Gas buyers are in panic mode right now and energy service providers are struggling to provide answers to a perfect storm of events that is driving not only natural gas prices into the stratosphere but also the prices of many other fuels.
“It’s hell on wheels,” said Jon F. Sorenson of Boxford, MA-based Competitive Energy Services LLC, who provides energy and fuel management to about 12,000 commercial and industrial customers in New England, New York and Texas. “The commercial market feels a lot like Yankees fans: doom, gloom, depression.”
Gas futures prices soared to highs of more than $8.20/MMBtu on Friday despite 3.2 Tcf of gas in storage. Meanwhile prices for competing fuels such as distillate (No. 2 oil) have topped $11.50/MMBtu, and crude oil has risen to $55.50/bbl.
“We have paper mills, colleges, universities, hospitals, institutions, a lot of manufacturing, but we haven’t seen anybody go under yet [because of energy prices],” said Sorenson. “But we have a lot of people complaining about it.
“Everybody is concerned, especially on the manufacturing side, that operations could be shipped overseas. With the combined cost of labor and now fuel, it’s increasing overall operational costs rather significantly.
“We have a customer that produces eyeglasses and the cost of copper has gone through the roof. You can’t tell a retailer to increase the cost of that product; they will buy it somewhere else,” he said.
Many large buyers in August and September believed that prices were too high, that the market was overvalued, and that with rising storage levels, natural gas prices would come down. It didn’t happen and now many are scared they will go out of business.
“Based on the fundamentals, it looked overinflated back then. But they are now wishing they had listened to us,” said Sorenson. “They are very scared. Our phone is ringing off the hook because customers are afraid of this market. They don’t know what to do. If they don’t act, they could get burned even worse. We’ve seen such volatility — up one dollar, down one dollar. It’s been crazy.”
Sorenson said his firm is trying a number of different methods to help ease the pain. Arbitrage and options are two important tools he’s using to help protect against price spikes and volatility.
“One thing I’m doing for a customer in Maine [is a daily cash deal],” he said. “He didn’t listen to us either because his gas price last year was $5/MMBtu locked in and he was like, ‘This has to come off.’ Well, it didn’t. The settlement price on a daily basis has been cheaper than if you do the settlement price at the end of the month. I don’t know if it [will stay that way], but I’ve actually been guessing this market correctly. I use the word ‘guess’ because this market defies logic.”
Nevertheless, Sorenson isn’t bitter. He hasn’t fallen in with the conspiracy theorists yet. There are many reasons why the gas market will be much tighter in New England this winter, he said. Storage may already be near record highs, but meanwhile, every single new or replaced power generation unit in New England over the last four years has been natural gas fired, he noted.
“There is more demand for gas. There are greater environmental concerns up here. Many of my customers were burning Bunker oil, No. 6. But efficiency concerns, environmental concerns and insurance risks have forced people over to distillate, No. 2, a lighter oil, and then over to natural gas. Many have been forced over to natural gas for environmental pressures and a sense of doing something for the community,” he said. “They felt it was the right thing to do.”
But there also are supply factors influencing New England. Although Distrigas is importing more LNG this year, the Sable Offshore Energy Project is producing less gas than expected. “At this point Sable Island was supposed to be at 650 MMcf/d, but it’s at 420 MMcf/d,” said Sorenson.
“We have two other LNG projects moving full steam ahead in Canada — Irving’s project at Canaport (500 MMcf/d) and Bear Head at Point Tupper (250-500 MMcf/d). That will really help this market in 2007. But between now and 2007 you are going to see constant volatility. I’m predicting between now and 2007 we’ll see a 10-35% increase each year in fuel prices. I think we’ll see a big dip in the market in March, but then it will start climbing right back up again. It’s going to do the same thing it did last winter.”
Sorenson said he is telling his customers to wait until February or March to buy longer-term gas supply. “We are also trying to do arbitrage deals, playing everything against one another. We’re also telling customers that if they are not dual-fuel they need to be looking at dual-fuel or even tri-fuel with Bunker, No. 6 oil.
“We also are finally looking at different financial products. We’ve always avoided those in the past because we didn’t want customers writing a $15,000-25,000 check to some financial house. However, those bets are gone now too.
“On the electricity side, we are looking at block pricing — blocks of energy at certain points in time in which you can make your electricity interruptible during peak periods. In natural gas, we’re looking at any type of optionality where we can reduce the risk on the top side. It’s hard, being a consultant, to do swaps because typically you need a financial trading house willing to lock in a notional value. We’re focusing on options. Unfortunately, they have gone up about 50% over the last two weeks.”
Sorenson said right now it’s ideal to have a customer willing to accept daily prices (because they are cheaper than futures) who also has the physical ability to switch back and forth between fuels. “If we can go long with one and short the other fuel, and if the price differentials move that long product back to market, we may make some money, but it’s very hard. It seems like we are working harder than ever.”
If these high energy prices hold, according to Ron Denhardt, an energy consultant with Strategic Energy and Economic Research Inc., eventually it will have a significant downward impact on demand. “It’s going to squeeze every efficiency possible out of the system,” he said. “You will see cogen plants buying power off the grid. There will be plant shutdowns. I’ve been talking to people and they are really scared.”
Although 1.5 Bcf/d of Gulf of Mexico gas production is shut in due to damage from Hurricane Ivan and the traditional winter heating season is only a week away, Denhardt said he’s bearish at these high prices. They have to come down. “The overall underlying fundamentals are not tight. I’ve been saying that as long as gas prices are between [residual fuel oil prices] and distillate [prices] you can move the market all over the place without having a huge impact on demand. That’s essentially what is happening. But when I said all over the place, I never had any idea we were going to get to [these levels].
“It’s going to be interesting when bidweek starts. I think the key is going to be if we get some mild weather. I sure would not be long now.”
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