Changes in regulation have significantly changed the habits of natural gas purchasers in recent years, according to a new report by Canada's National Energy Board (NEB).
"Canadian and U.S. LDCs (local distribution companies) have become the major buyers of Canadian gas under long-term contracts," NEB said.
But the report sees cogeneration providing another market for Canadian gas under long-term contracts and notes that U.S. gas marketers are emerging as long-term buyers as well.
Order 636 effects
After the U.S. Federal Energy Regulatory Commission's Order 636 removed pipelines from the gas merchant business, shifting the focus to transportation, many long-term gas supply contracts between Canadian producers and U.S. pipelines expired or were terminated.
The total volume of Canadian gas dedicated to U.S. buyers under long-term contracts declined to 5.6 bcfd in 1995 from 7 bcfd in 1991, the report said.
"It is possible that further volumes of gas that were released by U.S. interstate pipelines may be recontracted on a long-term basis to U.S. LDCs in the next year," the report predicted.
However, long-term contracts by LDCs likely will be restrained by policies in various states-including New York, Ohio, New Jersey, and California-allowing LDCs to unbundle their services, freeing up gas for purchase directly by end users of all types from other suppliers.
"To the extent that U.S. end users elect to purchase their gas requirements directly from producers and marketers rather than from LDC system supplies, it may become necessary to amend many contracts with U.S. LDCs over the next few years," the report said.
New markets
Cogeneration, however, should continue to be a good market for long-term gas supplies from Canada, the report noted.
"This market experienced rapid growth in the late 1980s and early 1990s and stabilized in recent years but is expected to continue as an important market for Canadian gas under long-term contracts," the report said. A typical contract with a cogeneration plant is 15 years, it noted.
U.S. gas marketers also have emerged as a key new market for gas purchased under long-term contracts, with terms of 10 years or less.
Market changes
The report also details changes in contract terms and conditions that have arisen in recent years. In the early years following deregulation of gas prices in the U.S., there was little information available on long or short-term prices.
Therefore, pricing terms in long-term contracts were generally based either on complex formulas based on alternate fuels or weighted average costs of gas to U.S. pipelines and LDCs.
Since the early 1990s, "Much greater confidence in both Canadian and U.S. short-term markets has developed," and "pricing information is readily available to all parties."
New York Mercantile Exchange futures contracts have become widely accepted as indicators of gas prices to be delivered at future periods and at specified delivery points, the report noted. Long-term contract pricing provisions are, therefore, more market-sensitive.
"There is also a trend toward greater standardization of long-term contracts to facilitate hedging activity in the financial or over-the-counter market," NEB observed. "It is expected this trend will continue."
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