Market dynamics have built big windows for North American natural gas projects, which international interests and big producers are ready to open, the Williams CEO said Tuesday.
Alan Armstrong, who runs the North American infrastructure giant, spent Tuesday discussing short-term and long-term strategies with analysts. The company, with affiliate Williams Partners LP, has for the past couple of years spent a lot of time and a huge amount of capital to build a top position infrastructure base in what management considers the best dry and wet gas play in the world, the Northeast, home to the Marcellus and still emerging Utica shales.
Pouring a lot of money into the region to ensure producers had enough capacity and midstream avenues, continued through sustained low gas prices and plunging natural gas liquids (NGL) margins, and the risky bets didn’t excite every investor or analyst. However, if it wanted to run with the bulls, it had to take the lead to dictate where it wanted to go, the CEO said.
Expect some “cross currents” as new gas supply/demand and infrastructure buildout/slowdowns drive price volatility, Armstrong said. However, beyond 2015, “improving natural gas prices will drive healthy, more sustainable supply and demand growth.” The “market dynamics,” created from a mix of gas-fired power generation growth, industrial demand, petrochemical expansions, fewer pipeline/midstream bottlenecks, along with what appear to be solid prospects for liquefied natural gas exports (LNG), will “renew U.S. economic vitality,” driving gas prices higher.
“Low prices grow demand in natural gas, NGLs and olefins, all of which are infrastructure-constrained.” U.S. gas producers also are “price-advantaged against crude and international naphtha products.” A sustainable gas price is needed to develop supplies ahead of growing demand, said the CEO. “I keep telling people this, but I don’t think the whole market is listening, or that investors are listening…
“A tremendous amount of demand is building up in this country for natural gas from those trying to take advantage of low-cost energy prices in the U.S. A lot of it’s coming from internationals…My concern is that it will all show up at once.”
Williams is preparing by putting “a lot of capital…in the ground to take advantage of that,” particularly in the Marcellus and Utica shales. Some investors and analysts have questioned that push to spend money ahead of having the demand in hand.
“If we were sitting at a $3.00 gas price, I’d be very concerned because we would not be building supplies on the demand side,” said Armstrong. “At this pricing model, a healthy market is developing on both the supply side and the demand side…”
Williams is focusing on volumes and away from relying on margins, or “spread-based business,” for both the gas side and the NGL side. “We think there’s going to be a market situation where first, low-price gas will attract demand, and then low-priced NGLs will attract petrochemicals…” Williams was slammed by low gas prices, then it was hit again when NGL prices plummeted, destroying the margin between liquids and higher gas prices from 4Q2012 through March (see Daily GPI, May 9).
There are “two sides” to NGL margins, said the CEO. Now gas prices are higher, “and while it actually may seem like a negative in the short term, it’s pretty positive long-term for our business model.”
The collapse in the ethane margins “was more prolonged than we expected. We now expect no ethane margin, no recovery through 2015…There will be periods there when we’ll see prices recovering for ethane, but it will be short-lived and low-margin. There’s plenty of supply out there. Beyond 2015, demand will start to pick up, grow volumes. That’s where we want to be.”
Between 2009 and 2012, Armstrong said, domestic gas demand grew about 10%. Between 2012 and 2030, it’s forecast to grow 37%, which “maybe is conservative…There was a decline in the industrial load from 2000 to 2012, but that is coming back in a very big way. We lost a lot of that to fertilizer, petrochems. We’ve not only regained what we had in 2000, but we going to grow well beyond that, given the capital in that space.”
Power generation growth for gas easily could “outperform” industry and government projections, said the CEO. “We’re pretty bullish on what we’re seeing on the demand side.” The United States “has been the only country to reduce greenhouse gas emissions…It’s very important to the environment that we’ve done that. And we’ve done that on the back of natural gas conversion from coal.
“We see a lot of continued pressure, not waning, on greenhouse gas emissions reductions in the U.S. It’s taken a backseat because of some immediate issues, but it will be coming out roaring, and it will drive a lot of power generation in the U.S.”
Williams now is forecasting that its fee-based businesses will grow 51% between 2012 and 2015, against a midpoint when it sees growth not depending on margins increasing.
“We’re not looking for big margin expansions because so much of our capital is going into fee-based projects. All of it is underpinned by massive arbitrage between low-cost U.S. prices and continued high prices around the world that depend on the higher priced oil business. Even if oil were to drop tomorrow, gas still has a a big advantage.”
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