US utility group hopes to secure future LNG supply at fixed price

US utility group hopes to secure future LNG supply at fixed price

Houston (Platts)--12May2005


A group of rural electric cooperatives and municipal gas utilities in the
southeastern US is hoping to change the way LNG is priced in the US by buying
at a fixed price. Historically, LNG prices in the US have been indexed to the
NYMEX Henry Hub futures contract price for natural gas, meaning that the price
of regasified LNG has closely mirrored the fluctuating price of pipeline gas.
But the utility group is proposing to buy a specific amount of LNG at a fixed
price for at least 10 years. 

With the price of gas having skyrocketed in the US from roughly $2.50/MMBtu in
2001 to more than $6.50/MMBtu, the group hopes its proposal can allow it to
buy regasified LNG in the future at a lower price than pipeline gas, said the
group's consultant, Ann Donnelly, of Boulder, Colorado-based Global Energy
Decisions. The group, which consists of the Alabama Electric Cooperative, the
Seminole Electric Cooperative, the South Mississippi Electric Power Assn and
the Southeast Gas District, last month issued a request for proposals to buy
up to 175,000 MMBtu/d at a fixed price.

The group would also consider other pricing alternatives, such as indexing LNG
supplies to a commodity that would be cheaper than pipeline gas. "They're
looking at a diversity of sources to make sure they always have the lowest
price they can get," Donnelly said. "The more sources you look at, the more
cost-efficient your portfolio is going to be. A fixed price would be their
ideal," she said. She said 15 "highly qualified suppliers" attended a question
and answer session in Houston Wednesday, but said it was too soon to comment
on whether they would offer LNG at a fixed price. 

Responses to the RFP are due June 15, with a short list expected to be
announced in July and two finalists selected in August. Industry experts
contacted by Platts were not optimistic that suppliers would be willing to
sell LNG at a fixed price or use an index other than the NYMEX Henry Hub
contract. "A fixed price would be difficult," said Jim Trifon, a managing
consultant at Wood McKenzie Suppliers, he said, have become comfortable using
a NYMEX-based price.

London-based analyst Andy Flower said, "It's really going to be a question of
whether there are LNG sellers out there who feel having a fixed price into the
US helps mitigate against the price risk in the US market." Flower said LNG
suppliers are just beginning to learn how the US market works and how Henry
Hub works." Donnelly said her group wants to test the waters of the
potentially changing US LNG marketplace. "It's a newly developing market;
nobody really knows what the norm is going to be," she said. "A number of the
new proposed regasification facilities need anchor markets that are long term
to justify their large capital expenditures. 

In general, the LNG industry is a long-term planning type of industry. This is
why there are going to be different pricing elements. One thing sellers will
want is long term commitments. We are going to the market and saying, 'What
are you willing to offer?' " Donnelly said. "It's a more proactive approach
than waiting for the market to come to you."

This story was originally published in Platts Natural Gas Alert
http://www.naturalgasalert.platts.com

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