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Natural Gas - How Canadian Markets Work

The Canadian and U.S. natural gas markets operate as one large integrated market. This means that events in any region such as changes in transportation costs, infrastructure constraints or weather will have effects on the other regions. Most Canadian and U.S. natural gas production comes from areas roughly following the continental divide, from the Gulf of Mexico to the Northwest Territories. Demand is spread across the continent but is concentrated in densely populated areas and in areas of intense industrial activity. Canadian gas production is connected to the North American gas market through a network of thousands of kilometres of pipelines that allows buyers to purchase and transport natural gas from a number of supply sources across the continent.

The price is made up of three parts: the cost of the natural gas (known as the commodity cost), the pipeline transportation cost and the distribution cost. Generally, the transportation and distribution costs are regulated by government agencies and tend to change moderately over time. The commodity cost makes up most of the final cost to consumers and will change in response to supply and demand conditions and can be much more volatile. It is important to note that residential households enjoy some protection from sudden price fluctuations, both when prices are rising or falling. This is partially because residential bills may not reflect daily fluctuations in market prices but instead the overall cost of their local distribution company (LDC) or supplier's portfolio of natural gas and prices.

The Henry Hub, an intersection of numerous pipelines in Louisiana, is the pricing point for natural gas traded on the New York Mercantile Exchange (NYMEX). As such, many gas market transactions in North America are based on the pricing at Henry Hub. The AECO-C hub in southeast Alberta is the main Canadian pricing point. The price of gas traded at these hubs is publicly available and establishes a commodity cost of natural gas. Figure 1 summarizes the production, exports and imports of natural gas in 2008.

Figure 1 - Canadian Natural Gas Supply and Disposition (Bcf/d) - 2010

Source: NEB

Figure 2 shows that natural gas prices have been extremely volatile in recent years. A lack of spare productive capacity in North America resulted in tight market conditions that have contributed to high and volatile natural gas prices since 2001. However, growing production from shale and other unconventional gas resources in North America has helped to offset the ongoing decline in conventional production, easing the tight supply demand balance, and contributing to the decline in gas prices starting from the second half of 2008. Since then, growing production in North America combined with lower demand for natural gas due to the economic slowdown has resulted in the ongoing low price environment for natural gas.

Figure 2 - 3-Day Average Natural Gas Price

Source: NEB

Natural gas pipelines transport large volumes of gas at high pressure over long distances from supply sources to market centres. The Canadian gas market is served by several major pipelines (most of which are regulated by the NEB), which also interconnect with the U.S. pipeline grid at about a dozen export points. As a result, market pressures in one region are rapidly transmitted to other regions. As an example, gas production and pipeline disruptions resulting from hurricanes in the Gulf of Mexico quickly caused natural gas prices to rise across the continent.

Distribution systems are the retail part of the pipeline industry. Local distribution companies (LDCs) receive gas from pipelines and deliver it to end users, such as homes, within a franchise area. The LDCs are regulated by provincial regulatory boards or commissions, or directly by provincial governments.

While natural gas production is fairly consistent year round, demand for natural gas peaks in the winter due to space heating use. To help bridge the gap between supply and demand, natural gas storage was developed. In Canada, the majority of gas storage is split between Ontario and Alberta. Natural gas storage allows production levels and pipeline volumes to remain fairly constant during the year despite seasonal swings in demand. Gas storage near market areas is very useful for responding to sudden changes in demand caused by weather extremes. In these ways, storage acts as a buffer between production and consumption, and helps to reduce costs to transport and distribute gas from the wellhead to the consumer.

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Date Modified:

2011-10-28