Tariffs on Canadian Energy and Their Effects on Regional Markets

The Trump administration has over the last few months announced a slew of tariffs targeting numerous products and countries, with even more coming April 2^nd. BTU Analytics recently wrote on the ongoing tariff exchange between the U.S. and Canada and the effect it might have on the supply of electricity to the U.S. However, another key source of supply is at risk of tariff-related interruption, as the U.S. recently imposed a 10% tariff on energy products imported from Canada, including oil and gas. In this Energy Market Insight, BTU Analytics explores the United States’ reliance on Canadian natural gas in particular and what regional indicators of market shifts to look for with the evolving tariffs.

To understand the regional impacts that tariffs might have on U.S. gas markets, we first need to understand the overall natural gas import/export dynamics between the U.S. and Canada. Canadian net imports into the U.S. averaged 5.6 Bcf/d over the past five years. This accounts for 5% market share of the U.S. natural gas supply. While this number might seem minute on a larger scale, the potential impact of tariffs on Canadian natural gas plays a much bigger role when zooming in on individual U.S. regions. As seen in the graphic below, on a monthly average basis, nearly all U.S. regions that share a border with Canada are net importers of natural gas, with the Midwest and Appalachia being the only two regions that are not net importers year-round. Also below is a map showing this dynamic, followed by breakdowns of the individual regions.

Pacific Northwest

The Pacific Northwest imports gas from Canada via Northwest Pipeline in Washington and GTN, which comes in from Idaho. While the Western Rockies sends gas into the Pacific Northwest via Ruby pipeline, it is at a much smaller scale due to the cost competitiveness of Canadian production. Gas from these regions serves Pacific Northwest demand, however, a large portion of the gas continues South to other demand markets. If tariffs are implemented, this could cause basis to strengthen in the regions that source Canadian gas if demand stays unchanged. If regional pricing gets high enough, the Western Rockies could help fill some of that demand using spare capacity on Ruby.

Midwest

Despite the recent shift in imports from Canada to the Midwest, the Midwest historically sends gas into Canada except during a few months in the summer. While nothing has been mentioned so far, if retaliation efforts continue from Canada (and natural gas gets lumped into the mix), it could impact pricing such that flows to Canada could be reduced. If that occurs, the Midwest could see a supply glut, meaning the gas typically flowing to Canada will have to be pushed to other regions, like the Gulf Coast.

Northeast

The Northeast sends gas into Canada for most of the year, but the flows flip during colder months to help serve the increase in gas demand for heating. These changes in flow, seen in the graphic below, occur when Iroquois pipeline imports more gas from Canada. If tariffs are imposed and increase the cost of gas, the Northeast could see higher winter premiums than what is typically anticipated during times of peak demand, specifically in markets served farther downstream on Iroquois, which include Long Island and parts of Connecticut.

Takeaways

The U.S. and Canada have had a long-standing relationship in terms of imports and exports of natural gas via pipelines. While the full impact of tariffs is yet to be seen, if pricing is impacted or flows materially change, regions throughout the U.S. will likely feel these impacts at varying levels of intensity. To see more of our coverage regarding natural gas, or any other energy sector, be sure to check out more of our Energy Market Insights!

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