Recent Changes in the Natural Gas Market

Natural Gas

By: Dean McCabe – Vice President of Operations

From the WB Condo Connection, Volume 6, Issue 1

The study of what drives natural gas markets is extremely interesting. Basically it comes down to storage and demand. For the past several years we have benefited from lower natural gas prices from systems providers – Union Gas and Enbridge Gas. Their prices have hovered in the 10 – 14 cent range and multi-unit residential condos have benefited from that stability.

This benefit was welcomed after many condos watched prices drop during 2009 and 2010 while they were locked into commodity contracts worth 25 – 35 cents. Contracts that were well advised when entering into them but which became difficult to swallow as the systems gas prices dropped. That drop in the market was largely due to drops in demand as North American manufacturing dropped and storage of gas increased.

Here comes the unwelcome news – Prices appear set to climb in the near future – this is for a couple of reasons. The North American economy is making a steady return to pre- 2009 levels and as markets turn away from the use of coal fired plants to generate electricity there are many natural gas fired electricity plants being constructed, and that will also increase demand.

On April 1st Union Gas has filed for price increases of 68% – from 13.30 cents per cubic meter to 22.39 cents. At the time of writing the Enbridge rates were not known.

There are three questions that Boards should consider.

  1. Is there a benefit in protecting your condo from spiraling prices?
  2. What are the options in purchasing Natural Gas?
  3. Which option provides a balance between protection and flexibility?

Here are a few thoughts for your Board to consider:

There is a huge benefit in protecting your condo from price fluctuations in the price of natural gas. If your condo provides natural gas services for heat and hot water to your residents it is not uncommon that natural gas can account for 20% or more of your maintenance fees. The increase from Union Gas on April 1st could mean an increase of 5 – 7% in maintenance fees – in one day.

The Natural Gas purchasing options include the option of staying on systems gas and being subject to quarterly price variations, entering into a supply contract for between 1 – 5 years for the purchase of the commodity or entering into a pool arrangement that has prices adjusted annually based on tiered purchasing.

Boards that enter into a 1, 3 or 5 year supply contract will have their price protected for that period and realize maximum savings as prices increase. At present a 5 year contract is available for approximately 18 – 22 cents. This protects the condo from price fluctuations. There is the possibility of a repeat of the 2009 market that would see systems gas prices drop.

The positive side of that equation is the stability that is offered and the protection from increasing prices. Boards that choose this option should consider a commitment to budget based on systems gas prices – or at least attempt to keep pace with market costs. There is nothing like a shock to the system when a five year contract ends and the condo is facing gas prices that have increased while they have been protected by a supply agreement.

The option of a pool arrangement is not one that WB has encouraged or facilitated as our primary purpose is the management of your condo community and not the operation and risk management of utilities pools that present both risk and uncertainty to the Condos we represent.

For the past several years we have been saying that the time for natural gas contracts was not here. Systems gas pricing was stable and there were no dramatic increases on the horizon. We may be facing the beginning of that change in market conditions that would give us cause to look at contracts again.