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ConocoPhillips Exec Expects LNG to Impact Gas Marketing Strategy by 2010

ConocoPhillips' natural gas marketing management team could probably write a new-and-improved version of how to succeed in the energy merchant business. In the past three years, the integrated producer has steadily grown from regional marketer to North American powerhouse, and now the company is positioning itself to become a major player in liquefied natural gas (LNG), a new market that likely will impact energy trading, a company executive said Wednesday.

Chris Conway, president of Gas and Power for ConocoPhillips, attributed the marketing unit's growth to its "strong focus on customers." In an interview last week, Conway said the 200-member trading unit, 95% headquartered in Houston, has concentrated on service, reliability and relationships, which he said, "will take us through the long run."

When Enron Corp. ruled the marketplace, ConocoPhillips was a regional marketer, focused on areas that were aligned with its equity production. However, as the merchant sector disintegrated, the company began to make a footprint across the continent. "We've been slowly, carefully, adding resources...fundamentally people ...to be more of a North American player, and it is showing up in what we're seeing."

Five years ago, Conoco (pre-Phillips Petroleum merger) was ranked 17th in NGI's 2000 Gas Marketer Rankings, averaging about 3.4 Bcf/d in sales and slightly higher than the 3.2 Bcf/d in 1999. However, by 2003, ConocoPhillips had more than doubled its wholesale sales, moving into fourth place in NGI's annual survey, averaging 8.7 Bcf/d in gas sales. By the end of 2004, sales were up 21%, averaging 10.5 Bcf/d.

By 2010, ConocoPhillips is betting that LNG will be "more of a component of gas sales," said Conway. "For us and the industry, LNG will become a more significant influence in the market and from a marketing perspective."

The producer already has put a lot of dollars into making the North American LNG boom a reality. In January, the company submitted an application to the U.S. Coast Guard to construct the Beacon Port Clean Energy Terminal, an LNG terminal that would be located in the federal waters of the Gulf of Mexico about 56 miles south of Louisiana (see NGI, Jan. 25). Construction could begin as early as next year, with service by 2010.

The producer also holds a major stake in the Freeport LNG terminal in Texas, which has received Federal Energy Regulatory Commission approval. Also, it holds a stake in the Long Beach LNG terminal planned near Los Angeles and the Compass Port terminal set for offshore Alabama. In addition, ConocoPhillips has an active liquefaction facility in Kenai, AK, as well as others at various stages of development around the world, including Australia, Nigeria, Qatar, Russia and Venezuela.

"LNG certainly has the opportunity to change the trading dynamics, specifically to the degree that LNG regas terminals are developed in areas other than the traditional producing areas," like the Gulf Coast, he said. "Where the LNG lands could change the dynamics and flow of patterns and trade."

By the end of this decade, Conway said LNG should be picking up a supply share, which could affect "trading dynamics" for gas marketers. "Anywhere but the Gulf Coast, we're likely to see some interesting dynamics on the trading front." For example, he said that if 2 Bcf/d of LNG was coming in on the West Coast, it would "change the dynamics of the Rockies and San Juan." If there were 3-4 Bcf/d imported on the East Coast, "it also will have an interesting impact."

Some wholesale marketers are expected to eventually merge with financial players or other companies. However, ConocoPhillips's gas sales strategy is to maintain a "strong, sustainable market presence...for our company. So for us, gas marketing and for that matter, the broader range of commercial activities, gas and power, we really feel an integrated energy company can have a strong presence in the market. We're here for the long run," he added.

"Looking at it from my perspective and our company, we view marketing and trading joint ventures as very difficult to manage and succeed," he said. "The difficulty comes from gaining alignment from the partners over strategy...risk profile, things that are important to the trading business. I believe for ConocoPhillips, it's not likely that it will partner up with another player in this market.

"There are certainly companies out there that do not have a position in the North American market that would like to have it, and they are interested in partnering with some of the major players and market share holders. For others, there certainly is a possibility that we'll see combinations occur, but it's not likely for us."

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