North American Natural Gas Market: 2012-2013 Heating Season Outlook

EXECUTIVE SUMMARY

For the winter heating season, which runs from November 1^st 2012 to March 31^st 2013, consumers can expect natural gas prices to remain relatively low compared to levels of the 2000 – 2011 period. Despite higher core demand for space heating, the following factors will moderate the price of natural gas:

• sustained high North American natural gas production levels;
• slowing economic growth, dampening natural gas demand; and,
• record storage levels.

Based upon a consolidation of expert consultants' forecasts, benchmark Alberta wholesale natural gas prices are expected to remain low, averaging C$2.90 per Gigajoule (GJ) over the 2012/2013 heating season.  One Gigajoule is approximately equal to 26.6 cubic metres of natural gas.  Total end-use consumer natural gas prices include the wholesale price (often called “commodity cost” on the consumer natural gas bill), but also contain pipeline transportation, storage, distribution, and other costs, and are higher. However, most of the variation in homeowner natural gas prices is due to variations in wholesale prices, while other components are relatively stable.

The North American natural gas market is currently characterized by a number of key trends: producers continue to focus on unconventional (shale) gas plays, particularly those with high natural gas liquids content; natural gas storage levels are at record highs; U.S. natural gas production continues to climb; Canadian production has levelled off; and low prices persist, both in absolute terms and relative to other fuels such as home heating oil.

PRICE

The wholesale monthly Intra-Alberta (AECO) price for natural gas settled below 3 Canadian dollars per gigajoule (C$/GJ) over the first 10 months of 2012. Monthly prices ranged between 1.57 and 2.99 C$/GJ, and compared to 2011, the year-to-date average AECO natural gas price of $2.13 is down by almost 40%.

NATURAL GAS SUPPLY

The supply of natural gas in North America continues to surge, mainly reflecting increasing shale gas production in the United States. Natural gas production in the U.S. has increased by 27% since 2005 and year-to-date information (through July) indicates that production is up 6% from that time last year.

By year-end, the U.S. Energy Information Administration (EIA) predicts that total U.S. marketed natural gas production will have increased by 4% in 2012 and will increase an additional 1% in 2013¹.

While U.S. production has grown since 2005, Canadian natural gas production has fallen by 16% over the same period. Production levels stabilized last year, with a modest 0.5% increase.  This increase occurred despite 23% fewer natural gas wells drilled in 2011 than in 2010. Through July 2012, Canadian production levels are almost 4% lower than levels at the same time last year.

Recent years witnessed increasing production per-well in Canada. Higher production per well is driven by the increased use of horizontal drilling and hydraulic fracturing, which allows for high producing levels per well.

The National Energy Board's (NEB) mid-range deliverability case projects Canadian natural gas production to remain relatively flat between 2011 and 2012 and then fall 4% in 2013².

Canadian natural gas production growth has lagged behind that of the U.S. mainly because of the relative immaturity of shale gas development in Canada, as well as low natural gas prices.  In the US, incentives to develop resources quickly (e.g., land rights expire if not developed) have also been a factor. As Canadian shale gas is more aggressively developed in the future, many analysts believe total Canadian natural gas production will increase.

STORAGE

The amount of natural gas in storage follows a seasonal pattern. In the summer, when natural gas demand is low, gas is injected into storage. Storage volumes peak in the fall and are drawn down in the winter during periods of peak heating demand.

Natural gas storage levels in North America have been well above their 5-year maximum throughout 2012. In Canada, October 2012 storage levels were 10% higher than the same time last year, with storage facilities now at 98% of capacity.³ In the U.S., July 2012 storage levels are 17% higher than the same time last year. The EIA “expects that inventory levels at the end of October 2012 will set a record high.”⁴ Strong storage levels are just another indicator that the North American natural gas market is well supplied and there should be more than sufficient natural gas in storage to meet any unexpected changes in demand this winter, which will provide some market stability and help moderate prices.

DEMAND FOR NATURAL GAS

Canadian domestic demand for natural gas is split amongst a variety of sectors. Industrial consumption is highest, at 62%, followed by residential at 22%, and commercial at 16%.⁵ Over the coming heating season, industrial demand will be primarily impacted by prevailing economic conditions, while residential and commercial demand will be affected by winter space heating requirements.

WEATHER

Residential and commercial consumers account for the use of 38% of delivered natural gas in Canada, primarily for space heating purposes. Almost half of Canadian homes rely on natural gas as their space heating fuel.⁶ An unusually cold winter tends to put upward pressure on the price of natural gas, while a mild winter tends to lead to weaker demand for natural gas, moderating prices.

Environment Canada's temperature outlook for December, January and February predicts British Columbia will have below normal temperatures and parts of the East Coast are expected to have above average temperatures.  However, since normal temperatures are expected for most of the country this winter, the weather is not expected to have a large impact on prices.

The U.S. is also expected to return to average temperatures this winter. The U.S. EIA is projecting a 14% increase in residential natural gas consumption this winter over last winter. The U.S. Northeast, Midwest and South are expected to have a warmer than average winter, however temperatures are still expected to be 20 to 27 percent lower than last year's mild winter. The western U.S. is expected to have a winter similar to last year's.⁷

ECONOMIC CONDITIONS

With industrial users consuming 62% of Canada's delivered natural gas, the economy can have a significant effect on natural gas prices. In its October 2012 Monetary Policy Report, the Bank of Canada noted that global financial conditions had improved in recent months, but remain fragile. Canada's economy is expected to return to its full potential by the end of 2013. The Canadian economy is expected to grow by 2.2% in 2012 and 2.3% in 2013, compared with projections for U.S. economic growth of 2.1% in 2012 and 2.3% in 2013.⁸ With limited economic growth this heating season, industrial demand growth is not expected to be a major influence on the price of natural gas.

EXPORTS & IMPORTS

Canada is part of a fully-integrated North American natural gas market where natural gas flows seamlessly across borders from supply basins to demand centers.

Canada's exports of natural gas continue to decline. 100% of Canada's exports are destined to the U.S., and with the U.S.'s own burgeoning supply the U.S. is relying less on Canadian natural gas to meet their domestic demand. As of July 2012, year-to-date exports are 5.2% lower than at the same time last year.

Canadian natural gas consumers are benefitting from increased production in the U.S. through increased imports of low cost U.S. natural gas. Year-to-date imports (as of July) are in-line with imports at the same time last year.⁹

SHORT-TERM PRICE OUTLOOK

Taking an average of expert consultants' forecasts, the monthly wholesale AECO price is expected to average 2.90 C$/GJ and range between 2.66 and 3.05 C$/GJ over the 2012/2013 heating season. If this price range is realized, natural gas prices would be slightly higher than during last year's heating season which saw an average price of $2.41 C$/GJ and ranged between 1.72 and 3.07 C$/GJ. The consultants' forecast higher natural gas prices in 2013, projecting an average price of 3.45 C$/GJ – a 60% increase from the projected average price of 2.15 C$/GJ for 2012.

While prices may be higher than last year, natural prices are still low relative to historical prices and relative to other fuels such as home heating oil.

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