The LDC Forum Rockies & West conference, which concluded last Wednesday in Irvine, CA, offered a regional glimpse of the post-global credit crunch energy sector. Panel discussions and keynote talks were as significant for what was not emphasized as for what was.
The talks revealed that energy price declines eventually will dampen the economics for various alternative energy projects, leaving the incoming Obama administration to rediscover natural gas as the "fuel of choice." This was one of the insights from a panel discussing "economical sources of supply."
Liquefied natural gas (LNG) was discussed but not with the same level of detail or enthusiasm as in past years at the annual conference; climate change was one of the topics, but not a dominant theme, and price was subordinated in importance to infrastructure and credit concerns. Ironically, it was a regulator, Timothy Alan Simon, from the California Public Utilities Commission, who talked most bullishly about natural gas -- not the marketers and distributors who spoke.
It is also telling that the keynote speaker a year ago at this same conference was a partner at Goldman Sachs & Co.; this year it was a state regulator. Concerns 12 months ago were about the West being able to get its "fair share of gas," and this year the focus was more on the prospect of a supply surplus.
Jim Simpson, vice president for analytics at Bentek Energy LLC, said natural gas could be the bridge fuel for decades. Michael Haigh, head of U.S. commodities research for Societe Generale Corp., agreed that gas generally would be the preferred fuel in the future, and LNG eventually will provide a new comfort level with gas-based national security efforts aimed at backing out imported foreign oil.
The pair, along with ethanol hedge fund investor Ejnar Knudsen, a co-founder of Craton Capital Management LLC, acknowledged that it is a "hard call" at this early stage to tell exactly how Obama's energy policy will take shape, but they agreed that gas ultimately has to play a major role because renewables and other noncarbon alternatives have limitations in the near term, particularly in the currently depressed global economy.
"As you look at 2009 with the credit crisis and you think of advice coming from large investors like Warren Buffett, with the new administration we will most likely see more natural gas use," Simpson said. "For lack of a better term, I think they'll see gas as a 'bridge fuel.' I personally think the bridge is not five years; it is more like 20-25 years, and maybe even as long as 30 years. I think as the new administration moves in and starts kicking the tires and looking under the hood, they're going to realize this. Pricing coming down quickly for energy is going to make it a lot tougher to go after alternatives."
Although their respective companies are not directly supporting LNG development in the West, managers from both Las Vegas, NV-based Southwest Gas Corp. and Houston/San Jose-based Calpine Corp. said they see price advantages from more gas-on-gas competition. "At the end of the day, we're supportive of anything that adds diversity to the supply mix," said Tom Gary, director of Calpine's west region gas supplies. John Olenick, Southwest's gas buying/transportation manager, echoed that sentiment.
Like all of the panelists this year, the buyers' group said the credit crisis has begun to alter gas-buying issues.
"From our perspective credit is always a key," Gary said. "If we lock in a fixed-price, long term supply, we need to have assurance that supplier is going to be around." Olenick said Southwest looks "a lot closer at suppliers' credit than we ever did in the past."
Grocer Safeway Inc. energy buyer Cathy Ikeucki, who deals with supplies in 22 states involving 300 different utilities, called the financial area extremely important, while a public-sector utility manager from a small muni in Safford, AZ, Darrin Gordon, said it's not a concern for his operations.
There was surprisingly little discussion about gas and the power generation sector, and Gary was the only speaker representing the independent or the utility power generators. The closest reference to the power sector, which has been the high-growth area for natural gas demand in recent years, came through discussions on climate change, and both a panel and Simon alluded to gas being a key part of state and federal responses to greenhouse gas emissions.
Another theme alluded to by various speakers was the growing disconnect between gas supply-demand activity and markets. It was not clear from the speakers' perspectives if the credit crisis will exacerbate this gap or narrow it. However, they agreed that capital spending on new supply and delivery projects will be done more carefully and haltingly as credit and liquidity stay in hiding.
Banks and the capital markets are "running scared" and how soon that ends and what the price of gas is at that point, no one had a good answer for.
"There is really no magical floor for how low gas prices could drop; it's anywhere between $1-4," said Bentek's Simpson, noting that at $3 there are more active rigs being laid down in places like the Rockies and elsewhere. "The good news is that the likelihood a $3 gas scenario will last a long time is extremely low."
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