With supplies pouring out of natural gas shale plays and the promise of more to come, end-users speaking at GasMart 2010 Wednesday were less than eager to step up to long-term supply contracts. Some also wonder how much of the natural gas price is the result of speculation in the market.
Nina Patrick, corporate purchasing manager for Packaging Corp. of America, said price volatility is a concern and she would like to contract for supply for five or six years at a firm, fixed price; however, she worries about a speculative premium in the market and hopes a blast of shale gas will drive down the prices paid by companies such as hers.
Asked what it would take to get her to contract long term, Patrick joked, “If I presented $3.50 gas [to management] for three to five years, that would work…I think I would need to be convinced there wasn’t a premium in the market due to speculative activity…I don’t want to pay that premium and neither does our executive management.”
Matthew Beach, manager of the City of Chicago’s energy and environment program, said he looks at moving averages rather than individual prices when he’s trying to divine where the market is going. “I do know that I’m not a market timer and price spikes are temporary,” he said. He also wonders what role speculation plays in price movement.
“Speculators — we’re told they provide liquidity, but it’s a supply-and-demand market,” he said. “Can it be both? Where does supply and demand end and speculation begin? Does anyone truly believe that regulators have anywhere near the sophistication and resources of the industry that they’re required to regulate or will ever have?”
One way for end-users to fight back — the best way in Beach’s opinion — is to just use less.
“I’m a demand-side management guy,” he said. “I’ve abandoned the notion of ever knowing my supplier profit margin or ever blocking my LDCs [local distribution company’s] rate case…The best way to manage the market is to take less from it…Energy efficiency is our best and last refuge…The cheapest therm is the one you don’t buy.”
That’s not the kind of talk producers like to hear, but this GasMart panel — which was moderated by Bill Griffith, vice president of marketing and origination for BP Gas & Power — was tailored specifically for end-users to air their wants, needs and concerns.
Like Patrick, who said her suppliers have acted honorably and have not tried to enforce “price majeure,” Alan Ellison, director of energy and procurement for Veolia North America, said he’s never had supply curtailed for anything but a good reason. Veolia operates district energy systems that provide steam and cold water for heating and cooling. Ellison joked that his is “the largest company in the world that no one in the United States has ever heard of.”
With natural gas a significant component of its cost structure, Veolia hedges to protect against losses and to protect profits as well as its customers. Discussions about regulation of over-the-counter derivatives transactions have Ellison concerned. “It’s certainly our company’s hope that however it plays out, it doesn’t become much more expensive and certainly does not become impossible to do the hedging that we need to do to protect ourselves and to protect our customers,” he said.
A large piece of Veolia’s U.S. operations is in Philadelphia, and Ellison said he is hoping his company benefits from its proximity to the Marcellus Shale with increased security of supply.
Matthew Nau, strategic sourcing director for building materials maker Lafarge North America, is waiting on the promise of shale gas and hoping for lower prices. “I think I would hesitate to go forward [in the market] too much longer because you never know what’s going to happen with prices as additional supply comes onstream,” he said and noted that he’s skeptical of the forward price curve given the supply outlook.
“We’re still in a contango market, and we shouldn’t be in a contango market if shale gas is coming on as suggested [at GasMart] yesterday. The peak of the contango market is $6 so it’s not as severe as it was two years ago. I would not favor a long-term hedge for that reason.”
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