ConocoPhillips VP: Natural Gas Costs, Not Oil, Driving Higher Gas Prices, NGI Reports

Business Wire, April 18, 2008

CHICAGO -- It's the high costs of the difficult to reach and developing basins now being tapped to supply this nation's growing demand for natural gas that have driven prices to a new level, and those costs won't go away regardless of the worldwide price of oil, a ConocoPhillips vice president recently told Natural Gas Intelligence (NGI).

While some believe natural gas prices have been dragged higher by $100/bbl oil or pushed up by supply shortfalls, these factors don't explain the step-change gas prices have experienced. Higher full-cycle gas production costs -- due particularly to greater reliance on unconventional supply basins -- have driven the prices all gas consumers pay to a new level, one where they're bound to stay, according to Will Hussey, ConocoPhillips senior vice president for origination. Hussey will be one of the key speakers at the upcoming GasMart 2008, the 22nd annual event coming up May 20-22 in Chicago.

"I don't know that people have a real appreciation for what full-cycle costs are for developing some of these nonconventional supplies," he said. "I think people think that the prices of gas are high and inflated and don't think it's justified. I think they think it's following crude oil. There's an expectation that if crude were to come down or if we were ever over-supplied, supply-demand would be at a balance and the price would go back to three bucks, and it's just not the way things work from a cost-based perspective."

Asked for his long-term view on gas prices, Hussey quips that they will be higher than costs. More to the point, "I think that a reasonable floor would be seven bucks," he said.

That outlook stokes no fears of demand destruction, at least not with Hussey. Even if one can switch from gas to oil, that's an even less attractive proposition where prices are concerned. Coal is still taboo among many. "I'm not nearly as threatened about moving people away from gas as I am just trying to manage expectations for what I think the future will bring," he said.

Factors influencing higher full-cycle costs include the technical challenges presented by unconventional reservoirs, but also higher labor and materials costs, particularly for steel. Not everyone appreciates this.

"People are looking at the E&P [exploration and production] companies and saying 'these people are making a killing on this stuff,'" Hussey said. While it's less costly to produce from legacy fields than it is from the unconventional frontier, consumers tend not to realize that the higher prices producers receive for gas today just drop down to the higher production costs in the new fields.

Generally, consumers understand the worldwide supply-demand outlook for oil, particularly where China is concerned, Hussey said. "And I think that the general prevailing thought is that gas has followed oil up, but when we can get the supply picture up for gas, then pricing can come back down," Hussey said. "I just want people to understand what the underlying costs for natural gas are, and I think that communication is taking place. I think that people will accept that message."

The pressure to is on natural gas to explore, expand and deliver as the only major "acceptable" transition fuel to a cleaner world. Hussey will be among a number of industry leaders speaking at this year's GasMart, including keynoters Brian Frank, President of BP Energy Company, North America Gas & Power and Kathleen Eisbrenner, Executive Vice President, Global LNG, Shell Gas and Power International. Their companies will be among the sponsors meeting with customers in the GasMart Market Network Center.

Purchasers will be taking an active role in this year's GasMart. The Process Gas Consumers (PGC), an organization of industrial natural gas users, is a sponsor and will be hosting a special luncheon for end users. Alex Strawn, Purchasing Group Manager, North American Energy for Procter & Gamble, will address the GasMart audience, as will buyers for Alcoa, AcelorMittal USA Inc., Potash Corp., Abbot and USG Corp.

Other speakers include executives from Nexen Marketing, TransCanada, Kinder Morgan's Rockies Express Pipeline, EnergyUSA, Integrys, OGE Energy Resources, and Wachovia. Offering market insight will be Porter Bennett, President of Bentek Energy, the industry's premier data collection and analysis firm, Aaron Studwell, Meteorologist for Weather Insight, and Jim Osten, Principal, North American Energy Services, Global Insight (USA), Inc.

The IntercontinentalExchange will have a workshop on electronic trading and host the main GasMart reception. The New York Mercantile Exchange is sponsoring attendance at a Chicago White Sox game and the North American Energy Credit and Clearing Corp. is hosting a golf tournament at the Harborside International Club.

The GasMart program and Market Network Center will be in the headquarters hotel, the Sheraton Chicago Hotel & Towers. More than half of the 450 already preregistered to attend are utility, LDC, IPP and industrial purchasers of natural gas. The event is hosted by Intelligence Press Inc., publisher of NGI, which has been reporting on natural gas market news and prices for 27 years and now carries the news real-time at intelligencepress.com.