Williams has no intention to delay any of its natural gas exploration and production (E&P) operations in the Rocky Mountains — even with the basis blowouts that have decimated gas prices in the region over the past few months.

The Tulsa-based company’s E&P division now concentrates most of its activities in the Rockies, but CEO Steve Malcolm said the company has not been as impacted as some producers in the Rockies, partly because of the massive gas pipeline business unit that has helped to circumvent other producers’ problems.

“There’s been a lot of hand-wringing as a result of the Rockies basin blowout,” CEO Steve Malcolm told attendees at the Lehman Brothers CEO Energy/Power Conference in New York City. But “we have been very proactive in terms of lining up capacity, being proactive in our hedging activities, and so only 7% of our gas was forced to accept Rocky Mountain prices…We talk consistently about how we are a Rocky Mountain producer, but we are not subject to Rocky Mountain prices.”

As a long-time player in the gas pipeline business, “we know how important it is to lock up firm capacity on these [Rockies] pipes. We never want to see any of our gas shut in.” Transportation capacity and hedging have played dual roles in the company’s pricing success.

About 93% of Williams’ U.S. gas “gets better than Rockies prices,” said Malcolm.

In 2Q2007, the company’s total U.S. production was 898 MMcfe/d. About 29% (260 MMcfe/d) was at Rockies prices before hedging; 71% (638 MMcfe/d) was produced or transported to other price points outside of the Rockies via Williams’ pipes. The company also hedged about 200 MMcfe/d of its Rockies gas.

Of the 260 MMcfe/d, 200 MMcfe/d was hedged, leaving only 60 MMcfe/d, or 7% subject to Rockies prices.

The bottom line: Rockies prices in 2Q2007 averaged $3.86/Mcf at CIG and $3.78 at Northwest. However, Williams’ average net realized price (less fuel, shrinkage and transportation costs) was $5.39/Mcf.

But what if prices fall even more or the lower prices are sustained for a lengthy period? Will the company remain an “aggressive driller?” a Lehman participant asked. “Generally, yes,” said Malcolm. “Our returns continue to be strong, north of 20% generally. Given that we plan for the long term, we envision ourselves to be an aggressive driller. We’re not intending to let things let up.”

Williams is banking on gas continuing to be the “key fuel for the U.S.,” he said. “Various alternatives” exist to fill the North American supply/demand gap, which he said included liquefied natural gas, a possible Alaskan gas pipeline, Canadian off-gas and additional drilling in the Lower 48. And Williams is banking on the still-to-be-found gas.

“New production plays a vital role” for gas, he said. “Approximately 25% of estimated [U.S.] wellhead production capacity is from wells drilled in the last 12 months.” And his company “has some influence” in all of the major gas basins of the Lower 48.

It also is taking the long view on prices. Williams is forecasting New York Mercantile Exchange gas prices to move in a “fairly narrow band” between $6 and $8/Mcf “over the next few years,” Malcolm said. And with its transportation in place and growing, the company has no reason to retreat.

The E&P unit focuses its work in the Uinta-Piceance and Powder River basins, but the leasehold extends into the San Juan and Arkoma basins and the Barnett Shale. Total production in 2Q2007 approached 1 Bcfe/d — 20% higher than in the same period a year ago. And its gas output, all organic, jumped 27.8% in 2Q2007 to 845 MMcf/d from 661 MMcf/d in 2Q2006.

Citing energy analyst statistics, the CEO said Williams trailed only Anadarko Petroleum Corp. in the percentage of its U.S. gas growth in 2Q2007. Anadarko’s output jumped 102% in 2Q2007 to 2.2 Bcf/d from 1.09 Bcf/d a year earlier — but Anadarko’s growth followed its acquisitions of Kerr-McGee Corp. and Western Gas Resources Corp., Malcolm noted.

Acquiring more reserves through bolt-on acquisitions also is a possibility for Williams, but Malcolm seemed confident that even without any additional purchases, the company will be able to build its gas production in the United States.

Williams has had great success over the last few years moving reserves from possible to probable to proved at a rate of about 500 Bcf a year, Malcolm said. “We continue to be pleased with our reserve adds. Our drilling activities are not driven to add reserves; our strategy is growing production as quickly as possible. Obviously, some reserve additions come with that.”

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