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Texas Producers, Royalty Owners Seek Investigation of Energy Transfer

The Texas Independent Producers & Royalty Owners Association (TIPRO) has asked Texas Attorney General Greg Abbott to investigate whether Energy Transfer Co. (ETC) manipulated the Houston Ship Channel physical natural gas market in the summer and fall of 2005 in order to profit from natural gas basis swap transactions in the financial market.

"If these allegations are true, then the state of Texas -- in the form of severance taxes and royalties -- individual royalty owners in the state and natural gas producers have all been damaged as the result of the actions of ETC," TIPRO said, citing an article that ran in Platts' Gas Daily publication describing the alleged manipulation.

Energy Transfer Partners LP (ETP) is a publicly traded partnership with 12,000 miles of natural gas pipelines in Texas and Louisiana, including the intrastate system Houston Pipe Line, which serves the Houston Ship Channel market. TIPRO represents 2,500 producers and royalty owners in Texas.

TIPRO Executive Vice President Adam Haynes told Abbott that the Gas Daily article alleges that Energy Transfer "purportedly engaged in a systematic and intentional scheme to manipulate natural gas prices by as much as $3.50/Mcf at the Houston Ship Channel by selling gas at below market prices in order to profit on large short positions in the financial swap market."

The time period of the alleged manipulation included the tremendous market impact of Hurricanes Katrina and Rita, which wiped out most of the production in the Gulf of Mexico, driving up gas prices across the country, but particularly in the Louisiana Gulf Coast area and the East.

At the time, there was a significant shift in the Houston Ship Channel basis market. The physical basis market at the Ship Channel ended several bidweeks much wider than had been expected in the financial basis market. Houston Ship Channel prices were averaging much lower than the near-month futures contract than had been expected. Unnamed market participants told Gas Daily that they had heard from others in the industry that Energy Transfer may have been responsible. The alleged scheme would have involved a systematic plan to flood the physical market with low-priced sales to ensure a low spot price while locking short financial positions to take advantage of the much tighter spreads in the forward basis market and then pocketing the difference between the two markets.

Haynes said TIPRO members would have been damaged from such activity, if true, because they would have sold gas at the lower Houston Ship Channel price, receiving less than a fair market price for their gas. As a result, royalty owners whose royalties are based on the price received by producers also would received lower royalty payments. And the state would have been damaged by receiving less severance tax revenue.

"On behalf of the royalty owners and producers that are our members, not to mention the schoolchildren of Texas, we respectfully request that your office investigate the allegations...to determine and take the appropriate action to prosecute any unlawful behavior," Haynes said.

Energy Transfer did not return calls from NGI regarding the allegations.

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