Gas users betting on US production to defray risk

OREANDA-NEWS. April 23, 2015. Natural gas end-users are betting that investments in gas production will defray the long-term price risk associated with the rough-and-tumble US market and the associated price volatility for domestically sourced LNG.

Electric utility NextEra and gas distribution company Northwest Natural Gas have already reached deals to participate in gas field development. And gas marketing and distribution company AGL Resources told Argus last week that it was considering investing in gas reserves.

In addition, US LNG capacity holders Japanese trading firm Sumitomo and state-controlled Indian gas company Gail have invested in gas-rich US fields. Sumitomo has a joint venture with US independent Rex Energy in the Marcellus shale of Pennsylvania and West Virginia and a joint venture in North Texas' Barnett shale with US gas producer Carrizo Oil and Gas. Gail holds equity stakes in Colorado's Niobrara shale and the Eagle Ford shale in south Texas.

The move by companies to invest along the value chain of gas supply will create "an economic bundle" that helps protect buyers from market turmoil, Tudor Pickering Holt analyst David Pursell said on the sidelines of the IHS CeraWeek conference in Houston.

Gas consumers can benefit from those deals by gaining access to US supplies during market downturns and by participating in the US gas market during price spikes, he noted.

Prompt-month natural gas prices, which shot to more than \\$6/mmBtu in February 2014 on unusually cold weather and dwindling stockpiles, are now trading below \\$3/mmBtu amid the ongoing boom in US production

The recent investments by US companies are motivated in part by a need for a gasprice hedge that is longer than the three-year agreements available in the market. Likewise, LNG buyers are making long-term investments in US exports by reaching 20-year agreements for capacity at planned US LNG export terminals.

Northwest Natural, which joined up with Encana in 2011 to jointly develop gas reserves in Wyoming's Jonah field, viewed its investment in gas reserves as a way of providing some price assurances to its customers over the next 10 years, said Eric Martin an attorney with Stoel Rives, which helped negotiate the deal.

The final agreement provided Northwest Natural with the needed clarity to invest in gas production. The field had a long production history, the necessary gas pipeline infrastructure and little exploratory risk.

Last year, state regulator Florida Public Service Commission approved NextEra Energy subsidiary Florida Power & Light's (FPL) request to invest in gas reserves in southeastern Oklahoma. The utility will spend an estimated \\$191mn to jointly develop up to 38 natural gas wells in southeastern Oklahoma's Woodford shale natural gas field and recover those costs from its customers. The deal could save FPL customers up to \\$107mn on their electricity bills over the life of the project, the utility said.

US independent oil and gas producer PetroQuest Energy will drill and operate those gas wells and provide a portion of the output to FPL. The deal would allow the utility to lock in gas prices at production costs rather than relying on market costs, which can be volatile, FPL said in the petition submitted to state regulators.