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Large Users Push for More Gas Supplies, Conservation; Less Volatility

End-users of natural gas are on the same page with much of the rest of the industry, seeking increased supply, more price certainty and stepped-up efficiency/conservation programs, according to an industry panel Thursday representing the industrial, utility and energy service sectors at GasMart in Denver. The panelists examined the topic of "End Users in a High-Priced Environment."

"When do you buy?" becomes a daily question for large customers, said Jon Sorenson, COO/partner at Competitive Energy Services, noting that natural gas prices rose 60% at one point last year and storage gas prices are at all-time high levels. "Customers say they can't afford some of the futures prices, so they'll have to cut back their operations. We're doing a lot of short-term strategies with customers -- one, two, three months at a time, looking always to reduce their costs.

"There is a lot of fuel switching. When do you buy? When do you use gas? This is a dynamic situation; you could drive a tractor trailer truck through the margin difference between distillates and natural gas prices."

For the Processed Gas Consumers Group (PGC), the nation's largest industrial natural gas users are coming out of a "year of fear" in 2005, according to Alexander Strawn, PGC's chairman and North American energy purchasing director for Procter & Gamble, responsible for $300 million in gas purchases annually.

"We can impact the market in a very positive way and get away from the fear that has been gripping us; we want to be proactive, and our companies have been," Strawn said. "We don't want to go through a year of this volatility again, if we can help it.

"We got through a very tough year [in 2005], and we're thankful to the producers, and the marketers, and everyone who allowed us to continue our businesses."

Hedging has become a means for customers to cut fuel bills. KeySpan Energy's efforts in the Northeast and New York state this past winter saved its end-use customers about $120 each on their bills this winter, according to Ronald Lukas, KeySpan's vice president for regulatory strategy/relations.

All three panelists stressed the need for a "balanced" approach that includes both supply-side and demand-side programs, even though for local utilities in the short-term their bottom lines can be affected by substantial cutbacks in usage by customers, unless state regulators provide rate mechanisms to make them indifferent to usage levels. The trio also agreed that larger users are indifferent on liquefied natural gas (LNG) and where other new supplies come from, they just want them to come as quickly as possible.

Lukas said that KeySpan thinks maybe two LNG terminals will develop in the Northeast, although it only expects a "fraction" of the terminals proposed throughout North America will ever be built. P&G's Strawn calls the current fervor for gas imports the "LNG Derby" and expressed frustration with all the hype, noting the industrial customers are not going to count on LNG until it is actually here, and they just would like the added supplies as soon as possible.

Currently, KeySpan tries to buy gas "where there is a lot of volume and market transactions, more price certainty and large numbers of buyers and sellers," taking them back further along the supply pipelines from the local load centers. This is a reversal of the strategies of the late 1990s of wanting to have supply points closer to the load.

"We see Rocky Mountain gas as being a break-through cost of gas, and we have sort of changed our strategy [from a few years ago]. Rather than closer to the load, today we are buying gas further and further back," Lukas said. "We won't go back all the way to the Rockies, but we will go back to points like Chicago, the Gulf of Mexico and Canada."

At today's prices, senior management at most end users are involved in buying strategies these days, Strawn and Sorenson said. "Demand for gas overall is returning, but not to the levels it was in 2000-01," Strawn said. "When it makes sense, we will try unusual, innovative projects, but they have to make economic sense."

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