NEB CHAIRMAN ANALYZES OUTLOOK FOR CANADIAN GAS PRICES, MARKETS

This is an Oil & Gas journal interview with Roland Priddle, chair of Canada's National Energy Board, Calgary

Q. What do you see as the general outlook for the Canadian natural gas industry in the short and medium term.

A. I want to stress that I am speaking as an industry observer, not a regulator.

I see a healthy development. There has been an improvement from the producer's standpoint, a sea change if you like, in the outlook since about February 1992. Spot prices before then were reported to be as low as 70-80 cents/Mcf. The days were obviously limited when you could get an adequate I supply in North America at those spot prices. Sensible consumers realize prices in the basement are not good for anyone in the long term.

The price improvement will be with us for at least a couple of years, and I think they will be stronger for the medium term of about 5 years. The gas industry is an airline which is going to be flying with relatively few empty seats, and it's an airline that has been flying with a lot of empty seats in recent years.

However, the upside on prices for producers is going to be limited by competing fuels. At an important margin of the market, residual fuels could come into play and change the supply/demand balance again. Gas industry people can't, don't, and mustn't lose sight of competing fuels.

Unless there is some coincident rise in oil prices, I do not see gas prices going up indefinitely.

There is an interesting dichotomy in the market. I'm told oil prices are relatively flat. In forward price markets you can buy oil 8 years out at $20/bbl, while there is a steady increase in gas prices. Perhaps the market is not recognizing that oil prices are going to place a ceiling on gas prices.

Q. Please comment on specific export market areas.

A. Canadian gas marketers and regulators made the right decision in developing new markets in the U.S. Northeast. The market is developing nicely, it is relatively strong and has growth possibilities because the gas share of the energy market is the smallest of any region of the U.S. The netback to producers is probably still lower than from the California market.

The Central U.S., the Midwest, has been a huge volume market for Canada but has provided relatively poor netbacks. That market has always been affected by traditional, strong, resilient production in the U.S. Panhandle.

On California, I subscribe to the common view that this market is overpiped. Additional capacity is well over I tcf, while demand is growing quite slowly.

The El Paso, Mojave, and Transwestern systems have expanded from the south. The Kern River system has come in with new supply capacity from the Northwest. I presume expansions to the Pacific Gas Transmission system from western Canada will come on stream Nov. 1. How is the demand for gas going to be shared among various producing regions?

In what proportions will the market be rejigged? The bloom may be off the rose.

Q. How do you see price trends?

A. We place a lot of confidence in the market, and we are confident if prices are allowed to move around the supply/demand situation will come into balance. Markets work for natural gas like anything else.

Q. What is your view on Federal Energy Regulatory Commission policies and, in particular, its Order 636?

A. FERC policies have been congruent with some of the things we have been doing in Canada. We, the NEB, were flattered as a board that they opted for straight fixed variable toll design for pipelines. I think that takes away from the argument of some U.S. opponents of Canadian gas imports that there was not a level playing field because of differences in toll design between the U.S. and Canada.

There is still a lot of work to be done. But Order 636 is being implemented in a market situation that is quite favorable for Canadian gas. There will be some hand-wringing and headaches for Canadian gas marketers, aggregators, and producers.

Pipeline gas sales have to be what I call rebranded. They have to go out from Canada under a different label and be used under a different label in the U.S. market.

The Canadian-U.S. gas market is going to take a lot of negotiation and legal work, but I think it should all come out in the wash. Gas may flow in different channels in the future but we are moving toward creating a more freely functioning continental gas market.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.