Abstract

Following price deregulation in November of 1986 the variation in prices paidby major shippers for Alberta gas increased considerably. The difference inprices can be explained by differences in market prices, access to markets, andtransportation costs between Canadian producing areas and market areas. Thecompetitive model of price determination would argue that within any producingarea there should be a tendency for prices of equivalent termed gas (i.e. spotor firm contract) to equalize. Since deregulation the major impediment to thisprocess has been the constraints to market access. However, these constraintsare gradually being removed and in the process the spread of natural gas fieldprices paid in Canada will narrow.

Introduction

In the 1985 Agreement on Natural Gas Markets and Prices, the Federal Government and the Provincial Governments of British Columbia, Alberta and Saskatchewan agreed to deregulate natural gas pricing in Canada beginning November 1, 1986. The purpose of this paper is to describe the Canadianexperience with price deregulation, contrasting the current deregulated priceenvironment with that which prevailed prior to November of 1936. Our discussionbegins with a description of the competitive model of natural gas pricedetermination. This is followed by an analysis of field prices currently beingpaid in Canada. We illustrate the wide range of prices and how these pricesvary by shipper and market served with this background, we then turn to adiscussion of the important factors determining Canadian field prices. We groupthese factors under the three headings of market pricing, market access, andtransportation costs. The paper concludes with comment on how Canadian fieldpricing is likely to evolve as more competitive elements are introduced to the North American gas market.

Competitive Model of Field Price Determination

It is informative to review the competitive model of natural gas pricedetermination. The gas industries in both Canada and the United States haveundergone a certain measure of deregulation, moving towards a more competitiveframework. As this deregulation process continues, particularly as it affectsthe transportation sector of the industry, we will see gas pricing more closelyconform to the constructs of the competitive model.

The competitive model would have the price of gas determined in a market wherethere are many buyers and sellers, all relatively small such that no one buyeror seller can influence the price. All participants in the market are pricetakers. In addition, the gas offered by one seller is indistinguishable fromgas offered by another seller, a homogeneous product is being exchanged. Andfinally, there are no artificial impediments to new buyers and sellers enteringthe market. For example, producers and consumers have equal access totransportation facilities, such facilities being designated as common carriersand subject to rate regulation.

The market price of gas is the price determined in the lowest valued marketwhere gas is traded (i.e., the marginal market) and, in the case of gas, thisis the industrial boiler market.

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