Canada's “Rock to Road” Magazine

November/December 2005 Issue

• Anthony Henday expressway section targets 2007 completion
• Self-Consolidating Concrete facilitates expressway construction
• Asphalt producers, roadbuilders feel oil, natural gas pain

For a copy of the issue that contains these articles with colour photos, click here.

Anthony Henday expressway section targets 2007 completion

By Andy Bateman, Engineering Editor

    According to Alberta’s provincial government, traffic congestion in south Edmonton will be significantly reduced by fall 2007, thanks to the construction of the Anthony Henday Drive Southeast Leg Ring Road Project. The 11 km long project forms the southeast section of the Edmonton Ring road and will connect Highway 2 to Highway 14/216. It incorporates six lanes of highway between Highway 2 and 50th Street and four lanes between 50th Street and highway 14/216. It will also include twenty-four separate bridge structures including five interchanges.

P3 promises savings
     The project is Alberta’s first highway Public Private Partnership (P3) project and will allow the road to be built faster and sooner according to Dr. Lyle Oberg, Alberta’s Infrastructure and Transportation Minister. In addition to earlier completion, benefits of the P3 approach are said to include a road built to full freeway specifications (with no stop lights) and fixed capital costs with the province protected from inflation. The province will also be insulated from risks such as weather delays, difficult ground conditions and construction defects. In addition, the P3 set up will deliver a road that will be built on time and on budget, with penalties for lateness and responsibility for all cost overruns falling on the contractor. There is also an extended warranty of 30 years on the work. Under the project plan, the contractor pays for the design and construction of the road. Once the road is open to traffic, the province will make predetermined monthly payments to the contractor over 30 years to cover construction costs as well as ongoing maintenance and operational costs.
    Access Roads Edmonton Ltd. (AREL) was the successful bidder chosen to design, finance, build and maintain this section of the bypass in the 30-year deal worth an estimated $493 million in current dollars. According to province, it would cost up to $497 million if the same project were delivered through conventional means. In addition the provincial spending on the project, the Government of Canada will contribute up to $75 million through the Canada Strategic Infrastructure Fund.
     AREL is a consortium of companies from Alberta’s engineering, roadbuilding and maintenance industries. The AREL team includes: PCL Construction Management Inc.; PCL-Maxam, A Joint Venture; Sureway Construction Management Ltd.; Lafarge Canada Inc.; Marshall Macklin Monaghan; Stantec Consulting; Transportation Systems Management Inc. and ABN AMRO Bank N.V.
    PCL Construction Management Inc, a member of the PCL family of companies, will manage all design and construction related activities.
PCL-Maxam, a Joint Venture will be responsible for constructing the bridges and overpasses on the project. Sureway Construction Management Ltd. will complete the required earthworks, drainage and underground utility works. Lafarge Canada Inc. will complete the surface works including granular base, asphalt pavement, signage and lighting. Design services will be provided primarily by Marshall Macklin Monaghan (MMM) and Stantec Consulting as well as a number of specialized sub-consultants. 
    Operations, Maintenance and Rehabilitation will be done by Transportation Systems Management Inc (TSMI), a subsidiary of Lafarge Canada. TSMI was one of the first private companies to provide highway maintenance services in Alberta. ABN AMRO is one of the world’s largest financial institutions.
   The Southeast Ring Road will be owned by the Province of Alberta and it will become part of the provincial highway network.

Back to top

Self-Consolidating Concrete facilitates roadway construction

By Andy Bateman, Engineering Editor

     Contractors are successfully using a Self-Consolidating Concrete (SCC) and self levelling concrete to pour high piers and other structural elements on the Anthony Henday Drive Southeast Leg Ring Road (AHDSERR) Project.
     The mix, Lafarge’s Agilia® Architectural, reportedly contains no special chemical or other mix constituents. Rather, its performance is said to be the result of careful mix design utilising, among other things, 9 mm aggregates and fly ash. Aggregates & Roadbuilding recently witnessed the mix in action on the AHDSERR Project where a 13 m high pier was poured in a single pour from the top of the forms. The pier is one of the supporting structures for a three level overpass connecting Anthony Henday Drive westbound with Calgary Trail southbound at the Gateway Boulevard interchange.
   Stephen King, Design-Build Office Construction manager for PCL Construction Management Inc., reports that the mix facilitates construction in a number of ways. Site safety is aided by eliminating any need for the concrete placing crew to go down into the forms to consolidate (vibrate) the concrete. The mix is also said to save time and therefore cost in both the pouring and finishing processes. Here the pier was poured to its full height in one continuous pour of about six hours, whereas a conventional high performance mix would require three separate lifts across a three day period.
   In terms of finish, completed piers showed a sound finished surface that would require little patching. With a conventional mix, a good initial finish would be hard to obtain in any case in a form so heavily congested with reinforcement. In terms of direct material cost, King reports a premium of 30-50 per cent per cubic metre over conventional high performance mixes.
   Lafarge personnel add that the cost premium is closer to the 30 per cent mark when compared to higher performance mixes, with the premium often off–set by savings in placing and finishing costs. These savings include its reduced curing and protection allowing bridges to be opened earlier. In addition, Agilia can be pumped from wherever access allows in spite of the possibility of air void segregation due to placing. A full compliance test is completed on every load to prove the flow and air contents at the point of placement due to ISO reporting requirements.

Back to top

Asphalt producers, roadbuilders feel oil, natural gas pain

By Andy Bateman, Engineering Editor

    Everyone will be aware of the devastating impact of recent Hurricanes on the Gulf Coast and their human and economic toll on the region. Fortunately for the rest of us, only economic waves spread far beyond the Gulf, largely the result of interrupted crude oil and natural gas production as well as interrupted refining capacity. For the public, the most obvious impact on a daily basis has been the price of gasoline, where the unheard of $1.00 / litre, still a bargain by European standards, was broken for the first time before subsequently falling back towards pre-hurricane levels.
   To get some idea of how changes in crude oil price have affected Canada’s aggregates and roadbuilding industry, this initial report looks at the impact on the production and use of hot mix asphalt - the coated material of choice on some 95 per cent of the country’s roads and a major end use of aggregates. For hot mix producers and users, the recent ups and downs of oil and natural gas markets have meant more time spent watching energy markets, buying materials and controlling production costs.
    Producers report that some of the bigger cost increases flow from higher raw material costs at source, the delivery of those raw materials, drying and heating costs, delivery to jobsite and placement costs. For operators of natural gas fired stationary hot mix asphalt plants, the prospect of more expensive gas is an additional headache.
   Roger Walls, a director of Red Deer-based Border Paving Ltd., reports a big jump in energy cost at the Alberta company’s hot mix asphalt plants, with drying and heating costs at natural gas fired plants increasing by 57 per cent since April 2005. Plants fired by Industrial Fuel Oil (IFO) have seen a more modest fuel cost increase, with a 17 per cent increase in average 2005 prices compared to average 2004 prices. Walls adds that tight supply in 2004 may account for this slower increase, noting that IFO prices increased by 30 per cent from 2003 to 2004.
   Turning to asphalt cement, suppliers are offering firm prices for 2006, enabling next year’s contracts to be bid with known prices. Asphalt cement prices through 2005 have been relatively flat. However, the province has had a poor summer weather-wise, and some contractors, fortunately not including Border, may be faced with carry over work and the completion of 2005 contracts work at 2006 asphalt cement prices. In such situations, contractors may have to absorb asphalt cement price increases ranging from $20 - $50/tonne next year, equivalent to between $1.00 tonne and $2.70/tonne of mixture.
   Adrian Van Niekerk, Chief Estimator for Etobicoke On based Gazzola Paving Ltd., describes recent increases in the cost of natural gas, diesel fuel and asphalt cement as the “Perfect Storm of three with the contractor in the middle.” The impact of these increases on Gazzola’s hot mix asphalt production costs at a gas fired asphalt plant in the west Greater Toronto Area (GTA) is summarised in Table 1.
   Van Niekerk explains that it requires 8-10 m3 of gas to produce each tonne of hot mix asphalt. In spring 2005, natural gas was running at about $6.90 per gigajoule (GJ) at Alberta’s AECO hub. Delivery cost to Ontario varies, but typically adds about $1.85/ GJ, giving a commodity delivered price of $8.75/ GJ. There are 26.53 m3 in one GJ, so this delivered price equates to about 33 cents per cubic metre of gas. Based on 10 m3 gas consumption per tonne, the gas cost per tonne in the spring was therefore about $3.30/tonne. With gas as high as $13.00 per GJ, the same calculation yields a gas cost of $5.60 / tonne, or an increase of $2.30/tonne in drying and heating cost alone.
   Turning to diesel fuel, Van Niekerk explains that independent truckers apply a fuel surcharge linked to the rack price of diesel and estimates that the increased cost of hauling aggregates to the hot mix plant has added between 50 cents and $1.00 to the cost of producing a tonne of hot mix asphalt. On top of that, it is costing about 25 cents per tonne more to ship asphalt back out to jobsites, for an overall diesel increase impact of about $1.25/tonne. For asphalt cement, prices are currently running at about $290/tonne. Assuming 5 per cent asphalt cement in a mix, the binder cost is about $14.50/tonne of hot mix asphalt.
   With prices of $325/tonne on the horizon for spring 2006 or sooner, the cost for asphalt cement alone jumps by about $1.75/tonne of hot mix asphalt.
   The combined effect of these three cost components; natural gas, diesel fuel and asphalt cement, is therefore adding about $5.30 to the cost of producing each tonne of hot mix asphalt.
   Who pays for this increased cost? In Van Niekerk’s view, everybody pays in the long run. In the short term, the answer depends on which producer’s customers are being supplied. For MTO contracts and those municipalities that have price escalator mechanisms, contractors can recover some of the asphalt cement and diesel fuel increase. However, for supply to developers and private customers, where no such mechanism exists, the producer/contractor has to absorb all of these increases in existing contracts unless new rates can be negotiated. The customer group most likely to bear the brunt of these price increases are third party customers who buy direct from the plant as producers seek to recover increased production costs.
   Van Niekerk argues that the current 10 per cent thresholds in the MTO asphalt cement cost recovery formula is out of date and does not adequately protect the contractor when base prices are so much higher. In the past, for instance 10 per cent of $200/tonne represented an increase of $20, but with asphalt cement at $300/ tonne, the unit price has to increase by $30/tonne before the 10 per cent threshold is exceeded, requiring the producer to absorb an additional $10/ tonne of the increase. One possible solution would be to reduce the threshold for asphalt cement and diesel fuel price adjustments to perhaps 5 per cent.
    For contractors, the buying of these essential raw materials has become a strategic decision where, like many major purchases, timing is everything. Some producers have elected to buy natural gas at spot market prices, while others have locked into medium or long term supply contracts to insulate themselves against future price shocks. While nobody can predict the future with certainty, the past can be a guide in this difficult process. Historical pricing charts, for instance, clearly reflect the market’s response to weather and other events in previous years, as well as the all too familiar impact of 2005’s unforgettable Hurricane season.

GTA aggregate delivery prices up sharply
     As part of this focus report, Aggregates & Roadbuilding has estimated the overall cost of increased diesel fuel prices on the delivery of aggregates to the Greater Toronto Area (GTA) as Canada’s biggest aggregate market. The GTA currently consumes some 60 million tonnes of aggregates annually, of which over half (56 per cent) is supplied from within the GTA and the balance (44 per cent) is imported from outside the GTA. The numbers in Table 2 indicate that every 10 cents/ litre increase in the price of diesel fuel adds nearly $11.5 million to the total delivery cost of this 60 million tonnes, or an average of nearly 20 cents/tonne.
     As high as these numbers might sound, they are indicative of the supply situation only in the short tem and likely to get higher still in the future. In “The Implications of Restricting Aggregate Supply in the GTA” by Clayton Research and MacNaughton, Hermsen, Britton Clarkson Planning Ltd., it was concluded that “for every 3 tonnes of aggregate produced in the GTA in the past 12 years, only 1 tonne of replacement supply was licensed. Based on expected demand, existing licensed reserves in the GTA will be exhausted within the next decade – and the impacts of scarcity are already emerging. Additional reliance on imports to fill the supply gap is not the answer. Over a 10-year period, additional imports to replace local GTA production would consume 820 million litres of fossil fuel and generate over 2.25 million tonnes of additional greenhouse gas emissions.
  There would also be price implications for consumers as transportation costs alone associated with importing more aggregates to replace amounts produced in the GTA today would be about $4 billion over a 10-year period. Base prices of aggregates would also be expected to increase in response to product shortages and higher costs of developing new supply areas.”

GTA aggregate prices continue to climb
     Discussions on hot mix asphalt production costs would not be complete without looking at the price of aggregates which typically make up about 95 per cent of an asphalt mixture. In the GTA, major aggregate consumers report that prices have increased significantly, with clear sized limestone aggregates typically increasing by about $5.00/tonne ((FOB or ex-quarry) over the last five years. Gravel aggregates have increased by about $4.00/tonne (FOB pit) over the same period. Anecdotal evidence also indicates that that the price of premium aggregates in the GTA has typically increased by about 50 per cent in the last four to five years. Aside from these indicators, available national data on aggregate pricing is scarce. In Ontario, the Aggregate Producers’ Association of Ontario (APAO) collects pricing information through its annual member survey, but the results of this survey are available only to survey participants and even then only in a consolidated regional format.
Editor’s Note: In the next issue, Aggregates & Roadbuilding will present an overview of how high energy costs are affecting aggregate producers across Canada.

How are the provinces dealing with rising fuel price increases?
     One method for dealing with changes in the cost of materials on construction contracts is to apply a price adjustment based on some form of monthly price indexing or escalator formula. Aggregates & Roadbuilding contacted provincial transportation agencies across the country to see how managers of public funds are handling price jumps in two oil derived products - asphalt cement and diesel fuel. Overall it was found that some agencies have escalator clauses in construction contracts for both asphalt cement and diesel fuel while others have clauses for one and some none at all.
     In Ontario, contractors bidding on Ontario Ministry of Transportation (MTO) contracts have the option to opt into the payment adjustment based on changes in the MTO’s performance grade asphalt cement price index. This index is based on the price, excluding taxes, FOB from depots of the main suppliers in the Toronto area for PG Grade 58-28 asphalt cement or equivalent. For contractors who have opted to use the payment adjustment system, adjustments are based on the PGAC price index for the month in which tenders were opened for the contract. To calculate any adjustment, the tender opening index is compared to the PGAC index for the month in which paving occurred. For any adjustment to occur, the index for the paving month has to differ from the tender opening index by at least 10 per cent. Where the 10 per cent threshold is exceeded, the contractor receives additional compensation for the increase in excess of 10 per cent. Likewise, the owner receives a rebate when the paving index is less than 90 per cent of the tender opening index. The same PGAC price index is applied to all asphalt cement grades. Most of Ontario’s asphalt cement is sourced from Toronto depots with the exception of imports near provincial borders with Quebec and Manitoba.
     Paul Sosney, head of estimating in the MTO’s Construction & Operations Branch, has compared laydown prices for HMA for 2004 with the projected numbers for 2005 and estimates that all HMA will be about 11 per cent more than 2004 in finished (laydown) price. Of this increase, only about 2 per cent of the year over year increase in laydown price is attributable to increases in asphalt cement price. Sosney puts the year over year increase in asphalt cement price from 2004 to 2005 at 6.8 per cent, with a similar increase expected for 2006 over 2005. In Sosney’s view, price swings in asphalt cement do not have a major impact on the laydown price of asphalt as asphalt cement typically comprises only about 5 per cent of the asphalt mixture. At least in Ontario, the increasing price of aggregates, the energy required to produce asphalt and increased haulage costs are accounting for most of the increases in laydown price.
     For diesel fuel used on MTO contracts, a payment adjustment mechanism is in place to adjust payments to contractors based on the Ministry’s fuel cost adjustment index. The index is based on the rack price, including taxes, of low sulphur diesel fuel at terminals in the Toronto area and is also used by contractors to calculate the flow through to truckers, subcontractors and other shippers or suppliers. Monthly payment adjustments are based on changes in the fuel price index, either positive or negative, and the estimated monthly fuel consumption for specific types of work completed on a contract.
     So how do increases in cost impact on the current year’s roadbuilding budget? The MTO’s Noris Bot, manager, Investment Planning and Programming, reports that a number of options are available if more money is needed in the current year. Firstly, the current year’s budget includes a buffer based on historical costs. In addition, funds may also be available for transfer from the mix of current ongoing and completed projects, although such transfer is subject to controls. If additional funding is still necessary, the MTO can make a special request to the Ministry of Public Infrastructure Renewal.
     In Manitoba, Lance Vigfusson, executive director of Construction & Maintenance Engineering & Operations Division, explains that Manitoba Transportation & Government Services takes a different approach to many other provinces. Here, the agency purchases asphalt cement and supplies it to contractors for a particular contract. By purchasing the asphalt cement directly, Vigfusson explains, the province removes the risk of price fluctuations from the contractor. In doing so, the province believes that the province obtains better value for money for its contract dollar as contractors do not have to hedge (allow) for unexpected increases asphalt cement price when bidding for work. Turning to diesel fuel, no escalator mechanism was in place until price shocks this summer became a major issue. As a result, the province has introduced fuel escalation measures for contract work from October 2005 onwards. The escalation mechanism is based on consumption rates for specific types of work such as hot mix placement or excavation.
     Bill Pacholka, director of Materials and Testing for Saskatchewan Highways and Transportation, reports that the province has no price index mechanism for increased asphalt cement costs. Like Manitoba, SHT purchases its own asphalt cement and thereby assumes the risk for changes in rack price. Increase in asphalt cement price have not had much impact on 2005 contracts, while diesel fuel increases have been a contributory factor in a modest increase in contract prices. The province is introducing measures to protect contractors against increases in the price of diesel fuel in excess of 7 per cent by comparing the month of consumption with the month of tender opening. Likewise, the agency receives a rebate if diesel prices fall by more then the 7 per cent threshold. Pacholka adds that future year contracting budgets are including above inflation increase in material cost which will have an impact on the how far the province’s contracting budget dollar will go.
     Alan Maynard, director of Highway Maintenance for Prince Edward Island Transportation and Public Works, reports that a one off adjustment was made for truck haul only was made in 2005 subsequent to the normal pre season negotiations for this and other rates. For asphalt cement, an indexing mechanism is in place and is applicable to material price on capital works. Maynard adds that asphalt cement prices were volatile in 2004 but less so in 2005.
In Nova Scotia, Gerard Lee, operations analyst, Nova Scotia Department of Transportation & Public Works, reports that the province has no current diesel fuel indexing system for construction contracts, although a 5 per cent across the board increase in truck haul rate was implemented in July of this year in response to rising diesel costs. Since that time, the province has tracked diesel prices and is reviewing the possibility of introducing a fuel escalation clause for both truckers and contractors on construction work. In addition, contractors have requested a price escalation clause for asphalt cement. Under the existing system there is provision for contractors to recover increases in asphalt cement price for work that carries over from one construction season into another, provided the delay in work completion was outside the contractor’s control.
     Chuck McMillan, director - Surface Engineering and Aggregates with Alberta’s Infrastructure & Transportation, reports that the agency is looking at potential escalation clauses for asphalt cement and diesel fuel, with none in place at present. Historically, the risk associated with price increases in these items has been considered by their department to be relatively small and borne by the contractor. That situation may have changed on some existing contracts, where for instance, contractors may consume large volumes of diesel fuel on dirtmoving contracts. Looking to next year, contractors are offering prices for 2006 and McMillan recognises that contractors may have hedged material and fuel prices in these bids to protect themselves against weather related or other factors.
     Mike Oliver, chief, Geotechnical & Materials Branch with the British Columbia Ministry of Transportation, reports that the province has no index mechanism to deal with creasing asphalt cement or fuel prices and does not have any plans to introduce any indexing systems. Oliver adds, however, that the province will be cutting back somewhat on this year’s budget at least in part from the effects of increases in crude oil prices.
     Terry Hughes, paving engineer with the New Brunswick Department of Transportation, reports that the province has adopted the payment adjustment mechanism for asphalt cement used by the Ontario Ministry of Transportation (MTO), although New Brunswick has no mechanism in place for diesel fuel. To make adjustments for asphalt cement, reference is made to the asphalt price index posted on the MTO and Ontario Hot Mix Producers Association (OHMPA) web sites, whereby adjustment payments are made or recovered from the contractor based on changes in the index in excess of a 10 per cent threshold.

Asphalt Cement: refining, price and supply
     In “Refining 101”, Tom Day, general manager at Petro-Canada’s Edmonton refinery describes crude oil as a mixture of hydrocarbons formed from organic matter. Crude oil varies significantly in colour and composition, with variations in composition including sulphur content, density, total acid number, the contained sediments and water. Crude is classified as light, medium or heavy according to its API gravity, a relative measure of crude oil density. Crude is described as sweet if it has a sulphur content of less than 0.7 per cent sulphur content and sour if the sulphur content exceeds 0.7 per cent. High sulphur crude requires additional processing to meet regulatory specifications. Acid content is measured by total acid number (TAN). High acid crudes have a TAN in excess of 0.7 and acidic crudes are highly corrosive to refinery equipment.
     Naturally occurring hydrocarbon molecules do not meet customer needs, so the refining process must adjust the molecules, reshape them and remove contaminants to ensure products meet requirements for both end use and environmental performance. For instance, Canadian market demand requires about 40-45 per cent gasoline while a light crude may contain just 20-30 per cent gasoline. For heavy crudes, the gasoline content may be even lower at 5-15 per cent gasoline.
     Basic refinery operations include separation, conversion and treatment/blending. At the conversion stage, the shape or size of molecules are changed. Reshaping is utilised to improve product quality while upgrading involves breaking larger molecules into smaller molecules. During the treatment/ blending stage, on specification products are produced by the removal of impurities and the mixing of components to meet specifications.
     For a refiner the two areas of safety and reliability cannot be compromised. After that, economic optimization is a series of trade-offs with refinery production considerations including feedstocks, crude rate, products and operations. Feedstock factors include the availability and cost of crude and the fit with refinery characteristics such as refinery complexity, product flexibility and constraints. Crude process rate should be maximised to spread fixed costs while the resulting products should meet market demands and profitability goals. At the operational level, the goal is to maximize yields from a given feedstock, while minimizing giveaways (nil value product) and optimizing energy use.

Husky Lloydminster
     As an example of how refining works in practice, Husky Energy’s asphalt refinery and terminal in Lloydminster, Alberta refines and produces over 30 different types and grades of road asphalt, ranging from simple dust-laying road oils to asphalt used to pave highways. Asphalt products are shipped to markets in Canada and the United States for paving, or to be processed further into building products. Crude oil for the Lloydminster Refinery comes from extensive deposits of heavy oil in the region. The composition and properties of crude oil vary greatly from one area to another, with crude from the Lloydminster area being black in colour and viscous (slow to pour). It contains materials such as water, sand, and a number of salts, including magnesium, calcium, and sodium. It has a relatively high specific gravity (one litre weights 970 grams in contrast to other crudes, which on average weigh 850 grams per litre) and is known as “heavy oil”.
     Based on 2004 volumes, the Lloydminster refinery processes 4,250 m3/day (26,745 barrels/ day) of Lloydminster blended crude. From this blend, more than half of the refinery’s output (2,250 m3/day) consists of the asphalt for the paving industry. After the asphalt has been removed the remainder of the crude emerges as a series of semi-finished products: light distillate, kerosene distillate, atmospheric gas oil, light vacuum gas oil, and heavy vacuum gas oil. The light distillate is used as diluent to be mixed with the heavy crude before it is transported via pipeline. The gas oils are sent to the Husky Lloydminster Upgrader (HLU) to be processed into synthetic crude oil. Husky currently does not produce finished gasoline or fuels at the Lloydminster Refinery.

Trends in asphalt cement price
     Long term, Lyle Kajner, regional manager asphalt, refined products for Husky Energy, expects the North American asphalt cement market to tighten due to a number of factors. These include consolidation within the asphalt refining industry, increased transportation costs, and increased production of petroleum coke instead of asphalt cement. Some larger integrated contractors have recognized the coming supply trend and are seeking increased security of supply through long term contracts and supply alliances. Kajner adds that a refiner’s decision to produce asphalt cement is largely an economic one, based on the difference between input costs (crude cost plus refining costs) minus the revenue generated from the sale of light-end product streams. Additional considerations include available production capacity, available storage capacity, and the need to dovetail into other integrated refining/logistical/marketing operations.
     Ray Legault, president of Markham Ont.-based Canadian Asphalt Industries Inc., points out that there are many factors driving asphalt cement price such as refining capacity, supply, the market place and the differentials between light and heavy crude oil prices. Legault expects to see higher asphalt cement prices in 2006 but much less than we might have anticipated with crude prices up to or above US$60/barrel.

Natural Gas - North American Market overview
     Natural gas is made up of hydrocarbon gases, primarily methane. It is usually found deep below the earth’s surface, often with deposits of oil, and is removed by wells that are drilled to access the petroleum deposits. After it reaches the surface, the gas is separated from any oil or water that may have been present in the petroleum deposit. It is then processed to remove impurities, other gases such as propane and butane, and any remaining water or water vapour.
     Natural gas accounts for almost a quarter of United States energy consumption and the NYMEX Division natural gas futures contract is widely used as a national benchmark price. The New York Mercantile Exchange, Inc., (NYMEX) describes itself as the world’s largest physical commodity futures exchange and the pre-eminent trading forum for energy and precious metals. Future contracts on NYMEX are traded in units of US$ per 10,000 million British thermal units, rather than the Cdn$ per GJ. The price is based on the Henry Hub in Louisiana, the hub of 16 pipeline systems that draw supplies from the Gulf Region’s deposits. From here, markets are served throughout the US Gulf Coast, East Coast and Midwest and up to the Canadian border.
     Because of the recent rapid changes in natural gas prices, a vigorous market has developed in the pricing relationships between Henry Hub and other important natural gas market centres in the continental US and Canada. These include Alberta’s AECO Hub™. The AECO Hub™, EnCana’s commercial natural gas storage business in Alberta is comprised of three gas storage facilities: Suffield (South-eastern Alberta), Hythe (Northwest Alberta) and Countess (South-central Alberta). EnCana is described as the largest independent natural gas producer and the leading owner and operator of independent, non-utility natural gas storage assets in North America.

Trends for natural gas price
     Rising natural gas prices are nothing new. Back in February 2004, the Calgary Herald’s Scott Haggett noted, “After years as a low-value commodity, natural gas has ascended into the spotlight as demand for the fuel to fire power plants, heat homes and serve as a chemical feedstock outstrips the petroleum industry’s ability to tap new reserves.”
     George Eynon, Senior Director, Research – Natural Gas for the Calgary based Canadian Energy Research Institute, (CERI), provides an industry specialist’s recent viewpoint: “Natural gas prices have virtually doubled in the last year while current prices are about four times higher than four to five years ago. Prices are following the basic demand supply relationship; demand has steadily increased while supply has topped out or declined in recent months due to Hurricanes Katrina and Rita. I don’t expect any big increase in supply, with short-term supply levels at best recovering to their pre-hurricane levels. Longer term, 5-7 years away at best, supplies may come on stream from currently undeveloped sources such as the Arctic but there are significant barriers. Huge capital investment would be required to extract and transport gas from these remote sources in addition to the complex regulatory process involved. The big question now is whether or not demand will fall in response to the recent jumps in price. I believe demand will remain strong despite the price hike.”
     According to the Washington D.C. based US Energy Information Administration (EIA), “the Mackenzie Delta, located in the Northwest Territories, holds an estimated 9-10 Tcf of recoverable natural gas reserves. Natural gas from the region could begin flowing to southern markets by 2010, if natural gas companies can complete the Mackenzie Gas Pipeline according to plan (see below). There are three large, proven natural gas fields in the Mackenzie Delta: Imperial Oil’s Taglua field with 3 Trillion cubic feet (Tcf) ConocoPhillips’ Parsons Lake field (1.8 Tcf), and the joint Shell Canada-ExxonMobil Niglintgak field (1 Tcf). Nearly every Canadian natural gas company has conducted exploration activities in the region.”
     The EIA database also shows reports from the Louisiana Office of Conservation on the current status of natural gas production. As of October 28, the Office had received reports indicating 912 million cubic feet per day (MMcf/d) of onshore and offshore (in State waters only) natural gas production has been restored, which is 40.8 per cent of total production before the hurricanes.
     Still in the U.S., the Cambridge Energy Research Associates (CERA), notes that: With September 2005’s hurricane-related natural gas production shut-ins approaching 250 billion cubic feet (BCF) – almost 7 per cent of the Gulf of Mexico’s yearly production – and rising, the spotlight is on liquefied natural gas (LNG) imports as the “supply of last resort” for natural gas users during the coming winter heating season. Michael Zenker, CERA analyst is quoted as stating that “The rising demand for gas, coupled with flat production, has tripled prices in the last four years. Relief should arrive then in the form of liquefied natural gas, imported to alleviate shortages of the increasingly popular fuel. Liquefied natural gas, or LNG – gas chilled to a liquid then shipped in tankers like oil – will provide a breather, experts said. It is expected to begin making an impact on the U.S. market as soon as some of the 59 proposed LNG terminals are approved and come online. That is expected no sooner than 2008.”
     Back home, SaskEnergy, Saskatchewan’s natural gas distribution company, illustrates how gas distributors are playing catch up with rapidly increasing natural gas prices. On October 11, 2005 SaskEnergy revised its commodity rate request before the Saskatchewan Rate Review Panel, in light of significantly increased market prices for natural gas. This revised application was only a month or so after its original application on September 9, 2005. “Since SaskEnergy filed its original rate application, the natural gas market has felt the full effect of two category five hurricanes, Katrina and Rita, which have severely disrupted production in the North American natural gas market,” Crown Management Board Minister Pat Atkinson said. “SaskEnergy has to ask for a higher rate increase to reflect the cost it pays for gas, which it passes on to customers at no mark-up or profit.” Under the October 11, 2005 application, the commodity rate of $10.88 per GigaJoule (GJ) would be applied effective Nov. 1st, 2005. As a result, General Service class customers (which include hot mix asphalt plants and other industrial users) would see monthly bills increase by more than 40 per cent. On October 24th 2005, the Saskatchewan Rate Review Panel recommended approval of a lower commodity rate, but also left room for the distributor to make application again January 1, 2006 with this commodity rate if necessary.

Back to top

November/December 2005 issue

Aggregates and Roadbuilding Magazine
4999 St Catherine Street West. Suite 315
Westmount, Quebec H3Z 1T3
Tel: (514) 487-9868 Fax: (514) 487-9276
EMail: rocktoroad@sympatico.ca