Tulsa-based Williams has launched a bold campaign to become a leader in building out North America’s natural gas infrastructure, CEO Alan Armstrong said Tuesday.
Speaking to financial analysts during a day-long conference, the CEO and his management team laid out an aggressive strategy to use the company’s solid gas pipeline and midstream assets to build out gas infrastructure both onshore and offshore. Williams still plans to spin off the exploration and production (E&P) unit as market conditions improve but company officials couldn’t comment because of the timing for the initial public offering (see Daily GPI, Sept. 12).
Armstrong stressed that the “new” Williams is going to be a more focused company going forward. And the focus will be natural gas and natural gas liquids (NGL).
“This is not a mature company that’s gone to seed that’s starting to generate cash back,” he said. “That’s not the story. We are well positioned for a lot of growth…The new Williams is focused on being the provider of large-scale infrastructure designed to maximize the opportunities created by a greater supply of natural gas. It will take a lot of infrastructure…”
Many have turned their backs on prospects for natural gas growth in the short term, the CEO noted. Williams prefers the long view.
“Here’s a picture of how much things have changed,” said Armstrong. “From 2004 to 2008 natural gas at Henry Hub averaged $7.91. It’s hard to imagine where we are today but for five years it averaged $7.91. In 2010 gas prices averaged $4.37. There’s a lot of pressure on natural gas prices.
“I don’t have to tell you that to discourage you to invest. We are a firm believer in continuing to lower costs and to lift resources being extracted. But the great thing is, it takes a lot of infrastructure to take advantage of that much gas supply. That’s what the new Williams will be all about.”
Williams’ long-term guidance is modeling gas prices “about up to $5.25,” which he said are “the kind of pricing levels that keep gas extremely competitive up against crude oil and will demand a lot of infrastructure growth.”
The company’s growth strategy will be tied to reducing the costs to produce natural gas, Armstrong explained. “We’re not just talking about service costs going down but with greater resources, we can now extract resources [at a lower cost]. Basis remains a tough story and it’s going to demand a lot of consolidation in the basins…There’s a lot of pressure and it’s going to take a tremendous amount of large-scale infrastructure on the gathering end to the power generation side on to the market end.”
Based on data, “we can point out on the mainline side that we know where 10% [of demand] is coming from easily,” he said. “We also can show that greater than 1.3 Bcf/d of processing capacity will be built per year and can name where 10% is coming from in our own business as well…
“We intend to embrace low natural gas prices, and by that, I mean we will invest in infrastructure to absorb and take advantage of that demand.”
Efficiencies across the chain keep new gas supplies coming into the market, the CEO told the audience. He noted that for instance, when Williams acquired the former Denver producer Barrett Resources Corp. 10 years ago (see Daily GPI, May 8, 2001), it took about 60 days “from spud to sales.” Today it takes Williams “about eight days” to complete a well and bring it to sale.
In addition to efficiencies on the drilling side, Armstrong reminded the audience that there also are increasing reserves per well. For instance, Cabot Oil & Gas Corp. has seen a “tremendous amount of growth per well” in the Marcellus Shale and it continues to use what it’s learned to drill better wells. Likewise, Southwestern Energy Co. has seen a “299% increase in initial per rig per reserves…Once they are in the basins, they learn a lot about them and then get to manufacturing in the basins…”
There are political issues regarding gas and oil drilling in the onshore, with criticism in some quarters about hydraulic fracturing and concerns about the state of natural gas pipelines.
However, “there’s more upside than downside to the present state on energy policy,” said Armstrong. “It has become clear that we cannot deny the facts that we are sitting on great resources…better than any other nation. At the end of the day, that’s going to win out. It is going to take political courage to make the case for natural gas.”
On the drawing board are supply-driven projects in the Marcellus, deepwater Gulf of Mexico, Canada and northwestern part of the United States, said the CEO. Market-driven projects are being readied for along the Eastern Seaboard and in olefins.
Two onshore projects were unveiled at the conference. The first large-scale project is to be done in two phases. The proposed Confluence Pipeline, designed as a 36-inch diameter rich gas gathering trunkline with a series of hydrocarbon dew point processing plants, basically would run vertically along a designated demarcation line that “separates” the rich gas in the western part of Pennsylvania with the dry gas production to the east. Confluence would offer blending and then tie into long-haul transmission lines.
Williams’ Transcontinental Gas Pipe Line (Transco), which traverses the Marcellus Shale, has several expansion projects on the drawing board including the Atlantic Access project, which has a forecasted in-service date of 2014. Confluence, which is to have 1.1 Bcf/d of capacity, would tie into Atlantic Access in southwestern Pennsylvania. Atlantic Access is still a proposal and not contracted, Armstrong said earlier this month.
Once Confluence is on track, Williams is proposing to build a centralized cryogenic processing plant in Pennsylvania to strip out ethane, which then could either go into a long-haul pipeline to the Gulf Coast or Canada, or to provide feedstock for cracker facilities. The cryogenic facility could be ready in 2016.
“Ethane build stays ahead of solutions” in the Marcellus, said Rory Miller, vice president of the Midstream business. “We think as some projects come on, that will take off some of the pressure. But the key is that without a large-scale solution, you end up with stranded gas and you can’t take advantage of blending capacity.”
Williams also plans to spend up to $400 million to expand its Geismar olefins production facility near Baton Rouge, LA. The light-end natural gas liquids (NGL) cracker has current volumes of 37,000 b/d of ethane and 3,000 b/d of propane.
“We are in a great position in all of these markets in the midstream and pipeline side,” said Armstrong. “It hasn’t happened by accident. There’s a lot of easy money out there but if you don’t have the competency, the producer is not going to hand over the keys [for a company] to provide services if they don’t have a competent operating staff.”
Williams expects to have capacity through both organic growth as well as through acquisitions, said Armstrong. “We’re going to be smart about that, disciplined, but we do think we are well positioned to take on acquisitions in the space as well.” Williams hasn’t closed the door in a bid to acquire Southern Union Co. and may improve its $44/share bid proposed earlier this summer, Armstrong said.
Following weeks of haggling between Williams and Energy Transfer Equity LP (ETE) over the natural gas pipeline company, Houston-based Southern Union said in August it would move ahead on a proposed merger with ETE (see Daily GPI, Aug. 18). But Southern Union’s last rejection “really doesn’t foreclose our options,” Armstrong said during an all-day conference.
“Let me be very clear on this,” Armstrong told the audience. “We do not have an outstanding offer [on the table]. We put an offer out there…and the last offer got rejected. But it doesn’t foreclose our options. We’ve done due diligence, we understand the assets, we don’t have to guess…We’ve been watching the market, on the debt capacity side as well as on the equity side. We think we are well positioned today along those lines. Certainly, as time goes by, the option erodes because the certainty of closing [between Southern Union and ETE] becomes closer…If we do make an offer, we will do it with discipline and it will be accretive to shareholders.”
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