts U.S. President Joe Biden will dip into the SPR, lest he look too politically desperate.
“What he’s going to do, I think, is arm-twist OPEC and OPEC+, which is Russia, to increase production or supply of crude oil to lower the prices,” he said.
He added that Alberta producers will likely ramp up production, too, especially with Enbridge’s new Line 3 replacement pipeline doubling crude transport capacity south of the border.
“Alberta has been through a pretty rough time, but I think they’re going to be rewarded,” he said.
The rub will be finding enough hands to keep production rolling.
Industry groups echo Mr. Tonken’s lament that the fossil fuel sector is awash with jobs but there aren’t enough workers to fill them.
Gurpreet Lail, the president and chief executive officer of the Petroleum Services Association of Canada, which represents oil field service companies, blames the lack of bodies on a combination of factors: continued instability in the sector, public perception that the industry is dying, and workers preferring to max out their pandemic relief benefits.
“In Q2, we’re going to see a major labour crunch, and that includes the drillers. They won’t have enough workers to man up crews,” she said in an interview.
“We’re incrementally increasing our drilling and production, but that’s going to come to a halt if we don’t have bodies to fill up those jobs to help us keep moving in this upward momentum.”
What does all this mean for a low-carbon energy transition?
In Europe, critics of energy transition policies aimed at fighting climate change have blamed a massive runup in energy costs there largely to a reliance on wind power, which has been affected by fewer breezy days in the North Sea this year. This has contributed to higher gas prices, though it is not the main reason.
Canada’s electricity mix is different, and its clean energy sources have little influence on heating and power costs. Hydroelectricity accounts for most of its renewable power. As a result, there is no increased demand for already depleted natural gas supplies to make up for a “wind drought” in major markets as winter draws near.
“There’s little reason to believe that any forecasts of increased prices this winter are related to renewables on this continent,” said Nicholas Rivers, an associate professor at the graduate school of public and international affairs and the Institute of the Environment at the University of Ottawa.
As Canada seeks to hit emission reduction targets to reach net zero by 2050, there is a national push to integrate more clean energy into provincial power grids and the country’s transportation systems. But the country has not diversified its power sources to the extent that Europe has, Prof. Rivers said.
Renewables make up a growing proportion of the Canadian energy mix. Hydro, wind and solar comprise about 16 per cent of Canada’s total energy supply, according to think tank Clean Energy Canada. With nuclear in the mix, more than four-fifths of the country’s power generation emits no greenhouse gases.
Hydro generates the largest proportion of power in the country, but wind and solar are making big strides, and the costs have been dropping. Since 2010, the cost of photovoltaic panels has fallen 82 per cent and onshore wind-power costs are down 40 per cent, Clean Energy Canada said. It pointed out that last year renewable power generation was less expensive than the cheapest new fossil fuel operation 82 per cent of the time.
Wind and solar generation, however, are limited by variability – that is, they remain dependent on breezy and sunny conditions. Storage facilities, such as banks of large batteries, are being added at some sites. Experts see storage as key to wind and solar becoming reliable baseloads for power grids, but adoption is still far from universal.
Renewables have been unfairly blamed for energy shortages before. Last winter, the Texas power grid failed when a freak snowstorm hit the state, and some state officials and pro-fossil-fuel groups blamed wind generation, which has seen major expansion there in recent years. However, energy facilities of all kinds suffered freeze-ups and damage.
“There was a small amount of wind that was at reduced capacity, but the system planners planned for that reduction in wind, and it was the concurrent gas failure that sent the system into blackouts. But a lot of the discussion was around renewables,” Prof. Rivers said.
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