Natural Gas
A World of Volatility
Patrick J. Strange
Senior Vice President
Energy Marketing & Trading Conference
University of Houston
January 26, 2006
AGL Resources. All Rights Reserved.
About Sequent Energy…
• Location: Houston, Texas
• Wholesale natural gas marketer, with
physical/logistical emphasis
• Sold an average of 2.17 Bcf/day in 2005
• Current headcount of 105, largely in Houston
• Sold volumes to 510 counterparties in 2005
• Conducts business on 49 pipelines
Sequent Energy (P. Strange) January 2006
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About AGL Resources…
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Parent Company:
NYSE:
Credit Ratings:
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Market Cap:
Total Assets:
AGL Resources
ATG
S&P – BBB+
Moody’s – Baa1
$2.8 billion
$6.3 billion
Non - Regulated
Regulated Utilities
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Atlanta Gas Light
Company
Virginia Natural Gas
Company
Chattanooga Gas
Company
Elizabethtown Gas
Elkton Gas
Florida City Gas
Sequent Energy (P. Strange) January 2006
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Sequent Energy
Management
Pivotal
SouthStar (70%)
AGL Resources’ Footprint
Elizabethtown Gas
Satellite LNG
Elkton Gas
Virginia
Natural Gas
Virginia Gas
Chattanooga Gas
Cherokee LNG
Chattanooga LNG
Riverdale LNG
Macon LNG
Atlanta Gas Light
Florida City Gas
Jefferson Island
Storage and Hub
Sequent Energy (P. Strange) January 2006
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Trading
This word can take on a different meaning
depending on your particular focus
What trading means at Sequent: (customer focused)
• Optimizing portfolio positions
• Physical spread options (transportation)
• Physical storage options (cash, futures, time)
• Modest risk limits (proprietary trading)
What trading does not mean at Sequent:
• Large outright speculative positions
• Financial market making
Sequent Energy (P. Strange) January 2006
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2005 – A Year of Extremes
• Supply, weather and uncertainty were
drivers of domestic gas price volatility
• Hurricanes created significant
challenges for entire industry
• New entrants into market with mostly
financial trading bias
• Outright price and basis volatility
• Continued consolidation in the energy
industry
Sequent Energy (P. Strange) January 2006
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Supply, Weather and
Uncertainty
It appears…
• More gas being consumed to produce
electricity
– Provides support for prices during traditional
injection period
• New supply additions looking for market
– Barnett Shale
– Rockies
• Traditional supply basins trying to keep up
• LNG players have options
– Cargo’s routed to higher price markets
Uncertainty of market direction creates
waves of buying and selling.
Sequent Energy (P. Strange) January 2006
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Hurricane Barrage
of 2005
Hurricane Rita’s Path
* At peak 75.9% of Gulf Coast region gas shut in
* 18% (1.7 Bcf/d) remains shut in
* Per Bentek Energy LLC
Sequent Energy (P. Strange) January 2006
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New Entrants
• Influx of capital into energy
commodities
• Emergence of new players
has not necessarily translated
into more depth and liquidity in
the physical market
• Imbalance of financial and
physical participants has
created cash vs. futures
volatility
Sequent Energy (P. Strange) January 2006
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Price and Basis
Chicago
Rockies
7.940
7.025
6.310
Northeast
8.940
9.190
5.470
Mid Cont Field
Waha
7.150
Locational Spreads** 2005
(.94)
Rockies to Henry
(.765)
Waha to Henry
(.655)
MC to Henry
(.1)
Chicago to Henry
.22
MA to Henry
2.78
NE to Henry
(.535)
STX to Henry
.46
Florida Z3 to Henry
2006
(1.23)
(1.105)
(1.05)
(.315)
.215
.685
(1.02)
.02
5.645
S. Texas
7.235
5.875
**Gas Daily Price comparisons are for Jan 25, 2005 & Jan 25, 2006
Sequent Energy (P. Strange) January 2006
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8.470
7.205
5.755
Mid Atlantic
6.630
Henry Hub
8.255 Florida Zone 3
6.410
8.275
6.870
Consolidation Within
Energy Industry
Producers
Chevron/Unocal
Conoco/Burlington
Oxy/Vintage
Utilities
Duke/Cinergy
Exelon/PSEG
FPL/Constellation
Pipelines
Enterprise/Gulf Terra
Energy Transfer/Houston Pipeline
Loews/GulfSouth
Sequent Energy (P. Strange) January 2006
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2006 and Beyond
• The landscape will change, however;
most roads lead to continued volatility
• Pipeline flows could change
dramatically
• New supply and infrastructure projects
• LNG (baseload or swing)
• Keeping up with the peak demand
• Credit and cash flow
• Regulation (federal and state)
Sequent Energy (P. Strange) January 2006
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Capacity Designed for Gulf Production
1,000 Bcf
5,000 Bcf
3,000 Bcf
13
4,000 Bcf
1,000 Bcf
Sequent Energy (P. Strange) January 2006
2,000 Bcf
Source: EIA, Office of Oil and Gas, Natural Gas Division
New Supply and
Infrastructure Projects
Expansions needed to help facilitate moving
gas west to east. Many major expansion
projects announced. Do they all make it?
Supply
Barnett Shale
Fayetteville Shale
North Louisiana
West to East
El Paso
Kinder Morgan/Sempra
ETX to Louisiana
Centerpoint
Gulf South
Kinder Morgan/Crosstex
Regency
Trunkline
Sequent Energy (P. Strange) January 2006
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Liquified Natural Gas
• The U.S.’s ability to receive
LNG will continue to expand
• Entrance of U.S. into the
global gas market
• Will the U.S. be a swing
market for LNG?
• What impact will LNG have on
basis values?
Sequent Energy (P. Strange) January 2006
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Peak Demand Is Growing Faster
Than Average Demand
Compound Annual Growth Rate of Gas Consumed
Natural Gas Use Per Residential Customer
(Residential and Commercial Customers)
120
Normalized Mcf per Year
100%
100
90%
80%
80
Since 1973, winter load (Dec-Feb)
is growing more than twice as
fast as annual load
0.80
70%
60%
60
50%
40
0.33
40%
30%
20
0
20%
10%
1980
1990
2001
2010
2020
0%
Annual Growth
Patterns in Residential Natural Gas Consumption, 1980-2001.
American Gas Association
Declining Use Per Customer Masks
The Challenge of Infrastructure Development
Sequent Energy (P. Strange) January 2006
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Winter Growth
Credit and Cash Flow
• Consolidation challenges
– Less players does not equal
more credit per counterparty
– Mergers do not equal stronger
balance sheets
• High commodity prices
• Working capital for storage
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Issues LDCs and Regulators Must Balance
Increasing
Available
Supply
Firm
Versus
Peaking Needs
Meeting Future Customer Needs
Sequent Energy (P. Strange) January 2006
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Realigning
Portfolios
To Meet
Needs
