Former BG Group plc executive Martin Houston's newly launched Parallax Energy is developing mid-scale liquefied natural gas (LNG) assets; putting together a gas marketing and trading shop; and, through an affiliate company, will be hunting for value in the U.S. shale patch. Houston told NGI he's getting ready for the price volatility to come.
Those who had grown complacent with $100/bbl oil got a rude awakening in recent weeks; $4 natural gas is not a "forever" proposition either, he said.
"I think the world was coming around to the view that it was kind of $100 [oil] forever, a comfortable price. Sellers like it; buyers like it; we can get used to it. But look what happens. In three weeks the market just turned itself on its head..." Houston said. "It sort of illustrates my point about gas, that the $4 forever thing, in my view, it's not sustainable as an argument because markets have a habit of dealing with inconsistencies. There are very low gas prices in North America, very high gas prices elsewhere; as we are seeing they are being intermediated and that will continue."
On Thursday Houston launched Parallax, based in Houston, to develop LNG projects and enter the natural gas marketing and trading arena. Affiliate company Millennial Energy Partners will be an investor at the exploration and production end (see Daily GPI,Oct. 23).
U.S. producers are likely able to weather lower oil prices better than many people imagine, Houston said, adding that the market "has shown resilience with "very, very low gas prices," $3.50 and below. "We think that's a good place to invest. We think the implied volatility from what we're seeing in markets at the moment, which is oscillating oil price and a gas price which hasn't really responded yet to the uptick in demand. We think that portends to a lot more volatility in the space...in both oil and gas, actually. I think we're seeing the return of the fundamentals, which are driving the absolute outcomes we're seeing."
To start out, Millennial Energy will pursue modest investments of $5 million to $10 million in nonoperated oil assets. "...[W]e see that as a real sweet spot for us, as well as some larger investments we're contemplating as well," Houston said. Millennial plans to build a base of nonoperated assets before venturing into operated holdings in about 12 months.
As for gas, $4 isn't so bad, Houston said. Pure gas plays, like the core of the Haynesville Shale, can be moneymakers at prices below $4 on a full cycle basis. Houston expects gas prices to become more volatile as the decade's end draws closer. What's nice at $4 gets a whole lot better at $6 or $7.
"I think my main point is with increased demand we see increased prices, increased volatility," Houston said. "Because of that, that creates opportunity. One of the legs of the business we want to build here at Parallax is what we're calling Parallax Gas Supply and Trade where we want to build out a gas marketing, transportation and logistics business. Those kind of businesses benefit from more price volatility."
One source of that volatility will be the big LNG liquefaction and export projects on the Gulf Coast that will be coming online in the near and medium term. "These [liquefaction] trains are pulling very quickly from nothing to 500, 600, 700 MMcf/d," Houston said, "an enormous shift in demand in one geographical location in a very short space of time. That's going to disrupt the markets, in our view, and we think it's a good place to be in those markets..."
It's not as crowded a place as it used to be either. "We're seeing a world in which there are no traders because the banks have moved out of the space," Houston said. "The specialists are fewer and farther between, so we think there’s a niche for a player like Parallax..." The new company will be in the marketing business at a scale appropriate to its means, Houston said. But it is seeking a deeper-pocketed partner to fully exploit the skills of the Parallax staff.
To whatever degree a new gas marketing and trading scene develops, that of Parallax won't look like some shops during the late nineties or early noughties, Houston said. "I think it is different. We've got this enormous domestic supply position, which makes the world look very different...We're not stepping out and taking a lot of risk, which is a characteristic of some of the previous trading benches and platforms we saw, some of which spectacularly failed."
Reaching for a word to describe what's to come, Houston latches onto "wholesome," but he admits that doesn't get it. Parallax plans to make close trades, taking advantages of its assets and what they allow for commodity movement. For producers, gas tollers and others in the market, Parallax aims to provide protection from the price volatility to come. "Our ability to attenuate that volatility for them is an offering that we're thinking very hard how we might put together," Houston said.
The Parallax LNG business is called Live Oak LNG, and it has yet to officially launch. One mid-scale liquefaction and export project is slated for Louisiana, Houston said, a region where shale plays like the Haynesville, Fayetteville and the Eagle Ford's gas window are strategically located. There is another project planned elsewhere, the location of which Houston said he's not ready to disclose.
By "mid-scale," Houston means 1.5 to 2 million tonnes per annum delivered from a "very low cost" project. "It really is small [liquefaction] trains where we are taking out the things that just are not necessary in LNG plants and bringing it back to some of the basics...Customers want to buy LNG in smaller tranches at the moment. That's evidenced by the deals you're seeing announced in various places, tolling deals and volume deals."
The LNG facility model Live Oak is pursuing is "design it once, build it many times," but it's not yet clear what's to come on the contracting front, Houston said. It has yet to be decided how much capacity will be contracted long term and how much will be left for spot, whether there will be tolling arrangements and how much volume those might represent. "Right now we're focused on the basics and what it takes to get the thing approved and under construction," Houston said. Project announcements are several weeks away.