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Gas Executives Forum: The New Downstream Dynamic

Gas distributors tell how their business strategies are changing in response to issues such as higher gas prices, electric M&A, LNG, and gas pipeline development. 

Fortnightly Magazine - April 2005

one in upper Michigan.

Fortnightly Will we see a lot of new pipelines going over the Rockies? Where will California get its gas?

Felsinger, Sempra Energy: California will get its gas by displacement. Price impacts will not be as severe as you might imagine, because Permian Basin gas will flow to California instead of going to Chicago. However, California could avoid a lot of pipeline charges if the state can get access to more LNG.

Fortnightly What's the status of LNG-supply contracting? Are marketers and big gas customers becoming comfortable with the risks of tethering their future to the global LNG trade?

Fowler, Duke Energy: First, you have to start from the realization that the energy business from now into the future is a global business. Second, we can learn a lesson from the way we handled crude oil. We depleted our crude-oil resources quickly, and then became dependent on foreign resources. In the gas industry, I would hope we'd bring in foreign resources earlier, which in effect lets you produce your domestic resources over a longer period of time. You get more leverage that way.

Downes, New Jersey Resources: Companies are working to fit LNG into their supply strategies. All the stakeholders are learning about how the market will change, and how those changes will affect their portfolios in the future. I don't think it's clear yet what types of contract terms will be required. Are we going back to the days when long-term contracts dominated? Which players should we be dealing with? What operational issues arise with LNG? The answers to these questions will change companies' future supply strategies. This is a time of transition.

Felsinger, Sempra Energy: I see the LNG business moving forward in a rational way, as opposed to the way the merchant power industry developed. No one today is building a merchant LNG receipt facility. They are all being built on the backs of long-term contracts.

People have always been convinced that the United States is the largest gas market in the world, but until recently they weren't convinced prices could sustain the investment required to expand LNG import capacity. You need prices in the high $3 range to land LNG in North America economically. When we saw gas prices rise in 2002, the gas majors didn't believe those prices would persist. We spent a couple of years traveling around the world, trying to convince gas producers that prices in North America would support landing LNG here. It was not an easy process, but we saw a turning point at the end of 2003 and the beginning of 2004. People now are comfortable investing in the infrastructure needed to support an LNG supply chain, because they understand the North American market better, and have some assurance they can get a return with posted spot prices.

We have a fairly liquid and deep spot market, with indices that people are now comfortable selling into. For the first time, producers are signing long-term LNG contracts and accepting the risk and upside potential of selling gas at spot prices.