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GasMart: Buyers Beware, ConocoPhillips Exec Says

With big cutbacks in North American natural gas production and new pipeline capacity coming on for the once-captive Midcontinent gas supplies, gas buyers will have to be on their toes to prepare for what may be intense competition later this year, a ConocoPhillips executive said Wednesday.

Will Hussey, senior vice president of origination for ConocoPhillips Gas & Power, offered his take on North American gas supplies at Intelligence Press Inc.'s GasMart 2009 in Chicago. He shared a panel with David Slater, managing director of marketing and structured products for Nexen Marketing, and John Hattenberger, managing director of Gazprom Marketing & Trading USA.

"So much has been changing so fast," said Hussey. "There's a statement I've been hearing a lot lately: 'What a difference a year makes.' Yes, that's true. We've seen the economy fall in the last year. Yes, we've lost employment. Yes, for a lot of reasons.

"As far as gas prices, gas buyers may look at where things were a year ago versus where they are now and breathe a sigh of relief. I'm here to say, don't be comfortable with that. Coming out of this winter, the markets were oversupplied, and we were ramming gas into storage. But I say you have to stay on your toes. Don't allow yourself to get whipsawed by what's to come."

ConocoPhillips is estimating that U.S. gas output will be down 4 Bcf/d by the end of this year from 2008. And even though he agrees that producers will be able to ramp up more gas output once demand and the price signals are there, he doesn't necessarily believe the oft-used "gas is reliable" statement.

"That [statement] can use some work," Hussey said. "Natural gas reserves are reliable, and everything I hear about shale, I agree with every bit of that. But from the standpoint of production, gas is reliable at a price."

The North American gas market was able to move gas supplies to record levels based not necessarily on what was in the ground but because of price signals, Hussey noted. That boosted output to record levels in 2008. "Then all of the sudden, prices went into the tubes. There was a new supply response, which turned everything upside down."

Unconventional gas reserves across North America have lifted producers' prospects like never before, Hussey noted.

"That's a great story," he said. "But my point is, it's price sensitive...Don't take for granted that because you've got an overhang of gas now that you're going to have all the supplies you want next winter."

One area that may be especially difficult in the coming months is the Midcontinent, where competition for gas supplies should be strong, Hussey said. "There will be no less gas available in the future, but gas in the future will have more outlets than it had in the past," he said of Midwest and southeastern markets.

"There's a tremendous build of production out of the Midcontinent, and out of the Carthage [TX] area," Hussey noted. However, "there is so much more pipeline capacity built...gas now has alternative outlets, and you'll have to compete harder for it."

In addition to a plethora of new pipes from Texas into the Southeast, the Rockies Express Pipeline system, designed to carry Rocky Mountain gas, will be taking on Midcontinent supplies, Hussey warned.

"Don't take anything for granted this year," Hussey told the GasMart audience. "This winter and going into next year you won't be able to count on things like you have in the past. There is an efficient grid, but you will be competing with a lot more people for that gas."

However, the ConocoPhillips executive said there are a few caveats.

"Everything I've said is worthless if demand continues to fall and if LNG [liquefied natural gas] comes in a big way," he said. "Energy experts have come down on both sides of those issues. Personally, I don't see either of those things happening," he said.

ConocoPhillips holds capacity at the Freeport LNG facility in Texas and at the Golden Pass LNG import terminal near Sabine Pass, TX.

"We have 1 Bcf/d at Freeport, and we've partnered with Qatar Petroleum and ExxonMobil at Golden Pass, which was supposed to have 2 Bcf/d this year. I can tell you, it's not going to happen," Hussey said.

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