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Cheap Gas Has Some Strings, End-Users Say

Cheap natural gas, courtesy of shale plays, is bringing industry back to the United States, growing economies along the Gulf Coast, in the Northeast and elsewhere. But it has also made holding gas transportation capacity a more dicey prospect for end-users, and there is a risk that some of the energy industry's risk management muscle could atrophy while on a diet of low prices and low volatility.

Robert Truman is director of business development for CenterPoint Energy, which has about 230 miles of intrastate gas pipelines along the Gulf Coast and holds about 500,000 Dth/d of transportation capacity in the United States.

Business is booming. "From CenterPoint's perspective, we see a lot of [gas-fired] cogeneration facilities going in in the Gulf Coast," Truman said. Industrials and petrochemical producers are going for the security of power supply that self-generation provides, he said, as well as attractive natural gas prices.

"We've gotten more interconnects this first quarter of the year than we did all last year," Truman said. "We're getting calls every week from compressed natural gas stations that want to be hooked up, from manufacturing facilities that are switching off of propane to natural gas, a lot of these asphalt facilities have typically been on propane and are switching to natural gas. With the type of spreads we're seeing now, it certainly justifies building the pipe."

Three different steel businesses -- all foreign -- have contacted CenterPoint in the last six months about providing gas supply to mills or fabrication plants along the Gulf Coast, Truman said. "The combination of inexpensive gas, inexpensive cost of capital and a low dollar, I think, is bringing a lot of industry back to the U.S."

But there is a cost in the change in the way of doing business. About five years ago price spreads between the Henry Hub and the country's supply basins were a lot wider. Now that they have narrowed, every marketer that holds transportation capacity has been affected, Truman told attendees at Argus North American Gas Markets 2012 in Houston.

"We've really been beaten up by it," he said, noting a "perfect storm" of gas supply growth, a slowing economy and new infrastructure development. "From this perspective, we at CenterPoint have moved more toward what we call an asset-light type position. We don't hold the type of transportation assets we held five years ago. We're looking at more asset management deals to get our capacity, looking more at the short-term released capacity, other opportunities to serve our customers."

Audrea Hill, senior director of raw materials and hedging for major gas consumer PotashCorp, said her company is enjoying the lower prices, but it is also looking at transportation capacity differently and doing less hedging in the shale gas era.

"The fact that the gas has moved in location, it's not coming into the pipeline grid where it used to, is making some transportation challenges for us," she said. "There are some bottlenecks. We manage our gas supply from the wellhead to the burnertip. We hold some transportation, but that's also getting more risky. In some areas there are a lot of shippers who are turning back their capacity, and so the shippers who are left are picking up higher and higher percentages of those costs. We're real cautious on some pipelines more than others."

With supply abundant and closer at hand, lightening up on assets is one response. Pulling back from hedging is another. Hill said her company's trading book has gotten thinner.

"A few years ago we had a very strong fixed-price hedging program. We haven't been utilizing that very much lately," she said. "Since 2008 with prices falling, we just haven't seen any real reason to step out there and lock in fixed prices."

And speaking of gas prices, they aren't that important to Hill in and of themselves. What matters to PotashCorp's business is the spread between gas prices and the commodities the company produces, particularly ammonia. Natural gas is a fuel and feedstock for ammonia plants and can account for 75-80% of the cost of production. Natgas-ammonia -- that's the spread that counts.

"What we would prefer to do is to seek [gas] producers who would sell to us on an ammonia netback basis," Hill said. "We would love to buy gas as a function of the ammonia price. That's how we buy gas in Trinidad; it works very well for us. It's a nice way to hedge our risk, which is really that spread risk."

Michelle Michot Foss, the head of the University of Texas Center for Energy Economics, said much of the industry's focus during the 1990s was dealing with the restructuring of the gas market and developing mechanisms to manage price risk. "Everything that we've done institutionally led to the creation of a whole bunch of businesses in price risk management," she said. That "capacity" to manage risk could suffer from lack of demand during these days of plenty, she said.

But one could be forgiven for missing that cloud for the silver lining of gas abundance: more demand for gas from existing industrial facilities and new demand from new facilities.

For Hill, the gas-ammonia spread is the thing. "Now with the shale gas revolution, natural gas prices in the U.S. are low and ammonia prices are being set by higher-cost markets. So as long as we expect U.S. prices to stay relatively low, it's very good for our industry," she said.

"Do we expect prices are going to stay at $2.50? No, not necessarily. But we do expect to have a competitive advantage for our fuel and feedstock in the U.S. relative to other countries that don't have the shale advantage or haven't learned to put it into play."

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