The New Relationship between Empress and Intra-Alberta Gas Prices

November 2011

• In the last year, there has been a reversal of the relationship between Empress and intra-Alberta prices.
• Prices at Empress are now at a discount to AECO prices, with the discount recently exceeding 30 cents per GJ or 10% of the price of gas.
• The reason for the discount lies in the content of the gas stream, and the relatively low price of natural gas relative to other hydrocarbons such as ethane, propane and butane.

In the past, the spot price for natural gas at the inlet to TransCanada Pipelines at Empress has traded at a premium of 10-15 cents per gigajoule (GJ) over prices in Alberta at the AECO-NIT pricing hub. This relationship makes sense - gas tends to flow from an area of lower prices towards markets with higher prices, so a price premium would attract gas out of Alberta and into TransCanada.

However, the last year has seen a reversal of this relationship. Prices at Empress are now at a discount to the intra-Alberta price. Recently, the discount at Empress to AECO has exceeded 30 cents or 10% of the price of gas. What is behind this new relationship?

The answer lies in the content of the gas stream, and the relatively low price of natural gas relative to the price of other hydrocarbons .

Natural gas, as it flows out of the ground, is a mixture of gases - primarily methane, but also other hydrocarbons such as ethane, propane, butane and pentane as well CO2 and other components such as water vapour. The gas is processed to some degree before it enters the pipeline system in Alberta, principally to remove contaminants and heavier hydrocarbons that would be liquid at pipeline pressures. However, that gas stream can still contain a significant amount of lighter components such as ethane, propane and butane.

These hydrocarbons have uses as fuels (for example, butane is blended into gasoline) and as chemical feedstocks (ethane is used to make ethylene and therefore polyethylene). These uses have a higher value than simply burning these components for their heating value. It therefore makes sense to extract these components from the gas stream.

Beginning in the 1960's, as gas export volumes climbed in Alberta, large liquids extraction plants were built to process the gas stream leaving the province at Empress, the entry into the TransCanada PipeLine system. These plants were called "straddle plants" as they sat astride the pipeline and processed all the gas flowing out of Alberta. The extracted hydrocarbons went to help build value-added petrochemical industries in Alberta.

Each GJ of ethane removed from the gas stream can be replaced for the cost of buying one GJ of dry natural gas to make up the energy value of the liquids extracted. But the liquids have a value greater than their energy value - thus the economics of extraction.

For example, if oil costs $100 a barrel, then the components of that barrel are worth about $15 per GJ. But dry natural gas (with the liquids removed) is worth less than $3 per GJ. Gas that is attracted to Empress can have its liquids removed for a profit of about $12 per GJ. Gas sellers are prepared to accept a lower price for the dry gas because of the added profit on the liquids.

These economics explain why the price of gas at Empress is lower than the price of gas at the NIT trading point, even though Empress is downstream of AECO-NIT. It appears that gas is flowing from a high priced market to a lower priced market, which is illogical. But the value of liquids makes the overall market at Empress attractive relative to the intra-Alberta marketplace.

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