The natural gas marketplace combines a volatile commodity market with a complicated array of regulated utility services and contracts delivered through a complex supply chain. It requires several players with unique roles to deliver gas to your organization reliably and cost effectively. Understanding who those players are and what they do will help you meet the unique challenges of natural gas procurement.
Canada is the world's third largest producer of natural gas. Most is produced in the Western Canadian Sedimentary Basin (WCSB), an area that stretches from northeastern British Columbia, through much of Alberta and into southern Saskatchewan. Gas is also produced offshore of Nova Scotia, and gas reserves are known to exist in the Mackenzie River delta, the Beaufort Sea, and in the high Arctic, although these are not produced at present. Currently, shale gas deposits are providing new gas supply opportunities both inside the WCSB and in non-traditional gas production areas such as the St. Lawrence lowlands. These will grow in importance as yields from conventional deposits in the WCSB continue to fall.
The major Canadian exploration and production companies are EnCana Corporation, Talisman Energy, Canadian Natural Resources Limited and Suncor. Foreign-owned companies such as Devon Energy Corporation, Shell Energy North America and BP Canada Resources are also major players.
Some large natural gas producers have their own marketing arms and sell gas directly to end-users. Those that do, typically prefer to sell large volumes to the largest users (gas utilities or very large industrial users). However, many producers focus on the exploration and production business, and sell their gas production to gas marketing and trading companies.
Gas Marketers and Trading Companies In the last 20 years, a sophisticated middleman has developed in the gas industry - the gas marketing and trading organization. The gas marketer makes a margin by buying and selling gas in the wholesale gas market. The marketers will buy from producers, sell to large buyers such as industrial users, utilities and retailers, and trade amongst themselves. Gas marketers and traders provide value to the industry through their ability to match buyers with sellers.
In 2009, over 10 trillion cubic feet of Canadian physical natural gas was traded on the NGX trading system. In addition to making a profit on the spread between purchases and sales in normal trading, these companies also offer more exotic products such as over-the-counter options, which offer buyers other ways to control their commodity price risk, while generating additional profits for the seller.
Major marketers and traders of gas in Canada include BP Canada Energy, Shell Energy North America, Navicomm and Direct Energy. We are also seeing bank-related companies such as RBC Capital Markets, TD Securities, Scotia Capital, Barclays, JP Morgan and Goldman Sachs becoming more active with their natural gas trading arms.
Pipelines Transportation of natural gas from production sites to consumers is managed through an extensive network of pipelines throughout North America. More than half of the Canadian gas produced is exported to the United States. The large manufacturing and industrial base in eastern Canada makes Ontario and Québec the largest domestic market for western Canada gas production. Alberta follows Ontario as the second largest gas consuming province.
To get from the production area to market, gas flows in large transcontinental pipelines. TransCanada PipeLines stretches from the Alberta border across the Prairies, through northern Ontario to Toronto, then east to Montreal. There, it connects with the TransQuébec & Maritimes Pipeline, which runs to Québec City then north to the Lac-St-Jean region.
Great Lakes Gas Transmission is wholly-owned by TransCanada and takes gas from an interconnection on the Manitoba/Minnesota border south of Winnipeg, and runs south of the Great Lakes, re-entering Canada just south of Sarnia, Ontario.
Alliance Pipeline originates in northern BC and runs through Alberta into the US, where it terminates near Chicago. Vector Pipeline connects with Alliance and runs to southern Ontario, also entering near Sarnia.
In the east, the Maritimes and Northeast Pipeline takes gas from the production fields offshore of Nova Scotia, travels across New Brunswick and Maine, and connects with US pipelines in Massachusetts. There is also the Emera Brunswick Pipeline which opened in 2009 and which brings natural gas from New Brunswick's Canaport liquefied natural gas terminal into markets in Canada and the northeastern US.
The high degree of interconnectedness between North American producing and consuming regions means that gas flows are constantly shifted as prices rise and fall in different regions, and market forces shift supply to meet demand.
Growing oil sands production in Alberta is leading to an increase in natural gas use within the province, at the same time as conventional Alberta gas production is declining. This is resulting in a decline in the volumes of gas being exported on traditional routes out of Alberta, most notably on the TransCanada mainline.
Gas Utilities The local natural gas utility or distributor takes gas from transcontinental pipelines and moves it to each point of consumption in a given service area. While the pipeline looks like a line from one point to another, the distributor's system looks more like a web or a network, with lines running up every street, to every house, and to large industries and office buildings.
Distributors play an important role in balancing the gas delivery system by using large storage facilities. Gas received by the distributor in the summer that exceeds local demand is stored until winter. They must allow the pipeline to deliver gas at a steady rate, while providing end-use consumers with gas as they need it and not when they don't.
Gas utilities provide both sales and delivery services. If a consumer has bought his or her own gas supply from a marketer, the distribution company will deliver that gas to the end-use location. Or, the consumer can buy gas from the utility, in which case the utility charges for both delivery and gas supply. The utility has a delivery monopoly and is not permitted to charge different delivery rates to its gas supply customers. Gas supply costs, themselves, will rise or fall in response to market forces.
The Regulators Traditionally viewed as natural monopolies, pipelines and gas utilities are regulated entities. They must get approval from their regulator to construct new facilities if they wish to earn a return on these assets. The regulators must also approve the rates to be charged for pipeline and utility services. For the gas utility, the regulator also approves the gas supply charges for the gas sold by the utility. Regulatory hearings are held for interested parties to submit and hear evidence on what should be considered under regulation. In Ontario, the Ontario Energy Board regulates gas distributors and licences gas retailers. In Québec, this role is performed by the Régie de l'énergie. The National Energy Board regulates interprovincial pipelines like TransCanada and Alliance.
Retailers offer natural gas pricing programs to residential and small business consumers. By buying wholesale and selling retail, they can offer buyers fixed prices for a specific period of time, usually one or more years. By providing price certainty for their customers, retailers accept the risk that prices will fluctuate and include a risk premium within their fixed price.
Aggregators manage mid-sized energy loads by pooling them to achieve large volume buying power. Each participant in the pool pays the same average price for gas. The aggregator or broker usually charges a fee per unit of gas bought by the customer.
Customers of aggregators and brokers usually get a better than retail price and have the opportunity to customize their portfolio to match their tolerance for price risk. However, participants will pay a price reflective of the group's characteristics rather than just their own.
Typically, aggregators can also act as the buyer's agent.
Advisors and Consultants The key difference between aggregators and advisors is that advisors do not take title to the gas they manage. Typically, advisors earn compensation on a fee-for-service basis. Most pure advisors are independent of any corporate relationship with a gas producer, marketer, or utility. Clients tend to be larger gas users than the customers of an aggregator. Advisors may act as agents for their clients, and typically perform services such as market analysis and regulatory analysis. They help clients plan and budget their gas costs, and track and report on actual costs.
Advisors are free to help clients find and buy from the best suppliers with the lowest price, and are able to provide objective advice about how and when to hedge energy price risk.
Aegent Energy Advisors operates purely as an advisor/consultant. We work exclusively for energy buyers. We do not buy, sell or trade energy for our own account and we are not affiliated with any energy marketers or utilities.