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Marketers Embrace Assets as Supplies, Demand Shift

It's going on seven years since the bankruptcy of a certain Houston-based energy trading giant, and natural gas marketers have remained true to their renewed faith in physical assets: pipelines and storage. But that's not to say gas marketing is a sleepy business of merely pushing molecules through pipes and counting dollars.

Shifting gas supply sources -- unconventional basins and liquefied natural gas (LNG) -- are expected to impact the activities of marketers and their power generation, local distribution company (LDC), commercial and industrial (C&I) customers. Further, the advent of what BP Energy Co. head of power trading and marketing Gerald Balboa calls "satellite markets" will be giving power and natural gas merchants something else to think about.

Gas and power convergence has come and stayed; next on the horizon are new areas of trading, such as electric transmission rights, emissions, ethanol, LNG, renewable energy credits, as well as increased coal trading as demand for that commodity grows globally, according to Balboa, who spoke recently at a University of Houston energy trading conference.

"These new markets, or expanding markets...they're usually driven by a couple of basic ideas, and that usually tends to be around economics or regulatory shifts...not new concepts by any means," Balboa said.

On the regulatory front, U.S. policy on emissions of carbon dioxide (CO2) by power generators and whether it leads to a cap-and-trade mechanism or tax will have implications for power generators and the gas marketers that serve them. Global LNG supplies and how much (or little) come to U.S. shores also will have an impact.

Greater reliance on lumpy LNG imports and increased load volatility driven by power generation have been predicted by many to require more work on the part of marketers to match supply with demand, noted Ed Kelly, Wood Mackenzie vice president for North American gas and power. "I don't think we've necessarily seen it yet. We haven't seen the LNG to the scale yet," he told NGI. "It's always around the corner. And it's always a story that marketers and others are out there with."

Kelly and Wood Mackenzie are notably less bullish on LNG supplies than others. LNG imports to North America are predicted by Wood Mackenzie to be about 5 Bcf/d in 2011 and 10 Bcf/d by 2015, a longer time horizon than other estimates. Still, the customers of gas marketers are wondering what it will mean for them.

"I do hear a lot of questions from end-users about if a marketing organization has the capability to address LNG and the changes in the supply mix in North America," Kelly said.

AGL Resources CEO John Somerhalder II runs a company with a wholesale marketing business and six utilities. He told NGI that the hurricanes of 2005 and their attendant gas supply disruptions taught his company and everyone else in the industry a lesson about security of supply through diversification.

"And diversification may be to LNG at a place like Elba Island in Georgia where we have an LNG terminal. It may be just more pipelines, or it may be to an area like the Barnett Shale in and around the Fort Worth area," Somerhalder said. "But we're clearly diversifying as a utility, and we see other utilities and other customers looking to do the same thing. Even someone like Southern Company that's looking to put power generation in, they're looking for more supply diversification."

Production-driven pipeline projects out of the Rockies and Midcontinent and burgeoning gas storage development, particularly the high-deliverability variety, are coming on-line to accommodate the shifting supplies. And capacity in these projects is attracting a diverse roster of takers, according to Somerhalder.

"We see a lot of people stepping up for that capacity. Marketers obviously step up for high-deliverability storage because they see that they can use that as part of their services for their customers. We see LNG suppliers...step up for capacity. We see power generators...willing to step up for capacity. We see utilities, we're willing to step up up and take capacity," Somerhalder said. "You really have almost every segment of the industry realizing that value, and that's probably good."

How much customers know about where their gas does and could come from depends to great extent upon their size, Sequent Energy Management President Douglas Schantz told NGI. Sequent is the wholesale marketing business of AGL, launched in 2001, not long before the wheels came off several of its competitors.

"Within the C&I ranks you find a whole range of sophistication," Schantz said. "The large industrials do [understand]. When you go down the food chain in terms of size, the small industrials and commercials really don't understand as well. And they rely on their suppliers to manage it for them. And they know at some price there will be gas available for their needs. So it's really, I think, up to utilities and gas wholesale marketers, like us, for example, to help manage that for them.

"We have to enter into contractual relationships with these new pipes and storage fields to help manage the changes for them. You've got to anticipate the need and set yourself up for it and then educate your customers around the infrastructural needs and what we're going to do to get good supplies to their citygate..."

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