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Direct Energy Offers Chunk of Retail Market for Piece of LNG Value Chain

Centrica is dangling a big carrot in front of liquefied natural gas (LNG) suppliers: its top market position in the U.S. and UK retail energy markets. Mike Hogan, senior vice president of upstream gas and power for Centrica subsidiary Direct Energy, said the company is actively seeking substantial new gas and power supply arrangements, including a stake in the LNG business, because of its rapid retail demand growth.

Centrica now has a grand total of 45 million customer relationships worldwide, including 58% of the retail gas market in the United Kingdom. Last year, Direct Energy added one million customers in North America through its purchase of ATCO's retail gas and electric customers. The company has about 5.2 million customers in North America, including three million gas and power customers in Ontario, one million power customers in Texas and one million power and gas customers in Alberta.

"We're aggressively trying to grow our retail business in new regions, primarily for the moment in the Northeast and the Mid Atlantic states," Hogan in an interview with NGI. "We have a fairly significant base in the Upper Midwest, in Pennsylvania, Ohio and Michigan, and we've just recently announced that we entered the Illinois retail gas market.

"We're really pushing for growth in our retail businesses in a number of markets across North America and that brings with it a lot of need for growth in our procurement capabilities and in our upstream production," he said.

The parent company already has announced plans to spend as much as US$10 billion on power generation capacity additions, gas exploration and production, LNG and other upstream activities worldwide from 2004 to 2009. Hogan said a large portion of that will go toward LNG operations, but some also will go toward finding more gas with the drillbit.

"We have today about 350 Bcf of gas reserves in western Canada with net production of about 85 MMcf/d. That satisfies about 17% of our retail requirements in Canada for gas supply. We're always looking at ways to grow that. In the past we've done it primarily through acquisitions," he said.

"But in the current market environment it's very difficult to justify some of the prices that are being paid for reserves. The prices that are being paid for reserves in the ground today are by and large really difficult to understand, frankly. It's a little bit of a bubble, we think, and bubbles don't last forever."

As a result, Direct Energy plans to add a lot more reserves with the drillbit than it has historically. It plans to expand exploration activities in coalbed methane and tight sands formations. It also plans to look for gas in areas the majors and other large producers have been avoiding in recent years, such as the Appalachian Basin.

But LNG will be a major target for the company both in North America and the UK. Centrica recently was awarded one-third of the regasification capacity at the Isle of Grain LNG terminal in Kent in the United Kingdom. The company also signed a 15-year LNG supply agreement with Indonesia's Petronas.

"We are in a position to offer LNG producers and those governments in some of the LNG countries tangible retail customer operations in both the UK and in North America, which gives them a real option for accessing the trans-Atlantic market and optimizing their economics and gaining better netbacks," said Hogan.

"We are actively looking for ways to invest here in North America in regasification and in midstream transportation and storage situations that would allow us to team up with the UK and invest in liquefaction and in production right on up through the LNG value chain."

Hogan said Centrica would like a stake in the various sectors of the LNG business in exchange for "affording our prospective partners the benefits of accessing both the Henry Hub and the National Balancing Point pricing markets [in the UK] with real customer operations to execute that.

"One of the problems that some of the other players who aren't active in retail are having in trying to access both U.S. and UK markets is that when it comes to North America, getting gas out of the terminal and to the customer is a lot more complicated than it is in the UK; it's a game that very few people are all that good at."

He said some of the larger LNG players and regasification capacity holders, such as BG, simply do not have the downstream and midstream market positions or expertise to capture the best price for their LNG.

"If you have made arrangements to bring an LNG shipment into Zeebrugge in Belgium and suddenly you decide that market prices in the U.S. are more attractive and you swing the shipment over to Cove Point, the fact of the matter is you don't have time, if you are not in the retail and the midstream business, to make arrangements to get that gas away from the terminal at Cove Point at prices that actually reflect the current market; somebody else is going to take that rent."

He said Direct Energy is actively seeking LNG regasification capacity in the Gulf Coast region and in the Northeast. "We are in discussions with most of the major players developing terminals in the U.S. Gulf as well as in the Northeast and in Canada."

However, the liquefaction business is a "tough club to break into, no question about it." And the handful of players that are significant LNG producers would like to keep it that way, but "we definitely have some very attractive assets to offer, including our very large and independent retail energy base."

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