Natural Gas Contracts - Alberta

[TerryF]

I am on the verge of renewing a natural gas contract for another 5 year term. Until now, it has been an excellent deal. $3.99/kj for the last 10 years with the option to renew at the same price for 5 years at a time for...... forever!

Right now though, it isn`t such a good deal. Regulated rate for natural gas has been lower than this for the last 7 months. The future looks a bit gloomy for the natural gas industry as well - the supply is very high, almost record high and storage is close to capacity. As a result the prices keep falling. Some predictions are that natural gas will never get back to where it was due to new technology releasing a lot of previously unavailable natural gas.

So,,,, I wondering if I should sign this contract renewal or not. Contracts are currently selling for around $7.95/kj. at Enmax and Direct Energy, but the regulated rate is so much lower and with the news I`m reading they may stay that way, for the foreseeable future.

I`m thinking this situation could reverse again and being locked in for $3.99/kj wouldn`t be so bad.

Any thoughts out there from anyone? Any `natural gas people` with an educated guess? I guess I would love to know from people who know more, what to do - to sign for another 5 years, or go regulated rate.

 

[JimWhitelaw]

I don`t know anything about the gas market specifically, but I do know that the companies offering fixed price contracts (like auto leasing companies) can`t make any money unless the market price they pay is less than the contract price you pay. Their profit has to come from somewhere and if they can`t make money they`ll go away and all you will have is a worthless contract. I`ve always preferred to just stick with a market rate. My view is that contracts are for people who value consistency/stability over net cost.

 

[housedoc]

Same boat.
Saved a little money over the past 5 yrs with a contract, but chose not to renew for the exact reasons you mention.

 

[lilbuffet]

I just purchased some natural gas stocks because the price was rock bottom, and winter is strolling in. Not sure if it was investing or speculating, but it wasn`t much money!

 

[GarthChapman]

According to industry predictions the new shale gas discoveries, backed by new recovery technologies, are threatening to keep Natural Gas prices in North America down for the fore-seeable future. Hence there should not be much likelyhood of price hikes going forward.

It`s a bit like the variable vs fixed rate choice in mortgages. Go with what makes you sleep well at night.

 

[TomB]

I would be tempted to sign for another 5 years! Yes, the prices may be low now because storage is at an all time high, but will they stay there??? I doubt it. It will be a slingshot effect down the road. Gas producers will quit producing because there is nowhere to put the gas if storage is full and they will be forced to sell it very low - not even enough to pay their bills. Instead they will quit. Then when the supply starts to dwindle and demand creeps up, there will be a lot less gas producers providing the gas and prices will go up! If your rate is $3.99/kj renewable every 5 years for the same rate - that`s an unbelievably good rate. Don`t let it go. If you do you might be ahead for a few months, maybe even a year, but in the end gas prices will have to go up and up and then you will lose.

 

[bizaro86]

Disclaimer: I work in the natural gas industry as my day job, although that obviously doesn`t endow me with the ability to predict the price of natural gas. If it did, I wouldn`t be fussing around with real estate!

All that being said, if I had the option to lock in my natural gas bill at 3.99/kJ, I would absolutely do it. Yes, it might cost you some money this year, but the savings over the long term are likely to be large. I would also consider the value of the option embedded in your contract. The right to continue renewing indefinitely at the same price could be a gold mine if inflation kicks back in, so having that option is worth something as well.

As to the comparison of fixed vs variable mortgages, its not quite apt. It seems to me that this contract is more comparable to a five year fixed at 2.75% with an option to renew at the same rate at the end of the term. How many people here would take that deal? I`m making the comparison because the 5 year cost is slightly higher than the current variable cost, but the variable cost is likely to go up over time.

I`m fully aware of shale gas and the current oversupply, but what some commentators don`t understand is the massive capital costs of completing wells for shale gas. It turns out pumping 500 tonnes of sand 5km underground isn`t cheap! If the price of gas stays low, companies will stop doing it, lowering gas supply.

Do you mind if I ask who this contract is with?

Michael

 

[TerryF]

QUOTE (bizaro86 @ Oct 15 2009, 03:00 PM) Disclaimer: I work in the natural gas industry as my day job, although that obviously doesn`t endow me with the ability to predict the price of natural gas. If it did, I wouldn`t be fussing around with real estate!

All that being said, if I had the option to lock in my natural gas bill at 3.99/kJ, I would absolutely do it. Yes, it might cost you some money this year, but the savings over the long term are likely to be large. I would also consider the value of the option embedded in your contract. The right to continue renewing indefinitely at the same price could be a gold mine if inflation kicks back in, so having that option is worth something as well.

As to the comparison of fixed vs variable mortgages, its not quite apt. It seems to me that this contract is more comparable to a five year fixed at 2.75% with an option to renew at the same rate at the end of the term. How many people here would take that deal? I`m making the comparison because the 5 year cost is slightly higher than the current variable cost, but the variable cost is likely to go up over time.

I`m fully aware of shale gas and the current oversupply, but what some commentators don`t understand is the massive capital costs of completing wells for shale gas. It turns out pumping 500 tonnes of sand 5km underground isn`t cheap! If the price of gas stays low, companies will stop doing it, lowering gas supply.

Do you mind if I ask who this contract is with?

Michael


Hi Michael,
Thanks for your input - very valuable to me to have your opinion. The contract was originally with AES and purchased in November, 1999. Then contract was sold by AES to Epcor before the end of the first 5 year term. Epcor has since quit providing residential gas with the exception of honoring this contract. A couple of years ago, we were offered $1500 by Epcor to terminate the contract which we refused. So they must be obligated to continue indefinately as long as we keep renewing.

 

[TerryF]

QUOTE (TomB @ Oct 11 2009, 05:00 PM) I would be tempted to sign for another 5 years! Yes, the prices may be low now because storage is at an all time high, but will they stay there??? I doubt it. It will be a slingshot effect down the road. Gas producers will quit producing because there is nowhere to put the gas if storage is full and they will be forced to sell it very low - not even enough to pay their bills. Instead they will quit. Then when the supply starts to dwindle and demand creeps up, there will be a lot less gas producers providing the gas and prices will go up! If your rate is $3.99/kj renewable every 5 years for the same rate - that`s an unbelievably good rate. Don`t let it go. If you do you might be ahead for a few months, maybe even a year, but in the end gas prices will have to go up and up and then you will lose.

You and Michael (above) echo my own sentiments. Thanks for your opinion - my renewal goes in the mail tomorrow!

 

[housedoc]

QUOTE (TerryF @ Oct 15 2009, 05:09 PM) Hi Michael,
Thanks for your input - very valuable to me to have your opinion. The contract was originally with AES and purchased in November, 1999. Then contract was sold by AES to Epcor before the end of the first 5 year term. Epcor has since quit providing residential gas with the exception of honoring this contract. A couple of years ago, we were offered $1500 by Epcor to terminate the contract which we refused. So they must be obligated to continue indefinately as long as we keep renewing.


So in you case it`s a no brainer. You`re just bragging.

3.99/KJ? How many KJ/ cubic metre?

How about that new Venezuelan discovery , eh?

 

[TerryF]

QUOTE (housedoc @ Oct 16 2009, 04:55 AM) So in you case it`s a no brainer. You`re just bragging.

3.99/KJ? How many KJ/ cubic metre?

How about that new Venezuelan discovery , eh?

No, house doc, not bragging. People are walking away from these contracts, as good as they seem. I only want to know if there is something I am missing - so NOT a no brainer. I`m glad to have this forum to confirm (or not) my own thoughts!