Les gaz de schiste contribuent à réduire les factures de chauffage.

By Danny Bradbury, Financial Post – December 7, 2012

You may have to pay a little more for heating this winter, but you won’t be burning dollars. Canadian heating prices are expected to spike, although in many cases they will still be relatively low, industry reports suggest.

Natural gas is emerging as a major heating source for Canadians, and prices have plummeted over the past five years. In January 2008, the spot price for natural gas in North America was $7.07 per gigajoule ($6.7 per million British thermal units), according to figures from energy research firm En-Pro. As of October this year, it stood at $2.94 ($2.78 per MBtu).

“The biggest determinant of price is supply and demand,” said Mel Ydreos, vice-president of marketing and customer care at Chatham, Ont.-based gas utility Union Gas Ltd. Back then, supply and demand were more evenly matched, meaning that minor events had a big impact on pricing.

Since then, natural gas has been discovered in new places. “We saw a year-on-year doubling of shale gas production in the U.S., and now 25% to 30% of its production is from shale,” said Ryan Creighton, a market analyst in the energy markets team at the National Energy Board (NEB). “The technology has increased at an incredible pace.”

The United States has increased natural gas production thanks to ongoing development of expansive shale plays, such as the Marcellus Shale, which spans six states in the U.S. Northeast. The discovery of more resources, and the use of these techniques to recover them, has seen shale gas production rise more than 300% to 5,336 billion cubic feet in the U.S. between 2007 and 2010.

However, much of this cheap gas is recovered using hydraulic fracturing (fracking) techniques, which have garnered criticism from environmental groups because of the injection of chemicals into the ground and its potential impact on water tables. Protestors have reacted strongly to shale gas developments in New Brunswick, and NDP leader Tom Mulclair has criticized the energy lobby for not enforcing fracking regulations. Quebec, meanwhile, has a moratorium in place on shale gas exploration and drilling while a committee studies its impact on the environment.

With gas prices still low, the Ontario Natural Gas Alliance estimates the average Ontarian gas customer has $400 more in their pocket than they did five years ago. Looking ahead, however, things may not be all rosy for the Canadian consumer, warns John Kiemele, vice-president of Oshawa, Ont.-based energy analyst firm En-Pro International Inc. He has seen spot prices in natural gas increase by 50% in a month and a half.

“I don’t think we will see prices as low this year as last, but they’re still low relative to the last five years,” he says, anticipating gas prices 5% to 6% higher this winter than they were last year.

The NEB says higher demand is narrowing the gap between supply and demand. Production increases in the U.S. are one factor, along with a warm winter last year that resulted in a large storage overhang. This created initially lower gas prices, but these in turn prompted demand for natural gas from the U.S. power-generation sector, increasing the demand and therefore the price.

The other factor influencing gas pricing is transportation. Pipelines from the shale plays to the distribution companies are expensive to build. Pipeline tolls, meanwhile, can cost as much as the commodity itself, Mr. Kiemele warns. This builds additional costs into gas delivery.

How quickly will these prices be passed on to consumers? Much will depend on the customer contract. In some provinces, the market for natural gas is deregulated. It can be bought from utilities, which are only allowed to mark it up by a certain percentage, or it can be purchased from marketing companies. The latter can enter multi-year contracts with customers to provide them with gas at a set price.

Not all heating comes from natural gas, of course. Electricity from nuclear sources and hydro power, oil and even wood pellets are all on the table. Their prevalence depends on availability. For example, Statistics Canada says that while natural gas is popular in Alberta, Saskatchewan, Ontario and Manitoba, electricity rules in Newfoundland and Labrador. Prince Edward Island gets 45% of its household energy use from oil, while Nova Scotia gets 35%.

In spite of New Brunswick’s ongoing shale gas development, the Maritimes in general have less access to inexpensive natural gas because there is less infrastructure to transport it there, warns Phil Walsh, associate professor at Ryerson University’s Centre for Urban Energy.

“They will pay more than average. It’s historically been that way,” he said. “If you have oil to heat your home or oil-fired power plants, you will be spending more.”

A heavier reliance on oil opens provinces to volatile crude pricing. The NEB says distillate inventories in the U.S. Northeast are 40% below the five-year average, which will cause heating oil prices to spike. Refinery outages in the U.S. and Caribbean won’t help. Canadian heating oil prices (including taxes) are expected to average between $1.15 and $1.35 per litre this winter, it adds.

Electricity pricing is an important factor in overall heating costs, given that electricity makes up 38% of household energy use, according to Statistics Canada. Fluctuations in that pricing will depend on where you are. Utilities in Quebec, Saskatchewan, Manitoba, Nova Scotia and Newfoundland have applied for rate increases that could take effect next year, with the Northwest Territories ready to pass a rate increase of 7% to customers.

About 61% of Quebec’s household energy usage comes from electricity, Statistics Canada says, and Hydro-Québec has proposed a 2.9% price hike that would be effective in April if approved. The province will doubtless continue to rely heavily on hydro, given its moratorium on the development of its shale gas reserves pending a broad-ranging environmental review. However, electricity bills in Quebec are still lower than in any other province in Canada.

On-peak electricity prices in Ontario will range between $27 and $37 per megawatt hour, the NEB says, exceeding last winter’s average $26 price. This despite the return of two nuclear power stations in that province.

Nuclear and hydro will become increasingly important to the electricity industry in Canada, given the gradual phasing out of coal, which contributes to 10% of electricity generation in Canada according to BMO Capital Markets research. Ontario has added 8,000 watts of wind, solar and natural gas while phasing out 10 of 19 coal plants since 2003, and plans to dispense with coal-fired generation entirely. While weaker than expected, Canada has introduced regulations capping emissions from coal plants federally.