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BP Exec Sees Growing Confidence in Merchant Sector

BP Exec Sees Growing Confidence in Merchant Sector

Despite the loss of players and support, and the increased scrutiny by financial institutions and federal regulators, natural gas and power markets have continued to function, and there are "clear signs" that confidence is returning to the energy trading industry, a BP executive said Thursday.

Cameron Byers, COO of BP Energy Co. in Houston, said that the merchant industry is "by no means fully back;...we've got a long way to go." However, BP, which currently is the leading energy marketer in North America, has "never lost confidence in this business. BP feels that, and we look forward to being a key player in the future." The merchant energy industry was in a "very difficult place" at this time last year, he said. Today, "it feels a lot better."

Byers was keynote speaker on Thursday at the University of Houston, home to the Global Energy Management Institute. The institute's Second Annual Energy Trading and Marketing Conference focused on restoring confidence in energy trading and marketing.

In the past two years, the merchant energy industry has undergone incredible change, said Byers. The players have changed, with producers now the dominant marketers. Regulators have taken on more of a "policing role." Customers and shareholders have demanded -- and seen -- more transparency. But one thing has not changed: supply and demand.

"Supply is fundamental, because supply has significant influence on confidence in the market. If the industry can meet the growing demand for natural gas...for power...this will go a long way toward restoring confidence."

To rebuild trust, however, will not come easy.

"It will be a tough job to restore confidence," said Byers. "The growth in indigenous production is the difficulty. There is maturity in the fields, which is a problem in the United States." Another difficulty is building infrastructure for nontraditional supply, such as liquefied natural gas (LNG) and a possible Alaskan gas pipeline.

"BP's internal supply outlook shows that U.S. production will be flat to 2010, and we estimate that production will be about 58 Bcf/d to 2010. Match that against demand growth, and there is a loss of about 10-14 Bcf/d. That is huge. We will have to rely on nonindigenous supply to fill the imbalance," Byers said.

The imbalance translates into price volatility, but the United States, he said, "has seen the last of sustained low prices" for natural gas. "It was $2 in 1999 and around $3.18 between 2000 and 2002. You know the price today. It's a very tight, elastic market. The gas industry faces quite a challenge. I'm not painting a picture of gloom and doom, but I want to stress that if prices ease off, we cannot be lulled into a false sense of security."

Into the future, LNG will become an integral part of the U.S. supply, Byers said. "Frankly, I think we are only seeing the beginnings of talk of LNG. It will feature very strongly in North America. There is plenty of natural gas in the world, but getting it downstream is the problem. FERC is now focusing on the LNG area, and the fact that the market is responding is a sign that the market is working, which will encourage investment, confidence in supply...because there is limited production in the U.S."

BP also enthusiastically supports the work by FERC to improve price indices and transparency, he said. "A lot of uncertainty makes some of us reticent to be in the market, and that needs to change to clear up the issues of the past so participants can participate."

Paramount to restoring confidence, however, are customer relationships, Byers added. "BP in the last year has focused more on the customers, and it will be the same in 2004. This sector of the market underpins all of our activity. We are holding customer forums on index pricing, transparency, liquidity, and we need to see more of that in the marketplace as well. Industry needs to up the gate on indices and transparency, and I have full confidence that industry will bring about price transparency changes."

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