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GasMart 2009: End-Users Mindful of Costs During Recession

The recession has delivered to natural gas end-users some of the lowest commodity prices they've seen in years. However, the gift comes with the curse of sharply reduced demand for their own products in many cases. Of course, end-users are still buying fuel and feedstock, just less of it. And they're still vigilant in defending their interests when it comes to supply procurement.

End-user speakers at Intelligence Press Inc.'s GasMart 2009 in Chicago last Thursday shared some of their triumphs and challenges during their years of gas-buying on a panel moderated by Bill Griffith, BP Gas & Power vice president of marketing and origination. The speakers also shared some of their concerns on the regulatory front and thoughts on what might lie ahead for the industry.

Bill Clem, manager of small ammonia producer Green Valley Chemical in Iowa, said end-users don't have to sit back and take what the energy industry dishes out to them, but he noted that it's important to reach out for help when necessary. He shared the story of how his firm used to buy gas from its local utility. However, during a rate dispute the company discovered that the utility did not own the pipelines serving its facility.

"The next meeting with the utility was a much different meeting," he remembered.

The company got a rate reduction, which to Clem's recollection was an unprecedented occurrence. Years passed and then the utility wanted to pass through costs associated with pipeline take-or-pay contracts following deregulation. Those costs would have sunk Green Valley, Clem said, so the firm hooked up with a Washington, "DC lawyer" to set things right.

"He said, 'give me 14 days and I'll have your gas flowing...' Our gas was flowing and it has flowed ever since."

Green Valley now happily consumes about 4,000 MMBtu/d, Clem said.

That was the story of "one guy battling Goliath," said Alex Strawn, North American purchasing group manager for energy at Procter & Gamble. Strawn also is chairman of the Process Gas Consumers (PGC), which represents the interests of end-users, and he represented PGC at the conference.

PGC believes in the free market system, even when commodity prices are high, as they were not all that long ago, Strawn said. Still, he emphasized that conservation is a "viable strategy," particularly for end-users. One of the main issues on Strawn's mind is overrecovery of fuel costs by pipelines. He said the lack of a uniform FERC policy on the issue leads to "significant unintended overrecovery."

Strawn cited a study of 11 pipelines that he said showed overrecovery of fuel costs from 2004 to 2006 totaled $1.7 billion. He also charged that one pipeline made 54% of its profit in one of those years due to overrecovery of fuel costs.

"Fuel was never intended as a profit center for the pipelines," Strawn said.

Another issue is gas quality, which has been grabbing fewer headlines lately but could emerge as a top issue with the arrival of more liquefied natural gas (LNG) supplies in the United States. And speaking of LNG, Strawn said he would like more clarity for everyone on the import gas supply picture.

"My favorite topic, which I call 'the LNG pleasure cruise...' Every year we hear about LNG and how it's the savior of our industry...I'm grateful that LNG exists to balance out our needs and our demand, but at the same time, what is the real story behind LNG? Is it available or is it not available? Do the boats start off and then suddenly make a turn back to the other coast? Are they afraid of pirates? What is the real story about LNG? Is it really available for our usage? Is it there? We [the commercial and industrial end-users] understand it, but the public is hearing all these different stories."

Supply security is always on the minds of end-users. In the last year or so, creditworthiness has been keeping them and many others up at night as well. Strawn noted that when his firm is queried about its credit by suppliers, a lot of times the credit of the party doing the asking "isn't that great."

Luke Marriott, risk manager for energy and fuels at MillerCoors LLC, said his company has seen "significant" changes due to the credit crisis.

"Before the credit crisis came to a head, we started backing away from hedging physically through our suppliers for that reason. We thought there was a lot of counterparty risk on the part of some of our suppliers so we started clearing everything through the exchange," he said. "Now that we've renewed some of those natural gas contracts, we've asked to hedge through some of those suppliers, just on the basis or what not. A lot of them want collateral up front. That's something that was never in question two or three years ago."

When Marriott wants insight into where the gas market is likely to go, he looks at differentials in gas storage levels from previous periods as this is a good indicator of future prices. "We feel that this gives us a good view of the market and we're always up to date," he said.

MillerCoors, a joint venture of two of the most famous names in brewing, consumes about 5 Bcf of gas per year.

Regarding the weak economy, Dave Ciarlone, manager of energy services for aluminum producer Alcoa Inc., said he would like to see the Federal Energy Regulatory Commission be more supportive of the manufacturing sector in its policymaking. "I think we need to grow the part of the economy where people who sweat make things you can touch," he said.

With conservation and renewable energy so much in the news, Ciarlone proudly noted that more than 70% of all the aluminum ever made is still in use. However, he was less enthusiastic to report that there has been a 56% reduction in the price of new aluminum since last year.

In normal times the company consumes about 51 Bcf/year procured through 15 pipelines and 27 local distribution companies. However, Ciarlone noted, gas consumption volume is down about 30% due to the recession.

At the top of Ciarlone's agenda on the regulator front is modification of Section 5 of the Natural Gas Act (NGA) to address "a fundamental disparity" between the NGA and the Federal Power Act (FPA).

Under the FPA FERC has authority to order reimbursement of pipeline overcharges back to the date the overcharges began. Under the NGA FERC can only order reimbursement for overcharges from the date of its order finding the overcharges took place, Ciarlone explained.

"We just don't believe there's any reason to treat natural gas and power differently," he said, noting that the Senate Energy and Natural Resources Committee is considering legislation that would modify the NGA to address the issue (see NGI, April 13). Pipelines oppose the measure.

"We're contacting those senators and letting them know this is important to us and we encourage you to do the same," he said.

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