By BEN LEFEBVRE
HOUSTON -- The lengthy North American natural-gas supply glut
seems to be prompting some formerly reluctant energy producers
to sell the commodity through long-term contracts.
Normally, natural-gas producers have avoided multiyear
supply contracts during periods of low prices, in the hope of a
soon-to-come rebound. On Wednesday, however, Chesapeake Energy
signed a 10-year contract to supply 36 billion cubic feet/year
of natural gas to Methanex's methanol plant in Geismar,
Helping to seal the deal was linking the contract price to
methanol, a chemical used in industrial and consumer goods.
Exact terms of the deal weren't given, but the use of a
commodity other than natural gas as a price benchmark could
help Chesapeake form long-term contracts with other customers,
said James Johnson, Chesapeake's senior vice president of
"Elements of the Methanex transaction could serve as a model
for potential agreements with a variety of industries," said
James Johnson, Chesapeake's senior vice president of
US methanol prices averaged $1.22/gal in
the week ending Jan. 18, according to data from pricing service
The deal could be a harbinger of things to come, said Rusty
Braziel, energy consultant at RBF Energy. About 10 similar
deals are being proposed by chemical makers, fertilizer
producers and other companies that depend on a steady supply of
natural gas at stable prices, Mr. Braziel said.
The key for closing such deals will be whether buyers can
sellers can agree on a benchmark not linked to Nymex futures,
analysts have said. Using a different benchmark will appeal to
natural-gas producers looking for a price hedge but will also
limit the pool of possible sellers to Chesapeake, SandRidge
Energy and other companies with large enough portfolios to
withstand a hedge gone sour, Mr. Braziel said.
Methanex had been pushing for a long-term supply deal for
months. Vancouver-based Methanex is moving a methanol production plant from Chile
to Geismar to take advantage of low US natural-gas prices.
Tim Williams, vice president in charge of the company's
upstream and feedstock acquisition, had said at a
conference presentation in September that natural-gas producers
were "mistaken or refusing to face reality" by not offering
more long-term contracts.
The natural-gas Nymex futures benchmark settled at $3.45 per
million British thermal units Thursday, a level seen as barely
profitable by many producers. Prices, which had surpassed
$13/mmBtu in July 2008, were brought low because a technology-driven drilling boom and
tepid demand resulted in an unprecedented boost in
Long-term certainty of supply will help US manufacturers
dependent on natural gas, leading to growth in the sector and
ultimately boosting natural-gas prices, said Bill Herbert,
analyst at Simmons & Co. International.
Dow Jones Newswires