Williams Gas Marketing Co. (WGM) is an early entrant to test the waters of gas marketing aggregation in the post Order 636 U.S. gas industry.
And the company is targeting small gas producers in the process.
WGM, an affiliate of Williams Cos., Tulsa, owner of two large U.S. interstate gas pipeline networks, has explained a special independent producer program (IPP) to Midcontinent operators. Centerpiece of the IPP is a netback price program WGM contends will give small independents a chance to obtain higher prices for their production and compete with majors and large independents by pooling supplies.
Some industry analysts see large market aggregators, especially those affiliated with pipelines, as the big winners in the aftermath of Order 636, the huge Federal Energy Regulatory Commission rulemaking designed to unbundle pipeline gas transportation services and complete the transition to a deregulated gas industry in the U.S. (OGJ, June 8, p. 24).
In addition to its pipeline affiliation, WGM cites its affiliation with another Williams Cos. unit, WilTel, the biggest private line telecommunications system in the U.S., in promoting its portfolio of gas transportation marketing services. And the company is offering small independents workshops on deciphering Order 636 and its effects.
HOW IT WORKS
Under IPP, WGM offers a netback price equal to a high percentage of its weighted average sales prices with a guaranteed price floor based on the applicable pipeline index.
Under this arrangement, dubbed Williams Independent Netback (WIN), independent producers can take advantage of WGM's marketing/transportation staff, which it contends consistently sells gas at a price higher than pipeline indexes.
WGM combines substantial volumes of WIN and other IPP gas into supply pools at common pipeline receipt points. By creating a bigger market profile for an independent's gas supplies through aggregation, WGM says it can then command pipeline transportation discounts and premium market prices. The goal is to net small independents increased gas prices and competitiveness with majors and large independents.
WGM also offers index based pricing, fixed and variable fixed pricing, and futures programs under IPP.
All independents participating in an IPP will be offered the first chance to participate in long term agreements that include winter and summer contracts, 1 year or longer contracts, and cogeneration contracts.
Another advantage WGM claims for IPP participants is reduced risk from market vagaries. During periods of weak demand and curtailments, long term and IPP gas will not be reduced, allowing participants maximum netback, optimum takes, and lower risk.
Participation in IPP requires an initial 1 month commitment. Upon committing to an IPP proposal for at least 3 months, the producer becomes a preferred producer and receives the first opportunity to participate in WGM's long term contracts and other benefits.
In addition to IPP, WGM purchases spot gas on an interruptible basis and swing gas day to day.
WGM introduced IPP on a pilot basis in its Pacific region last year. Producers there, with Rocky Mountain and San Juan basin supplies, have committed to 40 MMcfd, and Williams expects that will rise to 150 MMcfd.
In the Midcontinent program, producers have committed to 75 MMcfd and are expected to commit to a total of about 200 MMcfd.
The commitments cover about 45% WIN, 35% index based pricing, and fixed and futures pricing on the remainder for both areas. Williams expects growing interest in futures pricing arrangements because of the recent strength in the gas futures market.
The next IPP offering will be targeted to Gulf Coast producers, likely in 2 months.
IPP ADVANTAGES
WGM Vice Pres. Ralph Hill said IPP is designed to protect against gas price swings and "give the critical mass needed to compete via pooling with major supply pools."
Hill noted the program offers small independents access to multiple markets and hubs, supply and transportation management, and bigger pipeline discounts for bigger supply pools. It also features price floors for small independents wary of the kind of price slide that has plagued producers in the past year and a no risk, 30 day trial period.
Many small producers would have their first shot at term business through the program, Hill said.
To compete in the post 636 world, small producers' biggest concerns will be market/hub access, reliability of takes, and long term pricing.
In the new gas market, "long term relationships are a must...and reliable supplies will win out," Hill said.
To achieve that, small producers will need the services of a national market aggregator, he said.
PRICE RUNUP COMPLACENCY
Hill cautioned producers against becoming complacent about the recent rebound in gas prices, especially the effects of recent changes in Oklahoma's prorationing rules.
"It's not as big an impact as is perceived," Hill said. "It affects only about 1,100 wells in the state and maybe 200-300 MMcfd out of a state total of 5-6 bcfd of production."
The perception of how prorationing might tighten supplies helped spark gas futures activity, thus boosting prices, he contends. Other price firming factors included low storage levels and a significant number of shut-ins resulting from an extended period of depressed prices.
Hill cites an array of persistent underlying supply pressures in the U.S. gas industry, including effective utilization of storage capacity, an emerging surplus of gas supplies targeting California via competing pipeline projects, and a continuing "tremendous" lack of demand.
"If anything, there's likely to be increased volatility of prices," Hill said.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
