Foreign suppliers 'cool it' on natural gas prices to US
Foreign suppliers of natural gas to the United States are finding that their prices are too high. First the Algerians, and now the Canadians, have discovered that the price they are asking for their gas must be competitive to be sold in the US, especially with a continued "bubble" of surplus natural gas available.
The latest sign of this is the Nov. 17 decision by the Canadian government not to increase the price of gas exported to the US as of next Feb. 1. According to the Marc Lalonde, the Canadian minister of energy, mines, and resources, the decision to defer the increase was made "because of the effect that this would have on the volume of export sales."
Mr. Lalonde says he made the decision after consulting with the governments of Alberta and British Columbia, the Canadian Petroleum Association, and the Independent Petroleum Association of Canada.
According to Larry Jenson, a public affairs representative of the Canadian Petroleum Association, headquartered in Calgary, Alberta, the industry was opposed to a price increase because of cutbacks in exports after the price increase to $4.47 per thousand cubic feet last March. Exports to the US have shrunk from about 1 trillion cubic feet per year to about 600 billion cubic feet.
Joseph M. Egan, a natural gas industry specialist for Merrill Lynch, Pierce, Fenner & Smith Inc., says the decision by the Canadian government is not only a function of a surplus of natural gas on the US markets but also a function of the $4.47-per-thousand-cubic-feet price. Mr. Egan says that in the Pacific Northwest, where the Canadian gas is sold, fuel oil is cheaper. According to some industry analysts, No. 6 fuel oil in the Seattle area is selling at the equivalent of $3.60 to $3.70 per thousand cubic feet. Natural gas in the US, which includes much low-priced gas, is selling for an average $1.70 per thousand cubic feet.
Not only is fuel oil cheaper, but a surplus of natural gas is sitting over the markets. This surplus has been caused in part by the US recession and in part by increased gas production in the US. According to the Value Line Investment Survey, natural gas production in the US should increase by about 400 billion cubic feet this year.
Even more important, reserve additions have increased from 10.5 trillion cubic feet (t.c.f.) in 1978 to 14 t.c.f. in 1979 and should be even higher this year. At the same time, a warmer winter in 1979-80 resulted in reduced consumption. Mary A. Dunlea, an analyst at Bache Halsey Stuart Shields Inc., estimates that total gas sales could decline this year by 2.6 percent, barring a severe winter. Some gas companies may even have to cut their own production to avoid paying independent producers for gas they can't sell.
In Canada, a surplus of gas is also building up. Mr. Jenson notes that a combination of the recession and increased supplies has resulted in more gas for export. Canadian gas producers, however, are faced with not only price resistance in the US, but also political resistance in Canada. Last year the National Energy Board ruled that only 3.45 t.c.f. of additional gas could be exported to the US through 1987. The producers had hoped to ship an extra 8.8 t.c.f. in gas to benefit from pre-building a gas pipeline to bring gas down from Alaska. The pre-building, to be done before the gas started moving from Alaska, would save $1 billion in costs if enough gas were shipped through it.
The Canadians had hoped to raise export prices Feb. 1 by about 30 cents per thousand cubic feet. Without the increase, the government noted in its announcement, a 30-cent- per-thousand-cubic-foot tax on gas exports, effective Feb. 1, "will be absorbed by the gas producers." This tax was part of the National Energy Policy approved by the Canadian Parliament Nov. 1.
The Algerians have also run into difficulty trying to raise their prices. This spring they announced plans to raise prices from about $1.95 to $6 per thousand cubic feet. They also hoped to tie the price of gas to the price of OPEC oil. US buyers, however, including Columbia Gas Systems, Consolidated Natural Gas Company, Southern Natural Resources, and the El Paso Company, all backed off from paying $6 per thousand cubic feet. As a result, Algeria has suspended shipments, totaling about 1 percent of the total US consumption of 20 t.c.f. a year.