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Florida Electric Utility Going to Wellhead for Better Gas Deal

Florida Power & Light Co. (FPL) has a growing fleet of gas-fired power plants fueled via a portfolio of pipeline transportation contracts. Now it says it's time to take a stake in America's shale natural gas patch, going all the way back to the wellhead to snare a better deal for electric ratepayers.

By investing in gas production at the source rather than paying full market prices, FPL is projecting customer savings of up to $107 million over the life of its first such project.

FPL is partnering with PetroQuest Energy Inc. on a venture to develop up to 38 natural gas wells in the Woodford Shale region in southeastern Oklahoma. PetroQuest, an independent oil and natural gas producer, has been operating in the region and will oversee and operate the wells, including gathering and processing arrangements. FPL would receive a portion of the natural gas produced from each well for its use.

"...[W]e believe this to be the next logical step in providing clean electricity for our customers at affordable prices," said FPL CEO Eric Silagy. "This investment in natural gas production is an important component for delivering lower, more stable natural gas prices for our customers, and we anticipate identifying additional investment opportunities, thereby benefiting our customers even more over the long term. Importantly, customers will realize the greatest amount of savings in the early years when wells typically produce the most natural gas."

The utility filed with the Florida Public Service Commission (PSC) on Wednesday for approval of the plan and of guidelines for future gas production projects.

A unit of FPL affiliate company NextEra Energy Resources, USG Properties Woodford I LLC, has been established to pursue the venture. Assuming it is approved by the PSC, FPL would buy its share in the venture at net book value. If FPL fails to secure approval, the stake in the PetroQuest venture would remain within NextEra.

Assuming approval, FPL would be entitled to a percentage of the venture's production. The utility's share of the production is not being disclosed. When production from the partnership is at its height, FPL expects to be receiving about 46 MMcf/d. Over the life of the arrangement it expects to take delivery of 137 Bcf from the Woodford.

The initial investment in the venture is expected to be $68 million, and FPL expects to spend up to another $120 million over the life of the venture. FPL spokesperson Sarah Gatewood told NGI that the utility might need to procure additional pipeline capacity to move the Woodford production to Florida, but that is yet to be determined.

Numerous shale basins were considered for the program. Gatewood said PetroQuest and the Woodford were chosen because they could accommodate the utility's timeline for regulatory approval. "A lot of companies were not willing to wait that long to move forward on a project," she said. For future projects of this kind, multiple basins and parties will be considered, Gatewood said.

FPL purchases up to 2 Bcf/d for its gas-fired power plants at prices that fluctuate based on market conditions. The utility has a hedging program to dampen price volatility, but it said this is only a short-term solution.

"The Woodford Gas Reserves Project is expected to produce significant volumes of gas over multiple decades, all of which would be provided at the cost of production rather than market prices," the utility said in its PSC filing. "Those forecasted production costs are lower than FPL's forecasted natural gas market prices.

"...FPL would be able to lock in gas prices at production costs rather than relying on market prices. The gas reserves would provide additional price stabilization to FPL's existing financial hedging program in two respects. The existing program focuses on short-term transactions because of the cost and credit risks associated with long-term financial hedges, whereas the gas reserves would provide a hedge against market-price volatility over multiple decades.

"And the financial hedges on which the existing program relies have the effect of locking in the current view of future market prices; if the current view is that future prices will go up, then financial hedges can offer no protection against the expected increases. In contrast, FPL would obtain gas from its gas reserves at the same, stable cost of production regardless of whether future market prices are projected to increase."

Last fall, the PSC approved FPL's contracts for a planned 600-mile pipeline system to bring more gas into the state (see Daily GPIOct. 24, 2013). Gatewood said this project's capacity would carry some of the planned Woodford gas.

Gatewood said she was not aware of another electric utility that has a similar gas procurement program for its generation assets. However, Salt Lake City-based Questar has an exploration and production unit that provides gas to its gas utility (see Shale DailyJuly 30, 2013). In Marcellus Shale country, local distribution company National Fuel Gas Distribution Corp. has an exploration and production affiliate in Seneca Resources (see Daily GPIOct. 1, 2012).

PetroQuest did not respond immediately to a request for comment. About 18 months ago the company sold its Fayetteville Shale assets in order to focus on liquids-rich targets in the Woodford and Mississippian Lime (see Shale DailyJan. 9, 2013).

Over the last five years, FPL has knocked down three 1960s-era oil-burning power plants and is replacing them with gas-fueled facilities (see Daily GPIJuly 2, 2013). Since 2001, FPL's investments in the efficiency of its power plants have already saved customers more than $6.5 billion on fossil fuel costs and avoided more than 60 million tons of carbon dioxide emissions, the utility said.

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