Feature Article: 30th Anniversary of the Deregulation of Canada’s Natural Gas Prices


Release Date: 2015-11-16

On 31 October 1985, the federal government and the gas producing provinces of British Columbia, Alberta, and Saskatchewan signed the Agreement on Natural Gas Markets and Prices (Halloween Agreement or Agreement). This replaced government-controlled natural gas pricing with market-determined prices, and separated sales of gas from sales of transmission services by establishing open access for shippers on natural gas pipelines. Restrictions on exports from Canada were also relaxed, further opening the U.S. market to Canadian natural gas producers.

The Halloween Agreement was preceded by the Western Accord, a March 1985 agreement between the federal government and the provinces of Alberta, British Columbia and Saskatchewan that allowed for a transition to freely negotiated prices for oil and natural gas. Both the Agreement and the Western Accord were based on the concept of allowing market forces to determine the most efficient allocation between supply and demand, thereby increasing investment, employment, and trade, providing energy security for Canadians, and promoting competitive pricing.

Prior to the Agreement, the federal government and producing provinces negotiated natural gas prices, with an eye to changes in crude oil prices. Consequently, prices did not increase or decrease daily in response to market conditions. Natural gas export prices and volumes were also regulated by the federal government. Additionally, TransCanada PipeLines, the main transmission pipeline to eastern markets, bundled its transportation charges and natural gas commodity costs together under long-term contracts with consumers in Saskatchewan, Manitoba, Ontario, and Quebec. This effectively made the pipeline a merchant of delivered natural gas, as consumers were unable to negotiate directly with producers.

Figure Source and Data

Source: CAPP Statistical Handbook, Natural Gas Average Wellhead/Plant Gate Price Dollars, Table 05-01A, 05-01B.

Description: This chart illustrates Western Canadian natural gas prices in nominal and real (inflation-adjusted) terms. Nominal natural gas prices were about $3.25/GJ when the Halloween Agreement was signed, and then fell and remained less than $3/GJ until 1999. Prices between 2000 and 2007 were higher and more volatile, and have since come down to near the same level as during the time of deregulation. Real natural gas prices in the years leading up to deregulation were around $8/GJ in constant 2014$, more than double the level of prices in October 2015.

During the initial years following deregulationFootnote 1, natural gas prices declined due to increased competition, excess productive capacity in Canada, and a general decline in global energy prices. Production, exports, and revenues increased despite lower prices, however, as markets in the U.S. became more accessible to Canadian producers through new pipelinesFootnote 2. Between 1986 and 1995, natural gas production doubled, increasing from 7.25 Bcf/d to 14.7 Bcf/d. Net-export revenues increased from $2.5 billion in 1986 to $5.5 billion in 1995.

In the early 2000s, natural gas prices increased as demand rose while combined Canadian and U.S. production remained steady. At that time, prices were expected to continue to rise, and this encouraged the development of new liquefied natural gas import infrastructure. By the late 2000s, however, rapid growth in natural gas production from shale and tight formations in Canada and the U.S. significantly increased supply and decreased prices.

Figure Sources and Data

Sources: CAPP, EIA, NEB

Description: This chart illustrates natural gas disposition in Canada from 1947 to 2015. Canadian natural gas production is depicted by the area graph. Natural gas demand in Canada and net-exports are depicted by the two line graphs. Between 1947 and 2015, natural gas demand grew steadily at an average rate of 6.5 per cent per year. Production and net exports increased significantly following the Agreement and deregulation of prices, but starting in the early 2000s, natural gas production and net-exports started to decrease. In 2015, marketable natural gas production averaged 14.6 Bcf/d, while net exports averaged 5.5 Bcf/d.

Without the Western Accord and the Halloween Agreement, North American energy markets – one of the few in the world where buyers and sellers are able to freely negotiate prices – would look significantly different than they do today.

 

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