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| Enterprise Products Partners' gas-liquids separating complex in Mont Belvieu, Texas, is enjoying a robust business - Enterprise Products Partners LP |
Rock-bottom natural-gas prices aren't getting everyone down in the energy patch. Some participants are riding the downturn all the way to the bank.
Commodity traders and utilities have been stashing cheap gas in underground storage caverns during the past year. They have been locking in sales of the gas for future delivery at much higher prices on the futures markets or keeping costs low for electric power they produce in the future.
That is sparking a boom for companies that operate certain types of storage facilities, such as one controlled by Houston energy hedge-fund manager John Arnold.
And companies that turn natural gas into the raw material to make plastics, such as Enterprise Products Partners LP in Houston, are enjoying a boost, as crude-oil-based ingredients become pricey compared with gas.
The opportunities in a cheap-gas world underscore how operators in the energy business have learned to adapt to a range of market conditions. Some companies are prospering even as natural-gas producers come to the conclusion their fuel may be far cheaper for the foreseeable future.
Thanks to huge natural-gas finds over the past year and weak demand in the recession, natural-gas prices have fallen to seven-year lows. Natural gas for October delivery on the New York Mercantile Exchange settled at $2.829 per million British thermal units Wednesday, up 2.2 cents, or 0.8%, and off 79% from its high last summer. By November, most energy observers are predicting gas-storage caverns around the U.S. will be full.
Crude-oil prices, meanwhile, aren't down nearly as much, leading to an unusual gap between oil and gas compared with past years. Nymex crude prices settled Wednesday at $71.31 a barrel, up 21 cents, or 0.3%, but down 51% from the closing record in July 2008.
Crude oil historically has cost anywhere from six to 12 times more per barrel than natural gas costs per million British thermal units, a measurement of energy. As of last Friday, Nymex crude closed at a price 37 times higher than a key gas spot-market contract, said Rusty Braziel, managing director of Bentek Energy, a natural-gas research firm in Evergreen, Colo.
"Nobody, but nobody, thought it was going to get this extreme," Mr. Braziel said.
Some natural-gas storage operators are minting money from the glut of fuel. The storage "merchants," whose rates aren't federally set, have been able to charge market rates for services since federal regulators relaxed control over gas-storage pricing in the 1990s.
In 2006, Mr. Arnold of Centaurus Advisors LLC, whose hedge fund is one of the most active natural-gas traders in the business, created a company that bet on a growing need for gas storage. The company, NGS Energy LP, of Westport, Conn., built a series of storage caverns inside underground salt domes, and next to natural-gas pipelines and the power grid.
Its first facility opened for business in October 2008. Public data on the NGS Web site shows that its customers include electric utilities, gas-trading companies, gas producers and Wall Street banks. (Centaurus itself isn't a named customer; NGS declined to comment on Centaurus's gas-trading activities.)
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Today, the price of gas for delivery in October is nearly $3 less than the price for delivery in October 2010, an unusually wide spread. As those spreads become wider, gas traders can make more profits, and NGS can charge more for its storage, said Laura Luce, NGS president.
That is because some of NGS's customers are reaping big profits by trading on their cheap gas. By storing gas they bought at low prices, they can sell it at a higher price on the futures market, or simply lock in low costs for power they will generate with the gas in the future. NGS is privately held and doesn't report results.
Enterprise Products Partners, an energy infrastructure firm, is profiting from a big rise in demand from petrochemical producers who want cheaper natural-gas feedstocks such as ethane to make plastics. Enterprise holds a large market share in the business of separating natural-gas liquids from pure natural gas through an industrial process called fractionation.
Executives said Enterprise's natural-gas liquids-processing facilities are operating at near maximum capacity, both because ethane and related plastics feedstocks are cheaper than competing crude-oil-based products and because natural-gas production has risen so fast -- and could stay high -- thanks to improved drilling techniques. Last month, Enterprise announced an expansion at its main gas-liquids separating complex in Mont Belvieu, Texas.
"A low gas-price environment is good for us, particularly low gas relative to crude oil," said Enterprise Chief Executive Michael Creel in an interview. Jim Teague, chief commercial officer, said the economically hard-hit petrochemical sector is using record amounts of natural-gas liquids, even though its facilities have cut back production overall in the recession.
"What we produce will be the preferred feedstock for the petrochemical industry for the foreseeable future," Mr. Teague said.