El Paso Corp. is considering a $1.5-billion investment to build six liquefied natural gas facilities in the U.S., Mexico and the Caribbean over the next five years. That investment by the leading producer, processor and transporter of natural gas indicates that prices for the fuel will stay high for most of this decade.
The outlook is for prices of about $3.50 to $4 per 1,000 cubic feet (mcf), which would be double the pattern of the preceding decade and a half, yet below current natural gas prices of $6 and more.
Only at $3.50 or more per mcf would El Paso's investments in liquefied natural gas make sense. In LNG projects, natural gas is liquefied so it can be transported by tankers to terminals in the U.S. and other countries. The fuel is then gasified for use in generating electricity.
The use of natural gas as the fuel for electricity is a powerful trend--93% of power plants being built in North America plan to use natural gas for fuel, according to Cambridge Energy Research Associates, a consulting firm.
An equally strong trend is that the United States, Canada and Mexico are on a spree of electric power construction, adding or replacing generating stations equal to one-third of existing capacity. Other parts of the world are expected to follow as expansion of information industries increases demand for power.
El Paso saw the trend coming. "We correctly anticipated dramatic changes in supply and demand for natural gas and electricity," says William Wise, chairman of the company. "We have been on a journey to build the most broadly based, largest natural gas company in the world.
"And that is what we have built."
El Paso, an old company that built the original pipelines that carried gas from Texas to California and the Northeast, has since 1996 acquired the pipeline and gas holdings of Tenneco and of Sonat Inc., including one company--Zilkha Energy--that held numerous gas leases in the Gulf of Mexico. Just last month, El Paso completed its largest deal yet, a $24-billion acquisition of Coastal Corp.
In less than five years, El Paso has gone from $3 billion in annual revenue to more than $21 billion. Company stock has increased almost 400% in the last five years, from $15 a share to $70.99 as of Friday's close. "It is a very well-managed company," says Selim Zilkha, a Los Angeles investor who is El Paso's largest individual shareholder.
El Paso's growth and ambitions offer insights into the future of energy and how changes in the energy business affect investments and our daily lives.
The company has branched into electric power generation and now has power plants in a dozen U.S. states and several countries in South America, Europe and Asia. It sees electricity as a link in a chain of added value in which $1 worth of gas becomes $2 worth of electricity at the power plant and ultimately $5 worth of electricity delivered to a customer.
El Paso trades commodities and makes supply contracts at all links in that chain. "A power plant is to natural gas as a refinery is to oil," Wise says.
El Paso is also the target of state and private lawsuits alleging monopoly practices in the business of pipelining gas to California. And the Federal Energy Regulatory Commission, which has received numerous complaints over rising natural gas prices, plans a "technical conference" next month to consider whether abuses have artificially hiked gas prices.
The company is contesting the lawsuits, and Wise, a lawyer by training who has worked for 30 years at El Paso, says that the company doesn't necessarily benefit from high gas prices, because it hedges against price volatility by trading in financial futures markets and making long-term supply contracts.
Also, the company argues, today's furor over gas prices stems from forgetfulness. Natural gas was cheap for so long that current high prices look like a mistake or an injustice. But what we're seeing, they say, is only a new turn in a long cycle.
Massive development of natural gas deposits in the early 1980s led to oversupply and a collapse in prices. El Paso fell on hard times and was bought out by an energy and land division of the Burlington Northern railroad in 1983. It was spun off to independent operation again in 1992.
But natural gas won't go back to being cheap any time soon. The demand for the fuel in North America alone for the next 15 years will grow by 2.5 billion cubic feet a year, a rate of increase 2 1/2times higher than the pattern of the last five years.
The fact that natural gas burns more efficiently and cleanly--emitting less carbon dioxide and fewer pollutants--ensures that demand will grow worldwide.
Prices will be close to $5 per mcf for the next two or three years, predicts analyst Tom Robinson of Cambridge Energy.