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ConocoPhillips' Duncan Talks Utica, ISO-NE, FERC Gas Day Proposal

A natural gas marketing expert said it's unclear if producers in the Utica Shale will face problems in the future for not buying liquids pipeline capacity. Meanwhile, competing proposals to solve the riddle of gas use for power generation in New England are moving forward, the odds are against another brutal winter next season, and a proposal by FERC to improve coordination between interstate pipelines and gas-fueled power plants will encounter some obstacles.

ConocoPhillips’ long-time marketing analysis director Jim Duncan said huge increases to natural gas demand loom large on the horizon, especially by 2015 and 2017. Planned industrial and power generation facilities from Iowa to Florida "could be the equivalent” of several local distribution companies (LDC), which in turn, will affect the Utica Shale region.

"The Utica just got started and we haven't had enough data on it yet to really put a profile to it, to see how big it is," Duncan told attendees of the LDC Gas Forum Northeast in Boston on Monday. "We've only got a few wells out there. It's not like the Permian [Basin] or the Bakken [Shale] where they have almost an industrial process and have been shoving pipe in the ground for several years. From an ongoing basis, one of the things that would hurt those guys [in the Utica] most would be not having off-take capacity. The reality is they're probably expanding their takeaway capacity anyway so they don't run into that problem.

"By 2017, based upon the non-natural gas fundamentals, you're going to need all the natural gas you can possibly get. I've seen some seriously big numbers. The demand picture for natural gas is going to go up."

Last February, the Natural Gas Supply Association urged the Federal Energy Regulatory Commission (FERC) to quickly approve a proposal by ISO New England Inc. to implement a "pay for performance" (PFP) system that would compensate power generators in the region when they exceed their obligations during periods of system stress (see Daily GPI, Feb. 14). But Dominion Resources Services Inc. called the PFP "unjust and unreasonable" and urged the commission to accept a competing proposal by NEPOOL, a voluntary association whose membership includes hundreds of New England market participants, including Dominion.

"Which ones move forward?" Duncan asked. "You're seeing them move forward. Natural gas is going to be more in demand [because] coal is going to be relatively restricted, at least from a surface perspective. The structure of delivering of natural gas and its power cousin is going to have to be addressed.

"I've actually seen several projects move forward faster than I thought they would. New England is actually moving a lot faster. The problem is that you can't lay it fast enough to impact this winter. There's still a risk on winter."

Duncan said the last winter season was unexpected; meteorologists had predicted a mild winter.

"They were calling for an El Nino winter, and it didn't happen," Duncan said. "We've had three La Ninas in a row. But the fact that we had a cold winter proves that we can have a cold winter. The odds are very much against us having a winter that looks exactly like this.

"Since 2008, we've been doing several things as an industry and as end users. We've been turning back long-haul capacity and pipeline capacity because we thought we didn't need it. We've also been turning back storage and risk policy. [We assumed that] prices were going to be low, they were going to be low forever, and we can go into winter relatively expecting [low prices]. Well, that didn't work real well. We saw prices from a basis perspective in the Northeast above $100/MMBtu, even though Nymex [New York Mercantile Exchange] was down at $6.00/MMBtu.

"We didn't have a lot of risk management. We just didn't put it in place because we didn't think we needed it anymore. I hope that [next winter] we see a lot more risk-on policies. Regardless of how cold winter is going to be, it will be assumed to be cold until it isn't."

Duncan added that hurricanes obviously also bring price volatility. Between 2000 and 2010, older equipment deployed in the Gulf of Mexico was lost to numerous hurricanes, he noted. Since then, engineers have rebuilt structures to make them survive storms up to a Category 5.

"The natural gas world has done a very good job of structuring the hardware. But it's not just peculiar to the Marcellus. The day that a storm gets named, you see a move in the base Nymex price. There's some buying that goes on, and you can see how volatile this market can get."

Last March, FERC issued a notice of proposed rulemaking to begin the gas day at 4 a.m. central clock time as a way to give power generators an opportunity in every time zone to enter gas nominations (see Daily GPI, March 20). Duncan said such a proposal would encounter both hardware and software issues, but said looking at possible changes was a good idea.

"We have four cycles in the day, and we want to go to the hourly? Wow," Duncan said. "The degrees of freedom on that calculation is huge. You would have so many degrees of freedom that get restrictive down to the time slice perspective. Trying to do that is going to take some very strong structural changes from a pipeline perspective.

"Remember the pipelines have been really active in trying to make sure we have deliverability. There's a lot of changes, but with natural gas moving up the demand structure they have to be addressed. It's always good to evaluate it. If they were to introduce it, for pipelines it means they would have change their procedures from a nomination perspective. For producers, supply is still there. The LDCs are going to follow the pipelines and that structure. It's going to be very busy, but it's going to have to be more automated."

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