Price of Natural Gas Tanks

If the provincial government is counting on natural gas royalties to help free itself from a budgeting bind, it could be in trouble. The royalties are based on gas prices, which have hit record lows and don't look like they'll climb higher for some time. It looks like the provincial government is going to have more trouble and strife this summer. Prices for one of its major income generators – natural gas production – have tanked.

By Tony Wanless / April 14, 2012

It looks like the provincial government is going to have more trouble and strife this summer. Prices for one of its major income generators – natural gas production – have tanked.

The North American benchmark price for a million British thermal units of natural gas dipped below $2 this week, and looks like it’s going to sink even further over the summer and the fall. It’s the lowest point in a decade, and lower than the cost of producing it.

North American prices have been falling for some time due to the oversupply caused by new fracking technology that has flooded the market with gas. So the low price may not be a big shock to the government, which collected $313 million in royalties in 2010-11 – a far cry from the $1.9 billion it pocketed in 2005-06.

But a record low has to hurt.

What’s worse, the time is coming soon when gas producers may not be able to wait for the long-promised Liquid Natural Gas facility to be built in Kitimat for shipment to Asia, where prices are higher. The experts say that wil be in 2020.

Many will probably have to stop their drills and go away until prices recover and make it worth their while to start them up again.

That’s largely because until the terminal is built and we start shipping gas to Asia – fingers crossed someone like Australia won’t corner the Asian market before they get there – producers of gas in B.C. are going to have to sell that gas into the North American market.

Since it appears that the continent will be awash in gas for some time, it seems logical that prices aren’t going to climb by much in the foreseeable future.

B.C. projects gas royalty revenue to edge up to $398 million by next year and rise to $846 million in the following year. Finance Minister Kevin Falcon says the projections are based on the average of predictions by industry experts.

Sure, there’s going to be a slow conversion in North America from oil and coal to natural gas as the primary form of energy. Maybe by the time that terminal is built there will be an infrastructure in place to encourage the use of natural gas and prices will have climbed back to their former levels.

Maybe.

But that’s a big maybe, and I hope the producers – and the provincial government – have alternate plans.