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Peoples Sees Gas Futures In Chicago's Future

Peoples Sees Gas Futures In Chicago's Future

Yet another gas futures contract could be coming down the pipe, this time in Chicago where a bounty of Canadian gas expected from Northern Border and Alliance Pipeline has Peoples Gas Light &amp Coke thinking its system could host the contract's delivery point.

"We feel that Chicago's level of trading activity will greatly increase," said Raulie de Lara, who confirmed meeting recently with about a dozen marketers and producers to talk about a futures contract. "We are coming off of the meeting with some positive feedback. There is no imminent contract that's coming up in the next few weeks. The exchanges will look at the liquidity issue and the level of interest or volume of trading expected before they would come up with a Chicago futures contract." Except for the Henry Hub, trading at other gas futures contracts has been relatively light, prompting complaints over lack of liquidity.

Nevertheless, de Lara said it's just a matter of time before Chicago has its own gas futures contract, and Peoples is the best system to host its delivery because it is the only Chicago hub offering firm services. While not trying to disparage the Nicor Gas system, de Lara said it is not a header system like Peoples. Peoples has the double loop Mahomet Pipeline, which is connected to the Manlove storage field in Champagne, IL. Mahomet is connected to major interstates Natural Gas Pipeline of America (NGPL), ANR Pipeline, Trunkline Gas, Northern Border, and Midwestern Gas Transmission, as well as the Alliance project. The Peoples system also interconnects with Nicor. de Lara said the Peoples system could become Chicago's answer to the Henry Hub's Sabine Pipeline.

At the Henry Hub, about 3% of volumes traded come to delivery, de Lara said. "Chicago being a market area, more of the contracts should come to physical delivery.

"It's difficult to trade basis for more than two or three years down the road, so the trading that is expected for the Chicago futures contract will play not only a greater role in taking care of the additional Canadian inputs but also the power projects that are being developed in the Midwest." Power project developers should welcome the hedging tool of a Chicago contract, de Lara said. Hub fees at Peoples would be competitive, de Lara said. It costs about 3 cents to move gas across the Henry Hub.

Ted Lenart, Nicor's general manager of supply ventures, conceded the Nicor hub does not offer firm services. "So I guess it depends on what you're looking at doing. While we don't offer firm service, the gate at Nicor is a very liquid gate, and it's liquid by virtue of the 250 Bcf of end user gas that's bought there on an annual basis. If the futures contract requires hub services to wheel the gas to other pipelines, then clearly that's where Nicor would fall short, but if the contract were used to just sell into the liquid Nicor citygate, then Nicor would probably work real well."

The New York Mercantile Exchange did not return a call for comment on the prospect of a Chicago futures contract. A Kansas City Board of Trade spokeswoman said the exchange is always looking for different contracts, "but we don't have anything specific to make any announcements on." Similarly, a spokeswoman with the Chicago Board of Trade, which does not currently have a gas futures contract but does have electricity contracts, said the exchange is "exploring other opportunities, but we have no announcements about new contracts at this time."

de Lara said the next meetings on the topic likely would be between the exchanges and marketers/producers interested in establishing a contract. "There's no reason why basis should be calculated off of Henry Hub when the center of consumption is really in the Midwest for the whole North American continent. Chicago is more suitable here for basis to be calculated off of."

Joe Fisher, Houston

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