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June 13th, 2013

Q & A from the LDC Gas Forum Panel Discussion

by Andrew Price, President & COO

I had the opportunity to speak yesterday at the LDC Gas Forum in Boston as a member of the Gas Buyer’s Panel. I go to the three day LDC Gas Forum for the Northeast region of the US every year. The conference is a who’s who of the natural gas industry, including top executives from utilities, pipelines, suppliers, traders, producers, consultants and end-users. It was fun to represent the interests of CES clients on this panel. For this week’s blog I have included the questions that were asked as well as the answers I gave (as best as I can remember them).  

Q: How is the price of natural gas affecting usage?

A: Two part answer. Part 1. CES has a client base that stretches from California to Atlantic Canada. Most of my comments today will focus on our large industrial, commercial and institutional clients in Northern New England. Northern New England is perhaps the most interesting sector of the country today in regards to natural gas market dynamics. Many of our large clients in northern New England are still using oil. Every single one of these clients is looking at ways to convert to a cheaper fuel. They are looking at propane, compressed natural gas (CNG), liquefied natural gas (LNG), and biomass alternatives. Northern New England is also seeing a significant build out of the local natural gas distribution system. In Maine, the established LDCs - Unitil, Maine Natural Gas and Bangor Gas - are all expanding their distribution networks as well as partnering with CNG providers to serve new load. A new natural gas utility, Summit Natural Gas, is opening up a significant new territory in Maine off the Maritimes and Northeast pipeline system. In Augusta, our State’s capital, we have the interesting situation that two natural gas utilities, Summit Natural Gas and Maine Natural Gas are competing head to head for customers along the same street.  Together more than 3 bcf of new natural gas demand could come online over the next 6 to 12 months in Maine. This conversion is all being driving by the $6 to $12 per MMBtu in savings that is available between natural gas and oil at the burner-tip.

Part 2. We had many dual fuel customers switch to #6 oil last winter as spot natural gas prices spiked, exceeding $30 per MMBtu on certain days. The Independent System Operator of New England (ISO-NE) is considering the purchase of 4 million barrels of oil for use in New England power plants to keep the lights on this winter. Over the next several years, until new natural gas pipeline capacity is constructed to bring additional natural gas supply to the market, it looks like clients with dual fuel capabilities are going to be very glad to have this capability.   

Q: Long-term supply contracts vs. long-term hedging agreements – do they even exist anymore?

A: The appropriate term for a natural gas hedge is very customer specific. We are doing basis deals as long as 36 months, with terms through 2016, but 3 to 24 month terms are more typical. NYMEX commodity hedging is very customer specific depending on the need for budget certainty. We help many larger customers set price strikes (and sometimes stop loss triggers) on individual months or percentage strips of their expected gas volume.

Q: Even with the new gas lines that have been added to New York, how will capacity be added into the New England area overall?

A: The shortage of pipeline capacity to deliver natural gas into New England has been a central theme of this conference for me. Other speakers have talked about expansions on the Portland Natural Gas, Algonquin and Tennessee natural gas pipelines. These pipelines all deliver natural gas into New England and have access to cheap shale gas. A few of these potential pipeline expansion projects have an enormous range of potential capacity additions – the Tennessee expansion could fall between 0.5 and 1.2 billion cubic feet (bcf) per day. It is clear we need the very high end of these capacity additions but the question is, who will step up to subscribe the capacity? The natural gas Local Distribution Utilities are only subscribing enough capacity to meet their peak day heating requirements and the merchant natural gas power plants are unwilling or unable to contract for firm capacity, leaving no one to subscribe the incremental capacity of a new pipeline to meet peak winter power generation loads.

The State of Maine is trying something new to address this problem and seed the market for up to 2 bcf per day of new capacity into New England. An energy bill, passed out of the Maine legislature in the last few days by an overwhelming and bi-partisan majority in both the Senate and House, would allow the state to purchase up to 0.2 bcf per day of capacity at a cost of up to $75 million per year. This cost could be recovered from electric and natural gas ratepayers via a small volumetric charge administered by the State Public Utility Commission. By our estimate this could save $2+ billion per year for electric consumers in New England and $1.5+ billion per year for natural gas consumers. Across the region, the $3 billion +/- cost of adding 2 bcf of natural gas capacity into New England, could have about a 1 year simple payback. At less than 10% of the New England market, Maine is not big enough to get a line built on its own – but this is a regional issue and Maine is looking to interest other states in joining a consortium to solve this problem.  

Q: How do the increasing shale supplies affect your gas purchasing and contracting practices?

A: We are paying close attention to when new capacity into New England may come online and how forward basis pricing is reflecting this potential new capacity. Many of our clients want to see what will happen in regards to new pipeline capacity before extending beyond 2015/2016.

Q: What factors other than price, influence your decision to choose one supplier over another?

A: Credit and flexibility on contract terms. Also, a willingness to enter new markets. We have a brand new market in Maine behind a new natural gas utility. A couple bcf per year of load concentrated with a handful of large industrial clients. CES represents much of this load, and we are actively seeking suppliers that are willing to serve behind the Summit Natural Gas Utility in Maine’s Kennebec Valley. See me after the panel if you are interested in discussing this market.  

Usage bandwidth can also be important. Clients who hedged less than 100% of expected load or had daily zero or even monthly zero bandwidth products saw very high cashout prices this winter on the portion of their load exposed to the spot market.

Q: Given the regional efforts for gas-electric coordination, what are your concerns?

A: The costs associated with maintaining electric grid reliability over the next several years is a concern. The ISO-NE is looking at a number of initiatives, including the purchase of 4 million barrels of oil to be stockpiled at dual fuel power plants by Dec 1, 2013. ISO-NE has also looked at contracting for LNG cargos to New England import terminals as well as new demand response initiatives to handle a potential natural gas shortage this winter. Forward capacity Market payments to power generators could be linked to their ability to provide generation during periods of high demand or reduced natural gas supply. How much these initiatives will cost and how these costs get allocated are a concern for many of our customers.   

Q: LNG exports and imports. Thoughts and comments? 

A: It looks like New England is going to be in need of LNG the next few winters. Hopefully a mechanism will become available to make this happen. It is possible that Repsol and Suez could bring spot cargos on their own initiative but it is not clear that they will bring enough without some commitment by buyers.

Looking beyond 2017 it seems like the case for LNG imports is difficult to make. In my view, LNG exports from the US will be relatively limited due to competition from oversees sources of LNG.  Reversing or making existing LNG import terminals bi-directional would seem to offer the most flexibility to changing market conditions and provide some cost savings.

Tags: LDC Natural Gas Forum, LNG, CNG, pipeline, Maritimes & Northeast, Portland Natural Gas, Tennessee, Algonquin, Maine Natural Gas, Unitil, Bangor Natural Gas, Summit Natural Gas, Maine, New England, Repsol, Suez

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