Good morning, honourable members of Parliament.
My name is Shelley Milutinovic. On behalf of my colleague Darren Christie and myself, I would like to thank you for the opportunity to appear before you today.
As Canada's energy regulator, the NEB monitors supply, demand, and demand scenarios for energy commodities including oil, natural gas, and natural gas liquids such as propane.
Propane is used for a variety of purposes, from home heating and cooking to agricultural crop drying and fuelling vehicles. It is a common source of heating fuel for residents and businesses not served by natural gas pipelines. Statistics Canada estimates that approximately 1% of Canadian households heat with propane, with the highest rate in Ontario at 2%.
Canadian propane production is centred in western Canada. Approximately 85% to 90% of Canadian propane is produced from natural gas processing, nearly all in Alberta and British Columbia. The remaining 10% to 15% comes from crude oil processing across Canada.
Canadian propane exports are regulated by the NEB and governed by the National Energy Board Act and related regulations. All propane exports must be authorized by a licence or order and must be reported to the NEB on a monthly basis. In recent decades, the propane industry has exported propane by means of short-term orders rather than long-term licences. No propane licences are currently in effect, although the board did receive an application for a propane export licence earlier this year. Between 64 and 72 export orders have been issued in each of the last five years.
The NEB's propane export regime reflects a broader policy trend, initiated in 1985 and reinforced in later years through trade agreements and other measures, toward a more flexible and market-oriented regulatory framework for the energy industry.
To bring our focus in upon recent activity in the propane markets, as our colleagues have stated in their opening remarks, the Minister of Natural Resources and the Minister of Industry requested in February 2014 that the NEB and the Competition Bureau work together to review propane market issues. The resulting report was released in March and the final report in April of this year.
As we described in those reports, during the winter of 2013 initial propane inventories were significantly lower than average and demand was unexpectedly high in Canada and the U.S. Supplies tightened, prices increased rapidly, and there were local reports, especially in Ontario and western Quebec, of retail and delivery problems.
As noted, factors contributing to all of this work were: a colder than normal winter across the eastern parts of Canada and the U.S. that resulted in greatly increased demand for heating homes, livestock buildings, commercial buildings, and others; an exceptionally large, wet, and late corn harvest in the U.S. Midwest, resulting in greater than normal demand for propane to dry the corn down to 15% moisture for storage; supply chain congestion and disruptions due to weather and maintenance, resulting in less propane being available where it was needed for distribution and delivery; and rapidly growing U.S. exports of propane to overseas markets.
Tight supply continued for most of the winter, but prices came down considerably after peaking in late January, and local delivery problems eased. Redirection of supply from the U.S. gulf coast to the U.S. Midwest helped moderate prices in both Canada and the U.S.
In the final report to ministers, we indicated that there was no overall supply and demand imbalance in the propane industry that would create lasting supply and pricing issues or prevent the market from correcting similar issues in the future. However, we noted that propane demand and prices are historically volatile because of the industry's combination of steady supply, fluctuating highly seasonal demand, and complex logistics. For those reasons, unforeseen events such as those that occurred over the winter of 2013-14 will likely continue to cause volatility.
Darren will now speak to the details of subsequent developments in the propane markets.