Western Canada has some of the lowest cost natural gas in the world right now, limiting revenue for producers and government resource taxes, but giving gas users, including the agriculture and food sector, a competitive advantage.
In early July, I wrote about how Europe’s natural gas costs were soaring as Russia limited exports of the fuel to punish countries supporting Ukraine.
North American prices had also risen as American liquified natural gas plants worked overtime to ship LNG to hungry European buyers, although price gains here were much smaller than in Europe and Asia.
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Since then, European prices jumped even higher, American prices edged up but Canada’s continuing problems with pipeline capacity caused Alberta’s spot price to plunge.
The benchmark Dutch TTF September contract posted a record high close Aug. 19 of about 257 euros per megawatt hour or $98 Canadian dollars per million British Thermal Units (MMBtu).
Meanwhile, the Alberta Natural Gas Exchange daily index price crashed Aug. 19 into negative territory, minus five cents per MMBtu, down from about $6 in late July. Alberta is producing more natural gas than what the export pipelines, storage and domestic users can accommodate so its price plunged in the last few weeks. The average price in 2021 was $3.37
The spot price in the United States, known as the Henry Hub at the U.S. Gulf of Mexico coast, rose last week to near C$12.
Calgary Herald columnist Chris Varcoe on Aug. 19 talked about the weak Alberta price and the big discount to U.S. prices. The piece quoted industry experts saying typical differentials between the U.S. and Canadian prices range 75 cents to $1 to account for the cost of transportation from Alberta to the gulf.
The pipeline problem worsened last week by maintenance projects and breakdowns.
TransCanada Energy is investing billions of dollars in its North American pipeline system, including the $11 billion Coastal GasLink pipeline to LNG Canada’s ocean export facility under construction at Kitimat, B.C., but most of the new capacity will come online only in the next few years.
That negative spot price is not what users in Western Canada pay, given longer term supply contracts, but it gives a sense of how cheap the fuel is this summer compared to the rest of the world.
Alberta has had low gas prices before, like in 2018 and 2019. But back then U.S. gas was also very low as the new technology of fracking opened vast new reserves. Lured by the cheap and abundant resource, companies built LNG export terminals and the country shifted from a natural gas net importer to an exporter.
It is that export capacity, and Europe’s desperate need, that has helped lift gas values in the U.S. market this year.
Canadian natural gas prices this autumn could bounce back up as cooler weather increases demand and pipelines resume full function.
Nevertheless, prices here will likely remain much cheaper than in the rest of the world until our own LNG export facilities come online. The combination of the Coastal GasLink pipeline and the LNG Canada plant might be ready to start exporting LNG by 2025.
Another plant, Woodfibre LNG, is proposed for Squamish, B.C., with an opening target of 2027.
In the meantime, the Calgary Herald quoted Martin King, a senior analyst at RBN Energy in Calgary, as estimating lost gas industry revenue at more than $1 billion a month in July and August.
But producers’ losses should result in gains for domestic users.
Even with utilities raising rates earlier this summer, Canadian gas is affordable.
Food processors everywhere are already struggling to adapt to rising ingredient prices but Europe’s sector could face the additional burden of astronomical energy costs this winter.
The situation prompted a headline from Bloomberg news service that read: “The great European energy crisis is now coming for your food.”
In a worst-case scenario — with further Russian gas export restrictions, a failure to reach gas storage targets this summer, or a very cold winter that drives up demand — European governments might be forced to require factory gas users to shut down or scale back to prioritize heat and electricity for households.
Already companies such as BASF, Yara and others are cutting production of ammonia in Europe because of the high gas cost. Ammonia is best known for its use in nitrogen fertilizer manufacturing but it is also used in the production of items such as plastics and diesel exhaust fluid.
Ammonia manufacturing also yields high purity carbon dioxide used in meat packaging and carbonated drinks.
But almost all food manufacturing, from crushing oilseeds to baking bread, requires natural gas, so the coming months look worrisome indeed for Europe’s food system.
