Gas processors' outlook seen bright amid old, new issues

March 18, 2002
The future for natural gas is bright, from both demand and supply standpoints. And the natural gas processing industry can benefit from that prospect so long as it accepts certain realities about its business and deals directly with some old and new issues.

The future for natural gas is bright, from both demand and supply standpoints. And the natural gas processing industry can benefit from that prospect so long as it accepts certain realities about its business and deals directly with some old and new issues.

That was the keynote message delivered by Duke Energy Field Services Inc. (DEFS) Pres. Jim Mogg last week at the 81st Gas Processors Convention in Dallas.

On the demand side, he said, natural gas is an environmentally clean fuel that is the fuel of choice for virtually all new power plants planned or under construction in the US. On the supply side, producers historically have shown that they can find and supply needed natural gas whenever the economics have been right.

And because about 80% of all natural gas produced must be processed, that makes the natural gas processing industry a "must run" industry.

Volatility; success formula

Mogg began his talk by reminding gas processors of a reality of which they may have needed no reminder: price volatility.

DEFS began 2001 with composite NGL prices in the US at 72¢/gal in late January and ended early December with those composite prices at 27¢//gal. "I will tell you that when you start at 72¢/ and end at 27¢/, you feel a lot different than when you start at 27¢/ and end at 72¢/."

In early February 2002, NGLs were trading at 29¢/gal and in the past 30 days have climbed about 20-25%.

Mogg listed for gas processors what he said was needed for any company to remain competitive.

The successful processor must never forget that its primary focus must be on customer service. And the successful company must attain and maintain critical mass in its assets.

These are interrelated, Mogg said: "When you look at this sector [of the industry], from E&P, through the gathering and processing, fractionation, intrastate gas transmission, storage, NGL transportation-the midstream natural gas industry-there are opportunities through that entire value chain that don't put you in competition with your customers."

Companies must also have access to capital. And, Mogg said, one of the "new players" in the industry may be a key in that requirement. He noted that master limited partnerships are multiplying precisely because of their ready access to capital based on the more favorable tax treatment they bring to an enterprise.

A company must also strive to be the low-cost operator.

And in an era of consolidation-another reality of today's midstream gas business-it is essential, Mogg said, for newly merged companies to have good integration skills.

"Companies must not assume that new assets bring new employees who will merge effortlessly into the new structure. It takes work to prevent the 'us vs. them' mentality that can paralyze a company and can make the best strategy irrelevant. There must be good communication throughout the new organization."

Growth requirements; issues

Mogg noted three ways to grow in this industry: build, buy, optimize.

DEFS, he said, has acquired over the last several years "some $3 billion in assets; built 1.1 bcfd in capacity; [and] optimized by closing inefficient plants, moving gas to more efficient plants, driving up NGL production, and driving down the operating cost."

It's very important, he said, if a company wants sustained growth that it do all three things and "do them well."

Finally, Mogg noted the issues, old and new, that face gas processors.

Old ones include ongoing concerns over supply, safety, and best practices. "We've got to make sure we're doing the right things right."

And new issues center on regulation, particularly environment protection, pipeline integrity, and-a new one-business ethics.

The most important commercial issue centers on the "keep whole" contract. No doubt referring to the contractual complications in the US in late 2000, Mogg said, "We have a 'disalignment' between the processor and the gas that needs treating. Over a period of time, we will see contracts modified to deal with that.

"There are a lot of ways to deal with this contract problem, but it is essential that in this 'must run' industry, the gas processor not be printing red ink," he said.

Change and consolidation will continue, even accelerate, for the midstream industry, concluded Mogg.