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Home > Speeches and Presentations > Speeches and Presentations 2007 > The Changing Face of Natural Gas Regulation - 2007 Natural Gas Conference

The Changing Face of Natural Gas Regulation - 2007 Natural Gas Conference

Presented by
Gaétan Caron
Vice-Chair
National Energy Board

Industrial Gas Users Association's
2007 Natural Gas Conference
Québec City

Thursday, September 14, 2007

Good morning, everyone.

I was very pleased when Murray Newton called me in July to ask me to be here with you today to take part in your annual discussions on the state of natural gas markets and their direction. Quebec City is where I was born and raised, so it's great to be home and even more so as part of this event.

The last time I spoke at the annual IGUA conference was five years ago, in Toronto.

The theme of my speech at the time was: "Northern Gas - The Role of the Regulator". I cannot resist showing you the outline of my 2002 presentation. I am tempted to ask: can you tell the difference?

IGUA 2002 - Toronto: Northern Gas - The Role of the Regulator

Five years later and we are still talking about pretty much the same issues, but in a different context of course.

Gas supply remains on our radar screen.

Northern gas is still being talked about. We have applications in progress and there are other much talked-about pipeline projects from the North that have yet to be filed.

The key players are continually changing, with restructuring taking place upstream and downstream of the energy supply chain, and in-between.

What was then called Smart Regulation is still a key topic of interest for regulators and policy makers but it is now known as Improved Regulatory Efficiency and Effectiveness.

And clearly, five years later, there is still a lot of work remaining, for the marketplace and regulation, as they interact, to work at their very best.

Challenges and opportunities - 2007

It's been five years and, today, I have been asked to speak to you about what I see as the challenges and opportunities for gas users, gas suppliers, gas transporters, regulators, and the public, from the point of view of the national regulator.

This slide identifies the top five challenges and opportunities as I see them. I regard them as being of similar importance. They are:

• natural gas supply
• infrastructure
• energy market information
• regulatory efficiency and effectiveness
• people

NEB: a partner

Let me first remind you what the people at the NEB do.

We promote safety and security, environmental protection and efficient energy infrastructure and markets in the Canadian public interest in the regulation of pipelines, energy development and trade.

Our Vision says:

The NEB is an active, effective and knowledgeable partner in the responsible development of Canada's energy sector for the benefit of Canadians.

We achieve this with a relatively modest organization, in terms of overall size. There are about 300 people working at the Board. Our budget is approximately $35 million. We are headquartered in Calgary, Alberta, which means we travel a lot throughout the country for hearings and to meet with the people of Canada.

Natural Gas Supply

The story of natural gas supply is easy to summarize: supply from conventional resources is going down, unconventional supplies are going up, frontier resources are being examined, and LNG imports are about to begin appearing on the Canadian scene.

Our most recent work indicates that the margin for gas has declined and as a result we've seen a significant drop in drilling and reduced interest in unconventional production. Our work also suggests that the future is very much dependent on energy prices.

The net effect of these trends will be a gradual reduction in natural gas exports to the United States, except for the effects that some LNG terminals may have on the balance, such as the Canaport LNG Terminal approved for construction in Saint John, New Brunswick.

Gas Production

The Board is just completing its long term supply demand study (we call it Canada's Energy Future) which looks at Canada's energy outlook out to 2030 under three different scenarios. The report will be available in mid-November.

Under the Continuing Trends scenario, we have assumed that the current policy environment continues as is,  economic growth is strong, and gas prices are approximately $7. Here I show how gas production is expected to evolve in this scenario: a roughly flat curve for about 10 years, followed by a gradual decline, even when allowing for supply coming from the North, the offshore and LNG.

Like me, you know how difficult it is to predict the future, but this is a plausible view.

Canadian Gas Demand

We need then to compare supply to demand, in order to assess their plausible intersection, all of which will be adjusted through the price function.

The story is a simple one. Demand keeps growing in Canada, from about 9 Bcf/d now to as much as 11 to 12 Bcf/d by 2030, based on continuing trends. This could vary significantly, of course, depending on price and economic growth and other assumptions, notably with respect to environmental policies and programs.

Canadian Supply / Demand

Here is what you get when you put these two curves together for the continuing trends scenario. In the short and in the long-term, we can see that Canadians will get the natural gas they need. You can see the importance of LNG in this scenario to ensure this balance.

With increasing gas demand and flat to declining production from the WCSB, what you get is a net reduction in exports. I stress the "net" reduction since in all of our scenarios we assumed that exports from the west continue and imports in the east continue.

Role of the NEB in Gas Supply

Having shown these graphs, I would like now to explain to you how the NEB will contribute to the responsible development of Canada's energy sector for the benefit of Canadians, as far as supply is concerned.

Clearly, exploring for supply and supply development is a provincial responsibility in our constitution. Therefore, the NEB does not play a role in deciding whether or how natural gas resources will be developed. The exception is the Northwest Territories where, until devolution occurs as it has in the Yukon, the NEB exercises powers typical of a province. Our role there is to determine how natural hydrocarbons are to be developed, from a safety, environmental and conservation standpoint.

Since we are a national regulator, we have the ability to gather gas supply information from all producing regions in Canada, in order to give the market an overall view of Canadian supply. We are told that this objective, independent, and national perspective is important and useful information for the marketplace.

We also use our understanding of supply as an early indicator of the future need for infrastructure. As I will indicate in a bit more detail when I talk about infrastructure, given the decline in supply, we no longer see the need for ongoing overall expansions of existing systems. There is a general trend, however, towards more localized infrastructure to connect potential new supply, such as potential gas from the North, LNG imports and new regions in traditional areas, to existing grids.

Our challenge in the area of supply, therefore, is to remain up-to-date on supply trends, and to carefully decide how and when we bring our supply information to the market.

Our opportunity of course is to do that well. I will talk more about that when I address our energy market information work a bit later in my presentation.

Infrastructure

In July 2007, we published our latest edition of our Canadian Hydrocarbon Transportation System Assessment. Our key finding is that there is adequate capacity in place on existing natural gas pipelines. Natural gas supply from new sources continues to be added to supplement declining conventional supply from the WCSB. However, when combined with a growing demand within Western Canada, the net result is that there is some excess capacity on pipelines transporting gas from the region. This excess capacity has given suppliers the flexibility to access markets of their choice at most times. Natural gas pipeline projects in 2006 were mainly aimed at connecting new supplies and addressing bottlenecks in the market area.

These changes in Canada's natural gas supply and demand have important implications for both existing pipeline systems and proposed pipeline and LNG projects. Facilities connecting significant new supply from new sources such as the North and LNG or significant changes in regional demand (for instance, oil sands in Alberta and electricity generation in Ontario) will have the potential to influence markets and alter the utilization and gas flow on existing pipelines. In turn, these changes may impact the tolls and other costs associated with using those pipelines. For example, introducing new gas supply in Eastern Canada could cause greater utilization or flow reversals in regional pipelines and may also affect the flow of supply from traditional sources and pipelines. Similarly, greater demand in Alberta or Ontario can also alter the flow and availability of natural gas to neighbouring regions.

Shipper Satisfaction on Pipeline Quality of Service

One of the interesting features of our transportation report is that we also include the results of our annual pipelines services survey. Having adequate infrastructure is one thing. It is another thing for shippers to be able to use the infrastructure effectively.

The Board conducted its third annual Pipeline Services Survey in early 2007 to obtain direct feedback from the shippers on the quality of service provided by major NEB-regulated pipeline and midstream companies.

Based on our survey, the Board was able to conclude that shippers again appear reasonably satisfied with the services provided by pipeline/midstream companies. The three areas where shippers indicate that pipeline and midstream companies are doing very well are:

• Timeliness and accuracy of invoices and statements;
• Physical reliability of pipeline operations; and
• Satisfaction with transactional systems.

The three areas where shippers believe that companies could improve the most are:

• Reducing the level of transportation tolls or midstream charges;
• Exhibiting an attitude of continuous improvement and innovation; and
• Ensuring that settlements or tariff arrangements work well.

Our transportation report also concludes that NEB-regulated pipeline companies are financially sound and have been able to attract capital on reasonable terms and conditions. However, the investment community we consulted noted that market conditions can change rapidly and that on a stand-alone basis the regulated entities themselves may have difficulty attracting capital given current returns on equity.

US Developments - an example

While we have a direct responsibility to regulate inter-provincial and international pipelines in Canada, we also must know what is going on south of the border. Canada and the US are greatly inter-connected, and investments in infrastructure in one country very often have impacts on the other. I will use the REX pipeline as an example of this.

Rockies Express (REX) pipeline system (42 inches in diameter) will stretch across 1,663 miles, with a capacity of 1.8 Bcf per day. Its owners are Kinder Morgan, Sempra and ConocoPhillips. The REX West leg of the system, scheduled for service by the end of this year, will carry gas from the Rocky Mountains producing region (the only one expected to grow materially in the lower 48) into pipeline networks that feed gas to Chicago and the Midwest. REX East, due to come on-stream in two phases, will terminate at Clarington, Ohio. From there, gas will flow to the U.S. Northeast. Completion is scheduled for June 2009. FERC issued a certificate for REX West on April 19th, 2007 and an application to FERC for REX East was filed on April 30th, 2007.

A key challenge for REX is moving such a large incremental volume of gas through existing pipelines to major markets in New York and Boston. Should this prove difficult, there is the possibility for more Rockies gas to want to move north. This might happen via the Vector Pipeline into Dawn. From Dawn, the Ontario and Quebec markets could bid for some of the gas and some could move onto TCPL-Iroquois and head to the U.S. Northeast.

This is just an example to show that infrastructure development in the U.S. is, of course, relevant to dealing with our own challenges and opportunities in this area. Our staff monitors these developments. When you have questions about what is going on in the United States, please include our Gas Team among your information sources.

Memorandum of Understanding

In that respect, we have maintained a very close relationship with the Federal Energy Regulatory Commission (FERC) for a long time.

On the screen in front of you, in full length, is the Memorandum of Understanding between the NEB and FERC, signed in Halifax, Nova Scotia in May 2004. We are completely committed to the collaboration indicated in this MOU.

I would like to draw your attention to Clauses 4 and 5, which are particularly important. These clauses recognize that appropriate coordination could promote the public interest through increased efficiency, coordinated action on significant energy infrastructure projects, and cost savings to both the public and regulated entities.

The MOU builds on decades of regular meetings between senior staff at FERC and the NEB. In fact, the Chairs of FERC and the NEB have been meeting every year through their participation at the annual conference of the Canadian Association of Members of Public Utilities Tribunals, or CAMPUT. I fully expect this fine tradition to continue when CAMPUT holds its next annual conference in Banff in April 2008.

This partnership gives us quick access to the large amount of information processed every day by FERC. While we do not and cannot seek to influence each other's independent decisions, awareness of each other's actions and plans contributes to what has been called “conscious parallelism”, resulting in decisions that complement each other.

Infrastructure - Challenges and Opportunities

Our challenges and opportunities in terms of infrastructure are about engaging in meaningful debates regarding the necessity of building additional infrastructure and, if so, under what terms and conditions. Once built, our challenge turns to promoting their safe and environmentally sound operation, setting tolls that are just and reasonable, and having tariffs in place that allow for open access.

It is trite to say, but it is not trite to do, and to do well. Our opportunities in this regard include:

• maintain and enhance the Board's understanding of the market place; we achieve that through our people and through the knowledge we gain through monitoring and our public hearings;
• unfailingly deliver decisions with clear reasons that demonstrate complete understanding of the issues presented to us, an objective assessment, and a fair conclusion; and
• only take the time necessary to complete the tasks described above. In that respect, we seek to continually improve our processes. I'll say more on that when I get to the regulatory efficiency and effectiveness portion of today's presentation.

Energy Market Information

My third area of challenges and opportunities is the provision of energy market information.

It is well established in economic theory, and empirically demonstrated, that efficient markets require, as a fundamental component of their functioning, a free flow of reliable and readily available information. This information allows market participants to make their own informed choices and maximize their own economic rent.

The Board is very much a part of that flow of information and, indeed, is part and parcel of the market.

Our focus on monitoring markets is both internal and external.

Internally, we need to be on the lookout for developments in the marketplace. We then use that knowledge in our externally-focused business processes, mainly the review of applications and the public release of market information.

Energy Information - Short-term

I have here a few examples of gas market information that we continually monitor internally, in this case on a weekly basis:

• oil vs. natural gas relationship;
• Western Canadian Sedimentary Basin production;
• underground storage; and
• North American weather outlook.

This information is being monitored by our staff and Board members so that we can anticipate issues in the market place before they occur, or to be aware of them as they occur. Our goals in monitoring the short-term dimensions of the marketplace are to:

1. determine, and communicate, the extent to which the market place is working well, based on fundamental knowledge of the marketplace; and
2. prepare ourselves for applications to be filed in response to market developments. This can be about facilities, tolls and tariffs, or trade.

Summer and Winter Outlooks

We also publish summer and winter energy outlooks, our latest one being the summer outlook from April 30, 2007.

Energy Information - Long Term

Our monitoring also takes a more long term focus. You can see the results of our work through our publications, notably our Energy Market Assessments, and our flagship Energy Futures reports.

Some of our more recent EMAs are:

• Canadian Hydrocarbon Transportation System - Transportation Assessment - July 2007 - this has been an annual publication
• Canadian Energy Overview 2006 - Energy Market Assessment - May 2007
• Short-term Canadian Natural Gas Deliverability 2006-2008 - Energy Market Assessment - October 2006 - we plan to issue our annual update in the fall again.
• Natural Gas for Power Generation: Issues and Implication - June 2006
• Canada's Oil Sands - Opportunities and Challenges to 2015: An Update - June 2006 - shown here above. As you know, natural gas, and its supply, is very much part of the oil sands story.
• Short-term Outlook for Natural Gas and Natural Gas Liquids to 2006 - October 2005

Energy Pricing Information

A new feature in our suite of energy market information services is the energy pricing information section on our web site. This section gives you an assessment of current market conditions in all commodity groups, including natural gas, and is updated regularly. You will also find a more general discussion on how Canadian markets work, background information on the Canadian energy industry, frequently asked questions, and links to sites we ourselves regularly visit to update our own knowledge base.

Energy Pricing Information

Natural Gas Pricing

This is an example of one of the pages from the natural gas section of our Energy Pricing Information.

Natural Gas Exports and Imports Statistics

We also publish an array of statistical series. Of particular interest to the natural gas communities, I would cite:

• Natural Gas Exports and Imports Summary
• Exports Statistics, including:
  • Natural Gas Export Prices at St. Stephen, New Brunswick
  • Exports - By class of sale (volumes, revenues, and average prices)
  • Exports - By term (volumes, revenues, and average prices)
  • Exports - By export point (volumes)
  • Exports - By U.S. region (volumes)
  • Exports - By customer type (volumes)
  • Average export prices - By point of export
  • Average export prices - By U.S. region
  • Average export prices - By customer type
  • Average exports - By export point (volumes)

Briefing Notes - Coalbed Methane

This slide shows yet another recent innovation in the way we share energy market information, and that is the publication of briefing notes. The best example, relevant to your interest in natural gas, is the Overview and Economics of Horseshoe Canyon Coalbed Methane Development - Briefing Note - May 2007.

Energy Market Information - Issues and Opportunities

Having explained what we do about monitoring the market place, I'd like to now discuss the related issues and opportunities, from a regulatory perspective.

The market place is so dynamic and complex that it can be difficult to effectively target the information we offer Canadians so that it produces optimal value. How does one determine what it wants from a regulator, when there is no price signal? Our publications are free, given that the services we provide are in the public interest. But even if the market wants this information, how do we know that it expects the information to come from the NEB, rather than another source, including those that sell the information? Finally, given the absence of a price signal or sales volumes, how do we continually improve our suite of information products?

The partial answer to these issues comes with the opportunities. We are continually on the look out for feedback on our energy information. It is my hope that, as a result of hearing this story here today, one or more of you will examine this information, or will examine it again, and will contact our Commodities Business Unit to make suggestions.

Another opportunity is that which comes as a result of partnerships with other sources of energy information to the market place. We already have formal partnerships with Alberta, British Columbia and the Yukon. We are keen to pursue further partnership opportunities.

Regulatory Efficiency and Effectiveness

Five years ago in Toronto, I told this audience that we were working on Smart Regulation, as it was then called. We are still on it. We now call it regulatory efficiency and effectiveness. My colleagues on the Board along with myself and our executives spend a lot of time thinking and taking action about this. Let me give you a glimpse at some concrete examples on how we improve our processes.

• We have shifted away from prescriptive regulation towards goal oriented regulation. Particularly in matters of safety and environment, we specify the goals and the desired end results, and for the most part we let industry choose the best means for them to achieve these goals.
• We are working on improving our partnerships with other agencies: we will have a unique opportunity in this regard as contributors to the work to be done by the Major Projects Management Office, announced by the Government in the Budget Speech 2007. In the same vein, we expect to see some synergy from the action to be taken following the Council of the Federation (Canada's Premiers)'s announcement on August 9th, 2007 that they will seek to improve the timeliness and certainty of regulatory approval processes for the energy sector, while ensuring rigorous protection of the environment and the public interest.
• We constantly look for opportunities to more effectively use the tools in our tool box, notably our Appropriate Dispute Resolution (ADR) capabilities.
• We continually seek to improve the way we engage affected members of the public, such as landowners, farmers, ranchers and persons with environmental interests.
• We have published service standards for our main processes, we monitor our performance against these standards, and we report publicly on that performance. For instance, you now know that, under these standards, 80% of our Reasons for decision will be completed within 12 weeks following the completion of a public hearing.

The bottom line is that you can count on the NEB when you are looking for a highly motivated partner in search of improvements in the effectiveness and efficiency of regulatory processes.

People

The fifth challenge and opportunity I have identified is the attraction and retention of people. I will not burden you with the details of our own specific situation in this regard. I know you have your own difficulties, in an economy where attracting people with the right skills at the right time and in the right number is increasingly difficult for all of us. We are confronting that situation in the heart of downtown Calgary.

Let me just say that our challenge in this area is again also our opportunity. We have had an unsustainable turnover rate in the last few years, and we are not out of the woods yet. We still have people leaving the board in a larger proportion than we'd like. I am pretty sure most, if not all of you, would say the same thing right now. The opportunity that comes with this challenge is that we are now very focused on our people agenda, and good things come out of a focus on our people. Our actions include recruitment, of course, to offset the ongoing departures. We have just set up a special team of people from all business units to focus on recruitment. We are also focused on making the NEB an attractive place to work, with such options as workplace flexibility making up a key component. I am sure our story resembles yours.

While I feel the road will be bumpy from time to time on our people agenda, I see a successful path ahead, as we continue to work with the federal government and all of our partners to target specific actions that lead to solutions.

Looking Ahead

This is a copy of the last slide I showed when I spoke at the IGUA conference in Toronto in 2002. I think the sign on the side of the road is still appropriate: « Steep climb ahead - speed up! » In my view, this does not mean: «let's work in haste», or «hurry up and wait», but rather, when we look ahead to the next five years, let us be prepared for a future that will not be any more stable and predictable than the last five years. This requires us to be constantly on the lookout for information in the market place that will inform our own actions, as we evolve as a participant in that market.

The NEB sees itself as a participant in the marketplace, as a provider of market information, and as a place where people come to resolve energy issues within the NEB's mandate, such as energy infrastructure, tolls, tariffs and open access.

The NEB will remain an active and knowledgeable partner in this journey. I encourage us to work together, formally through our processes such as hearings and energy market assessments, as well as informally through our ongoing monitoring work, so that we can reach the top of the next hill, and so that we keep moving towards a sustainable future for all participants in the market place.

Contact Us...

If you are interested in knowing more about the topics I discussed today, you can talk to me at the conference. Also, you can:

• visit our website
• drop by our library in Calgary
• call us toll-free. The people in our Energy Commodities business unit, and in particular our Gas Team, look forward to hearing from you.

 

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Date Modified:

2012-03-21