While liquefied natural gas (LNG) continues to look like the perfect supplement to lagging U.S. domestic production, local distribution companies (LDC) are questioning why they are not being approached to ink long-term agreements with LNG suppliers; presumably such agreements would help support construction of LNG regasification terminals.
Speaking at UBS' 2005 Natural Gas & Electric Utilities Conference, a panel of local distribution company CEOs discussed the country's supply challenges Wednesday in New York City. AGL Resources CEO Paula Rosput Reynolds pointed out that there might be some smoke and mirrors involved down the line. "I am not being approached by a lot of producers [asking] do you want to go ahead and contract for long-term supply to help me secure this value chain," she said. "In fact, it is really the opposite.
"To the majors right now, these regasification facilities are just supply areas...so they are saying if you have any kind of relationship with me, be blind to where my source of supply is. [I'm] just buying from [them] around index and [they] might put a regas facility in to help serve that. [I] just need to have the pipeline capacity to receive my gas, regardless of source."
Rosput Reynolds said a perfect example of this is the Southern Natural pipeline system. "You have supply area points and then you have the Elba Island [LNG Terminal], which is going to grow," she said. "The fact is a producer that sells to us off of that value chain simply says as long as you have a receipt point at Atlanta, we'll take care of letting you know whether it is flowing from Elba or the Gulf Coast." Noting that regulation doesn't encourage any LDC to do differently, Rosput Reynolds said, "we just sit, wait and say 'the game doesn't change for us.'"
Atmos Energy CEO Bob Best agreed, saying his company also has not been approached by one LNG supplier. Best also noted that part of the reason could be the expected difficulty in getting any agreement through the regulatory process.
"For us in the LDC business, we are going to have to bring our regulators along, because five years ago they didn't even want you hedging gas and now we are talking about signing long-term contracts at prices that no one is sure [whether or not they] are low, high or competitive," he said. "Our regulators are literally going to have to be partners with us when LNG starts entering the country."
While agreeing that building additional LNG infrastructure in the U.S. will be "a good thing," Murry Gerber, CEO of Equitable Resources, noted that the regulatory framework isn't really prepared for it. He also noted that LDCs are not likely to enter the capital intensive LNG business.
"By and large, LDCs pass on the cost of their infrastructure and the commodity to the customers. So there is not a whole lot of will on the part of most of the companies to go ahead and sign up...because it's sort of damned if you do, damned if you don't. If you sign up for some sort of high-priced deal, you'll get criticized down the road.
"It will be extraordinarily capital-intensive and extraordinarily cyclical," said Gerber. "We will overbuild and have too much capacity, then the prices will crash down. Basically, I am long the constructors of LNG and short the owners."
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