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Williams’ Armstrong Sees Demand, Prices Gaining, Ethane Potential Huge

Williams may not win every project it proposes in building out North American infrastructure, but there's plenty to go around and more opportunities ahead, CEO Alan Armstrong said this week.

Speaking at the Credit Suisse Global Energy Summit on Tuesday, Armstrong said observers need look no further than Williams' Transcontinental Gas Pipe Line (Transco) system in the Northeast to acknowledge there's plenty of natural gas still to come and it all has to be taken somewhere.

"We recently saw on Transco [that] we saw a peak day of about 11.8 Bcf/d," he told the audience. "If you just did that in degree days, there should have been about a 20% increase over our normal, just if you look at heating degree days.

"We actually saw a 30% increase on that day relevant to the norm. Part of the reason for that is, is that gas has found its way into lot of crooks and crannies...and additional industrial loads."

Gas "is starting to take a bigger share from fuel oil...Demand is creeping up even beyond just what a cold winter has brought on this year."

"What we have got going on right now in the industry is exactly what we were hoping for in terms of the tailwinds that are created...We are seeing gas demand starting to pull through, and we are starting to see price signals...into the forward markets a little bit, on natural gas in a way that is going to encourage the continued development of the supply.

"Frankly, one of the risks to our strategies was that we would see gas prices so low for so long that we would be in a position where it would be hard to recover and meet that demand and we would see prices swing way back up on a sustained basis, and then start to kill the long-term demand growth and the overall market growth for the U.S."

There are signals "that better days are ahead" and for Williams, gas is at a price that's attractive enough for producers to keep drilling. "We are getting very near to kind of that perfect place from a Williams perspective."

Natural gas liquids (NGL) supplies also continue to grow, "driven by the ridiculously high-margin between very low gas prices and relatively high NGL margins," said Armstrong. "I would tell you this is a great sign of capitalism here in the U.S. If there is a margin to be taken, we will go out and we will put the resources in place to take it, but it takes time...not only for drilling rigs to drive it [but] it takes processing plants and ultimately to get this done it’s going to take a lot of petchem infrastructure as well."

The ethane content in the gas stream today "is a little over 50%," but the infrastructure in place is nowhere near able to handle it, said Armstrong. "It takes more pipelines. It takes more cryogenic facilities. And it takes a while when a basin starts to develop for all of the infrastructure to get in place. The Marcellus is no different.

Armstrong made no mention of the proposed Williams-Boardwalk Pipeline Partners LP venture, Bluegrass Pipeline, that would carry liquids from Appalachia to Gulf Coast markets; Boardwalk management also hasn't said much (see Daily GPI,Feb. 10).

Competing projects have slimmed the field for potential customers, said Armstrong. However, more takeaway has to be built.

"I will tell you from our vantage point, [NGL takeaway is] a very critical piece of infrastructure, whether it's us building this or somebody else building this, something has to get built" to export liquids. "If we don't find a solution like this...we will ultimately slow down for a period of time the growth in the Marcellus.

"And so I would tell you that as we stand here today, we are continuing to have a lot of very intense negotiation with customers, the commitments that they are looking at making are huge. If you just do the math on call it a 15-17 cent transport rate, a 10-11 cent frac[tionation] rate and a nickel export rate, you are little over 30 cents a gallon on say 50,000 b/d commitment from somebody. If you do the math on that, it’s over 200 million of commitment on somebody every year for 15 years. Those are major, major commitments."

Growth in the North American petrochemical market will drive more NGL production in Appalachia, said the CEO.  "It is clear from our vantage point, the U.S. ethane has such an advantage right now on anything else in the world relative to the petrochemical market."

As a petrochemical manufacturer, "where would you build a plant today? If...you saw the kind of demand in the ethylene space out there, where would you go build a plant today?..It becomes pretty clear in terms of how advantaged the U.S. is both on the supply and the pricing side right now."

However, in Appalachia, "as an industry and as a basin we are competing for rigs. And if we don't get the right infrastructure in place, we don’t get the right gas takeaway infrastructure, the right access to markets...We are going to be disadvantaged in terms of being able to attract rigs into this market because the netback to the producers isn't going to be good enough to attract that."

Where the oil and gas industry is today is the sweet spot for Williams, he said.

Williams and its pipeline partnership are focused on gas and the arbitrage against world crude oil prices in larger markets, said Armstrong. "That isn't to say that we are wanting to go out and hold that price spread because that is exactly what we are not wanting to do, but we do think that big spread drives a lot of investment in infrastructure...You are starting to see some pretty important signs of that very recently as you saw the LPG [liquefied petroleum gas] market starting to gain parity..."

Williams may be considered a Northeast-centric operator, but it also is one of the  biggest gas pipeline infrastructure developers in the Gulf of Mexico. As well, it has growing interests across the Rocky Mountains that should offer "an important part in meeting the demand picture" over the next three to four years, said Armstrong.

"Producers know they can quickly hit the bid" in the Rockies "because the infrastructure is in place, the markets are in place, the contracts are in place" for producers to drill and get back the cash margin quickly.

Independents and master limited partnership explorers, the "clean-up guys," are moving into the Rockies and building positions in the Pinedale Anticline and the gas-heavy Jonah and Wamsutter fields, Armstrong said. Many are taking acreage long held by the majors through acquisitions and making a prosperous home for themselves.

Still, it's the Northeast that's still showing the big growth, he said. "Even here in the early innings of this gas renaissance we are seeing pretty strong growth on the demand side," but "a lot of the demand is yet to come because it takes a lot of infrastructure to build out the demand, whether it's power generation assets, whether it's steel plants, whether it's fertilizer plants...The pipeline infrastructure that it takes to connect all that takes a lot of time."

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