It's the price, stupid! At least that seemed to be the underlying theme and tension for a supplier/marketer/end-users discussion of demand-side issues facing gas purchasers at GasMart 2008 in Chicago last Wednesday.
The implied, but unstated, conclusion was that there could be some unhealthy excessive speculation by parts of the hedge fund industry causing double-digit natural gas prices, and the leader among the end-users association of major gas buyers hinted that regulation to curb those excesses could be coming from Congress.
For their individual parts of the industry value chain, the GasMart panel's supplier, John Eagleton, Kinder Morgan Energy Partners vice president for business development; marketer, Craig Jimenez, president of OGE Energy Resources Inc.; and Alex Strawn, chair of the Process Gas Consumers Group (PGC) and North American energy group purchasing manager for Procter & Gamble, all talked about working together. They conveyed a sense that high-priced and volatile natural gas markets are here to stay for the foreseeable future.
In response to a specific question, Eagleton said that when Kinder Morgan completes its multiple eastern expansions of Rockies Express Pipeline (REX) all the way to New York City, perhaps by 2012, there should be some price dampening through greater gas-on-gas competition, and Jimenez assured that as a major marketer his firm is prepared to add value in terms of reduced net costs and risk management and to do it in an "ethical manner."
The always thought-provoking Strawn, however, when answering skeptical questions -- not trying to take a more statesman-like approach for PGC's large gas-buying members -- hinted there are some excesses in the marketplace that need to be curbed by the federal government, while stressing that his company and the gas buyers' group have consistently supported free-market solutions to the industry providing reliable and environmentally sound new supplies.
Moderator Dena Wiggins, a partner with the law firm of Sutherland, Asbill & Brennan and general counsel to the PGC, asked any of the panelists to address a question from the audience on the extent to which they thought hedge fund speculative trading activity contributes to the run-up of gas prices.
On the plus side, OGE's Jimenez said the speculation adds to liquidity. "When you want to hedge, it is nice to have somebody on the other side willing to make a market," he said, adding that there are "some excesses, and some of them are speculative excesses."
Strawn countered with the rejoinder that Jimenez's response was the "old answer" that called for more liquidity to make a better market and tamp down prices. "The problem is that right now the broader people in the market -- not just end-users like myself -- are questioning the role of speculation. A lot of the general population is starting to put a black hat on what they perceive to be [too much] speculation."
A questioner from the audiece said Strawn handled the speculation question "with kid gloves," and as a gas buyer asked what is being done in Washington, DC, related to energy price speculation. The questioner inferred that physical developments in supply and infrastructure have less impact on price than "what Goldman Sachs or T. Boone Pickens thinks one day" the price should be. The sector has gone from 10 firms trading in energy options five years ago to hundreds of firms in the business today, the questioner said.
Noting that he understands people are concerned about the issue of speculation, Strawn said there are some firms being questioned who are "possibly bad actors" and they are being asked to account for themselves in ongoing congressional hearings. "I do believe that speculation provides a role in liquidity, but it is mind-boggling to me to see some of the current price information that cannot be supported by fundamentals.
"I want to look for the fundamentals in the market, but I have to agree there is the possibility of some things in the market that are certainly unsavory and I hope the people that are in that activity are being scrutinized properly and I think they are."
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