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Economy

ON LOW NATURAL GAS PRICES…

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15 minute read

From the Frontier Centre for Public Policy

By Terry Etam

To say that “natural gas is a dying commodity” takes either some world-class mental dishonesty, disturbingly blind faith in policy over reality, or some kind of “clouds hate me” philosophical stance on life.

Is there any critical industrial material as bizarre as natural gas?

The stuff holds almost zero interest for the general public, for the same reason no one is interested in the sound of a washing machine. Both boring. Both ubiquitous. Natural gas isn’t even sold on Amazon. But forty-six percent of American homes use natural gas for heat, and surely more in Canada.

But consider the storm below the surface. Traders love it, because it is one of the most volatile commodities in existence, and volatility means trading profits. The volatility, at the slightest provocation, is almost unbelievable at times. The weather pattern shifts for three weeks out over a portion of the US and boom – the entire forward 18 months of prices can collapse or soar.

In the bigger picture though, natural gas today in North America trades at close to the same price it did a quarter century ago – not inflation adjusted, just the same old nominal dollar value, which is astonishing since global gas demand has increased by 60 percent in that time.

Natural gas is a critical fuel for much of the world, and usage is growing, particularly the relatively new field of LNG. According to the Global Gas Infrastructure Tracker website, which doesn’t even like the stuff, there are a total of 2,449 significant pipeline projects underway in the world for a total of 1.2 million kilometers (and that’s the big pipe, not the little straws that go to your house). There are 238 LNG import terminals and 189 export trains in development globally. One hundred and thirty countries either have natural gas systems or are constructing them.

Traders, consumers and businesses love the stuff even if they don’t say it often enough, while others loathe it because it is a ‘fossil fuel’. Natural gas is caught in an existential war whereby said opponents will do everything in their power to just make it go away (they really think they can). The Toronto Globe and Mail, “Canada’s news paper” (note to self: develop ethnocentric balloon head emoji, make millions), recently ran a pricelessly ludicrous opinion piece entitled ‘Natural gas is a dying commodity, and Canada needs to stop supporting it’. The article was written by one of those think tanks (International Institute for Sustainable Development) that produces nothing but ideological amplification, safely distanced from people that actually do stuff, and a mountain of impressive T4 income tax slips (latest fiscal year personnel/consultant expense: $33 million). There is no surprise that their team of political scientists would attack natural gas; their latest financials show that the Government of Canada granted them $40 million, a third of which is from climate activist/federal minister Guilbeault’s office. There’ll be no biting that little hand.

Many climate leadership icons of the world, the US, Canada, Western Europe, Japan… pretty much anyone that can, is building natural gas (LNG or non) infrastructure as fast as they can. Germany, home to the world’s most advanced green energy demolition derby, built an LNG import terminal in an astounding 5 months. Many that want to import LNG but weren’t able to last year because Europe hoovered up every molecule on the market are simply doing what it takes to attain energy security, and that can mean, lord tunderin’, coal. Pakistan is the most notable example – the country plans to quadruple coal fired power output and move away from gas only because it could not obtain it: “A shortage of natural gas, which accounts for over a third of the country’s power output, plunged large areas into hours of darkness last year.” The country’s energy minister went on, “We have some of the world’s most efficient regasified LNG-based power plants. But we don’t have the gas to run them.”

For those fortunate enough to line up LNG supplies, the ante is normally a 15-20 year contract.

To say that “natural gas is a dying commodity” takes either some world-class mental dishonesty, disturbingly blind faith in policy over reality, or some kind of “clouds hate me” philosophical stance on life.

Beyond the silly messaging looking to undermine natural gas though are some very powerful undercurrents that are shaping the world in ways most don’t consider, but they should.

Thanks to the shale revolution in the US and Canada, native natural gas production exploded onto a scene that couldn’t handle the excess, leading to persistently low prices. North America is turning into an LNG export powerhouse, but until that export capacity outpaces productive capability, natural gas prices in North America look set to remain far below global prices.

It is worth remembering how significant this scenario is for North America. Cheap natural gas is an industrial godsend, enabling many strata of industries and enterprises that simply would not exist without. In May of 2022, the head of the Western Equipment Dealers Association, said that the previous winter’s high natural gas prices were unsustainable for businesses that had to heat 30-40,000 square-foot shops. The 2021-22 winter of which he was discontented saw Henry Hub prices average $4.56/mmbtu – about a third of global prices, and a fraction of what the world was to face later that year.

The same article pointed out how the Industrial Energy Consumers of America, a trade group whose members include smelters, plastics and paper-goods makers, wanted the US to stop permitting new LNG export terminals because “The manufacturing sector cannot invest and create jobs without assurances that our natural gas and electricity prices will not be imperiled by excessive LNG exports.”

Those guys aren’t crazy. The US gas market is balanced on a knife edge. A change in next month’s forecast can create havoc in forward prices even up to several years out.

The rise of LNG is making things even more unstable. The Freeport LNG terminal had an 8 month outage due to an accident, removing 2 bcf/d of demand from the market (in a 100 bcf/d market); this single event caused a storage surplus in the US that has depressed natural gas prices ever since. All else being equal, the US natural gas storage scene would be in a deficit to the five year average as opposed to today’s surplus if Freeport had not gone down, and both spot and futures prices would most likely be significantly higher. The Freeport outage probably knocked US natural gas prices down by at least $1/mmbtu for a period of 8 months, and actually probably much more. But even at that level, in a 100 bcf/d market, where 1 bcf is equal to 1 million mmbtus, the cost savings to US consumers totaled $100 million per day. (Of course, had the price stayed higher, we might have seen far more drilling, which may have caused a collapse as well, just a bit further down the road.)

That $100 million per day cost saving came out of the hide of North American natural gas producers selling into that market, and you’d think they wouldn’t like that one little bit. And they don’t. But gas producers have their own realities and game plans which don’t generally involve sacrificing any of their sales for the good of all other producers, as economically sensible as that strategy may be.

US producers find themselves in an odd situation. Every one of the large producers knows that they could cut production by 5 percent and double their profits; the market is that tightly balanced. Doing so would single handedly drive up NG prices substantially – just observe how the gas market goes ape over a change in weather forecast.

But driving up prices, even if it is in their own self interest, will mean a spike in production, because at sustained $4 US gas, the market becomes flooded. EQT president Toby Rice, the largest US gas producer (EQT, not Toby), says at a sustained $4/mmbtu natural gas price, the US could export 60 bcf/d of natural gas. Keep in mind that $4 gas is a fraction, anywhere from a third to ten percent of global LNG prices.

Mr. Rice may very well be correct, but glosses over the reality of natural gas prices: we will never see a sensible sustained price like $4, even though we may average it – we will see 2 and 8 and 3 and 9 and so on and so on.

On top of this, solution gas from oil plays like Permian is providing massive amounts of gas in itself. The Permian, primarily an oil field, produces more solution gas than the entire country of Canada. Permian solution gas, if a stand alone country, would be one of the world’s top five largest producers.

So who cares? Well, you all do. We all do. The goofballs that wrote the Globe & Mail article do, though they either won’t admit it or simply refuse to understand.

Natural gas is the bedrock of most economies, and cheap natural gas is a special elixir to North America. It is absolutely crucial to the level of industrial activity we enjoy. There is no substitute for the clean burning capability of the stuff. Wander into a typical big box store or more crucially try to wander into an industrial building that you won’t be allowed to because it is unsafe… drive around an industrial park and look at all the magnificent industrial activity that gives us the life we live. Now imagine those being heated by wood stoves. Or solar panels in dead of winter. Geothermal? Sure, if you plan on drilling into the earth’s mantle. And if you live on an appropriate acreage. And have enough money. I guess there’s always coal.

And that sums up a lot of the world’s population’s situation: If countries aren’t building LNG, it’s likely because they are building coal, as in the countries that Europe outbid for LNG last winter in a shocking me-first display of hydrocarbon-swilling (accompanied by fossil-fuel-subsidizing self-loathing?) hypocrisy.

There are storm clouds on the horizon. The drilling efficiency that these companies boast about relentlessly in IR presentations and every 90 days in conference calls consists to a large degree on drilling longer horizontal wells. Do the math on that one. Reservoirs are finite in size. If you increase the length of wells by another mile or two, you’re just draining the reservoir faster. One day we will see true sweet spot exhaustion, which is not a laughing matter when one considers that three fields – Appalachia, Haynesville and Permian – account for more than 70 percent of US gas production, and about a fifth of global production.

But for now, North America reigns supreme with respect to the world’s most coveted heating and industrial fuel. The US, Canada and Mexico remain more or less isolated from global natural gas prices for now, which brings incalculable benefits to North American businesses and citizens, a benefit that shouldn’t be taken for granted.

Terry Etam is a columnist with the BOE Report, a leading energy industry newsletter based in Calgary.  He is the author of The End of Fossil Fuel Insanity.  You can watch his Policy on the Frontier session from May 5, 2022 here.

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Alberta

Ford and Trudeau are playing checkers. Trump and Smith are playing chess

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By Dan McTeague

 

Ford’s calls for national unity – “We need to stand united as Canadians!” – in context feels like an endorsement of fellow Electric Vehicle fanatic Trudeau. And you do wonder if that issue has something to do with it. After all, the two have worked together to pump billions in taxpayer dollars into the EV industry.

There’s no doubt about it: Donald Trump’s threat of a blanket 25% tariff on Canadian goods (to be established if the Canadian government fails to take sufficient action to combat drug trafficking and illegal crossings over our southern border) would be catastrophic for our nation’s economy. More than $3 billion in goods move between the U.S. and Canada on a daily basis. If enacted, the Trump tariff would likely result in a full-blown recession.

It falls upon Canada’s leaders to prevent that from happening. That’s why Justin Trudeau flew to Florida two weeks ago to point out to the president-elect that the trade relationship between our countries is mutually beneficial.

This is true, but Trudeau isn’t the best person to make that case to Trump, since he has been trashing the once and future president, and his supporters, both in public and private, for years. He did so again at an appearance just the other day, in which he implied that American voters were sexist for once again failing to elect the nation’s first female president, and said that Trump’s election amounted to an assault on women’s rights.

Consequently, the meeting with Trump didn’t go well.

But Trudeau isn’t Canada’s only politician, and in recent days we’ve seen some contrasting approaches to this serious matter from our provincial leaders.

First up was Doug Ford, who followed up a phone call with Trudeau earlier this week by saying that Canadians have to prepare for a trade war. “Folks, this is coming, it’s not ‘if,’ it is — it’s coming… and we need to be prepared.”

Ford said that he’s working with Liberal Finance Minister Chrystia Freeland to put together a retaliatory tariff list. Spokesmen for his government floated the idea of banning the LCBO from buying American alcohol, and restricting the export of critical minerals needed for electric vehicle batteries (I’m sure Trump is terrified about that last one).

But Ford’s most dramatic threat was his announcement that Ontario is prepared to shut down energy exports to the U.S., specifically to Michigan, New York, Wisconsin, and Minnesota, if Trump follows through with his plan. “We’re sending a message to the U.S. You come and attack Ontario, you attack the livelihoods of Ontario and Canadians, we’re going to use every tool in our toolbox to defend Ontarians and Canadians across the border,” Ford said.

Now, unfortunately, all of this chest-thumping rings hollow. Ontario does almost $500 billion per year in trade with the U.S., and the province’s supply chains are highly integrated with America’s. The idea of just cutting off the power, as if you could just flip a switch, is actually impossible. It’s a bluff, and Trump has already called him on it. When told about Ford’s threat by a reporter this week, Trump replied “That’s okay if he does that. That’s fine.”

And Ford’s calls for national unity – “We need to stand united as Canadians!” – in context feels like an endorsement of fellow Electric Vehicle fanatic Trudeau. And you do wonder if that issue has something to do with it. After all, the two have worked together to pump billions in taxpayer dollars into the EV industry. Just over the past year Ford and Trudeau have been seen side by side announcing their $5 billion commitment to Honda, or their $28.2 billion in subsidies for new Stellantis and Volkswagen electric vehicle battery plants.

Their assumption was that the U.S. would be a major market for Canadian EVs. Remember that “vehicles are the second largest Canadian export by value, at $51 billion in 2023 of which 93% was exported to the U.S.,”according to the Canadian Vehicle Manufacturers Association, and “Auto is Ontario’s top export at 28.9% of all exports (2023).”

But Trump ran on abolishing the Biden administration’s de facto EV mandate. Now that he’s back in the White House, the market for those EVs that Trudeau and Ford invested in so heavily is going to be much softer. Perhaps they’d like to be able to blame Trump’s tariffs for the coming downturn rather than their own misjudgment.

In any event, Ford’s tactic stands in stark contrast to the response from Alberta, Canada’s true energy superpower. Premier Danielle Smith made it clear that her province “will not support cutting off our Alberta energy exports to the U.S., nor will we support a tariff war with our largest trading partner and closest ally.”

Smith spoke about this topic at length at an event announcing a new $29-million border patrol team charged with combatting drug trafficking, at which said that Trudeau’s criticisms of the president-elect were, “not helpful.” Her deputy premier Mike Ellis was quoted as saying, “The concerns that president-elect Trump has expressed regarding fentanyl are, quite frankly, the same concerns that I and the premier have had.” Smith and Ellis also criticized Ottawa’s progressively lenient approach to drug crimes.

(For what it’s worth, a recent Léger poll found that “Just 29 per cent of [Canadians] believe Trump’s concerns about illegal immigration and drug trafficking from Canada to the U.S. are unwarranted.” Perhaps that’s why some recent polls have found that Trudeau is currently less popular in Canada than Trump at the moment.)

Smith said that Trudeau’s criticisms of the president-elect were, “not helpful.” And on X/Twitter she said, “Now is the time to… reach out to our friends and allies in the U.S. to remind them just how much Americans and Canadians mutually benefit from our trade relationship – and what we can do to grow that partnership further,” adding, “Tariffs just hurt Americans and Canadians on both sides of the border. Let’s make sure they don’t happen.”

This is exactly the right approach. Smith knows there is a lot at stake in this fight, and is not willing to step into the ring in a fight that Canada simply can’t win, and will cause a great deal of hardship for all involved along the way.

While Trudeau indulges in virtue signaling and Ford in sabre rattling, Danielle Smith is engaging in true statesmanship. That’s something that is in short supply in our country these days.

As I’ve written before, Trump is playing chess while Justin Trudeau and Doug Ford are playing checkers. They should take note of Smith’s strategy. Honey will attract more than vinegar, and if the long history of our two countries tell us anything, it’s that diplomacy is more effective than idle threats.

Dan McTeague is President of Canadians for Affordable Energy.

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Business

Canada needs to get serious about securing its border

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From the Macdonald Laurier Institute

By Todd Hataley for Inside Policy

US President-elect Donald Trump has made clear his intention to call out Canada on weak enforcement on migration, money laundering, and the cross-border trafficking of narcotics, especially fentanyl.

Until just very recently, Canada has remained largely silent on these issues. Security agencies, such as the Royal Canadian Mounted Police (RCMP), Ontario Provincial Police (OPP), Sûreté du Québec (SQ) and the Canada Border Services Agency (CBSA), have tried to secure the border via memorandums of understanding, framework agreements, and legislated agreements that allow them to share information and even work together.

However, resources are limited for cross-border law enforcement co-operation. CBSA remains  understaffed and RCMP Integrated Border Enforcement Teams (which work with US security agencies) have limited geographic reach, leaving much of the enforcement between ports of entry left to police of jurisdiction, who already are hard pressed to provide services to the communities they serve.

The Canadian government’s apparent strategy of largely ignoring the problem is becoming more difficult to maintain. With the United States Border Patrol intercepting increasing numbers of illegal migrants crossing into that country from Canada, it’s clear the porous border is a concern. Exacerbating the situation is the recent discovery of illegal narcotic super labs in Canada – where production far outstrips the market – and Canada’s unfortunate, albeit well-deserved reputation as a haven for global money launderers.

Thanks to Trump’s 25 per cent tariff threat, the crisis is now endangering Canada’s relationship with its largest and most-important trading partner. This announcement sent all sectors of government and the private sector into a frenzy, prompting Prime Minister Justin Trudeau to fly to Florida to seek out an early audience with Trump at his Mar-a-lago resort home. Trudeau’s team spun the trip as proof that the federal government is serious about working with the US to address its border security and public safety concerns.

But with political crises piling up, it will be difficult for Trudeau to also manage the political optics of kowtowing to Trump, who is widely unpopular among Canadians. Spending extra money to appease Trump during the ongoing housing, immigration, and health care crises could make the Trudeau’s popularity nosedive even further. Adding insult to injury, Trump is essentially demanding that Canada do America’s work by stopping illicit goods and people from entering the United States: customs and border security officials generally work on the principle of stopping goods from entering their country.

Trudeau faces many practical challenges, including the need to ramp up the number of border and law enforcement agents who have the skill sets and training required to police offences such as drug production, money laundering, and the cross-border smuggling of goods and humans. Purchasing helicopters and drones to conduct surveillance will do little to aid enforcement, since most goods smuggled across the border pass through legitimate border crossings. RCMP Commissioner Mike Duheme even suggested putting RCMP cadets along the border – a challenging proposition since vast swathes of the border are either wilderness or water. Surveillance is one thing, but the act of enforcement takes skilled people with the capacity to investigate, gather evidence, and articulate that evidence into something that can be used by the courts for convictions. These concerns are not being addressed in this current frenzy to spend money on border security.

There is also good evidence that fortifying the border, or what has become known as forward deployment along the border, does nothing to stop the cross-border transit of contraband goods and people. One need only look as far as the United States-Mexico border to see the failure of forward deployment.

As authorities increase border enforcement activities, the costs of smuggling goods and people mounts for criminals. Eventually, it drives out amateurs, leaving only the professional, skilled, and well-equipped criminal groups. This, in turn, often leads to increasing levels of violence along the border, making interdiction and disruption far more difficult for law enforcement agencies.

Canada has several clear options to address Trump’s border concerns. It can increase the staffing of frontline CBSA officers, including border agents, inland enforcement units that actively investigate and remove individuals from Canada, international liaison officers, and customs processing staff. It can also create a plan for CBSA to take over enforcement between ports of entry. Currently, CBSA enforces entry into Canada at the ports of entry and the RCMP are responsible for the areas in between. Having a single agency manage the border builds capacity and expertise, avoiding inter-bureaucracy competition and confusion.

Canada can also work to better integrate law enforcement, intelligence units, and border services at all levels of government and across international boundaries. Cross-border crime operations are often planned and execute far from the border.

Some of this already takes place, as noted above, but it needs to go much deeper and be more supportive at both institutional and individual levels. This process must also include private sector stakeholders: companies such as FedEx, UPS, and Amazon, as well as freight forwarders, trucking companies, and customs brokers, are all involved in cross-border trade. Their participation as partners in reducing cross-border criminal activity is essential.

Finally, the government needs to designate laws specific to cross-border crime and include meaningful penalties as a means of deterrence.

Hyper-focusing on the border while ignoring other aspects of cross-border crime may be good political optics, but it is a bad strategy. What we really need is functional enforcement – including an integrated process extended vertically and horizontally across all sectors of border stakeholders, at and away from the border, supported by strong policy and legislation. This is the path forward to better cross-border crime enforcement.


Dr. Todd Hataley is a professor in the School of Justice and Community Development at Fleming College. A retired member of the Royal Canadian Mounted Police, he worked as an investigator in organized crime, national security, cross-border crime, and extra-territorial torture. He is a contributor to the Macdonald-Laurier Institute.

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