GAS CAN CAPTURE MORE POWER MARKETS IF ...

Large capital outlays and updated thinking will be needed if gas is to claim a significant share of future U.S. power generation markets. "We have to fundamentally change the ways gas producers, marketers, and end users deal with one another," says Jeffrey K. Skilling, chairman and chief executive officer of Enron Financial Corp. "The way gas is purchased in this country has to change for the system to operate correctly again," he told a meeting in Houston of the Texas Independent Producers and

May 27, 1991

4 min read

Large capital outlays and updated thinking will be needed if gas is to claim a significant share of future U.S. power generation markets.

"We have to fundamentally change the ways gas producers, marketers, and end users deal with one another," says Jeffrey K. Skilling, chairman and chief executive officer of Enron Financial Corp.

"The way gas is purchased in this country has to change for the system to operate correctly again," he told a meeting in Houston of the Texas Independent Producers and Royalty Owners Association.

Gas market evolution is the root of the problem. All sectors of the U.S. gas industry must alter their views of markets to restore order and increase demand, he said.

Enron estimates recoverable U.S. gas resources at 1,000 tcf, enough to serve enormous latent markets. But Skilling said transportation issues and contractual problems must be resolved to break the gridlock crippling a marketing system that finds it hard to match supply with demand.

Enron Finance is a unit of Enron Gas Services Group, in turn a subsidiary of Enron Corp.

EXPANDING INFRASTRUCTURE

Skilling said expanding gas infrastructure is a critical part of winning future markets.

"To increase gas markets by 1 Mcf, someone somewhere in the system must invest $15-21," he said. "To increase U.S. markets by 3 tcf/year by 2000, we're going to have to invest more than the estimated cost of rebuilding Kuwait."

Skilling's figures include investments of $11 /Mcf for exploration through pipeline transmission, along with $4 for distribution or $6 for power generation or $10 for a methanol plant.

Yet today's deregulated, flexible gas markets discourage outlays needed to encourage future demand, he said.

Enron believes about 80% of gas sold on U.S. markets will move under best effort, spot transactions during 1991. Conversely, as recently as 1983, 90% of the gas sold in the U.S. was purchased at the wellhead by interstate pipelines, which added cost of service and regulated profit margins before delivery to end users.

The prevalence of spot market sales is a problem because most U.S. gas producers are independents, who have difficulty assuring long term supplies, Skilling said. That denies price and supply predictability needed by end users to arrange financing for projects that will increase demand.

"The bottom line is, markets won't invest because they're not sure gas will be there, and suppliers won't invest because there are no guarantees of future markets," Skilling said.

"When you don't know if the gas is going to be there or what price it's going to be, it's kind of tough to invest that $21/Mcf to make the market grow."

POOLING SUPPLIES

Enron's solution to the impasse is to eliminate some risk by encouraging producers to pool gas supplies.

"If we can pool enough gas supplies, we can essentially portfolio away the geological risks of individual actors and create a production decline curve we feel comfortable with," Skilling said.

Then gas producers could start carving out new markets that fit within the combined production decline curve, he said.

Skilling suggested long term supplies could be offered to power generation markets, which need 15 year supply contracts with known prices and volumes to satisfy financing requirements.

Midterm supplies could be offered to local distribution companies trying to retain load by hedging portions of their supply portfolios to dampen price volatility for their customers.

And short lived supplies could go to the industrial and financial institution sector "where portfolio managers are hedging annual gas transaction risks."

ELIMINATE BIASES

However, Skilling said, for Enron's plan to work, gas producers have to eliminate power industry and regulatory biases against using gas as a base load fuel.

"They have to take into account the fact that a 30 day spot transaction is fundamentally different from a long term, firm contract," he said.

"Under long term contracts, electric generation, combined cycle, and cogeneration markets will have to pay more for gas, and regulators are going to have to allow that to be passed through because it's to the customers' benefit."

He said gas can compete effectively with other fuels in all emerging markets. But for power generation markets to be developed effectively, "more certainty of supplies is necessary for companies to make the investments that will increase demand."