Williams' Barrett Purchase Backs Generation Market

Williams outbid Royal Dutch/Shell Group for Barrett Resources Corp. based on "electricity economics, along with fully integrated economics," Stuart Wagner, a principal with Petrie Parkman told a GasMart/Power 2001 audience last Thursday. He suggested other merchant operators might also be in the market for gas reserves.

The acquisition will mesh with Williams' pipelines in the West and its power generation plants in California. "Williams bought on wellhead-to-power-plant economics," Wagner said. Williams topped Shell's $60 per share bid, offering $73 a share last week (see related story).

Coalbed methane is a fairly small part of the acquisition equation, Wagner said. For a power generation load it's important "that you know the gas is there. It's low risk, low exploration costs. That's a perfect power generation play."

Other companies that might be attractive because they have a similar profile to Barrett are HS Resources, which is active in the DJ Basin, Mitchell Energy and Development Corp., and Western Gas Resources, Wagner offered, adding that Williams may also be interested in Mitchell.

As for buyers, the Williams move may prompt others of the same ilk, such as Duke Energy, AES, Entergy or Dynegy, to look at similar opportunities to fuel their power plants. Calpine, which already has embarked on a course of acquiring some gas reserves for its power generation plants, reportedly also looked at Barrett before Williams moved in, Wagner said.

As for the majors, Phillips, which has already stated it wants to be the largest coalbed methane producer in the country, also is likely to be shopping in the Rockies region, Wagner added. And a disappointed Shell may also continue looking.

The activity is being driven by an economic outlook that shows natural gas wellhead prices staying above $3.00 for the long term. "Allowing for the natural tendency of Wall Street to frequently be wrong on oil and gas prices," Wagner said Petrie Parkman's conservative estimate is "for $4.00 gas next year and after that, subject to the variables of supply and demand, for $3.50 gas in 2003.

Wagner pointed to several arguments for "pretty strong long-term natural gas prices." One is the number of serious players backing LNG projects. Since most of the projects would land the LNG at Gulf coast points, rather than market points, the LNG would have to compete with gas at wellhead. While new technology has lowered LNG facilities costs from the $2.50/MMBtu level of the 1970s, the cost of gasification, transportation and regasification still add up to about $1.80. Adding on the cost of gas, translates to a market price between $3.00 and $3.50 for deliveries to the Gulf Coast.

Chevron, Shell, Phillips, Enron and El Paso are all involved in plans to spend billions of dollars on LNG facilities based on those economics.

Also, the Alaska pipeline, which Wagner expects to see completed by 2007 or 2008, would require a $3.00 to $3.50 Chicago citygate. And the majors "are very, very serious about building that pipeline. You don't do that on temporary high gas prices."

The point is that "really smart folks, really big players seem to be willing to bet billions of dollars on $3.00 gas."

Underpinning the gas market is a stable oil market. Wagner said the OPEC cartel is strong and should keep oil prices in the $22 to $28 a barrel range for the foreseeable future.

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