ANALYSIS: US natural gas producers acquiescing to long-term contracts


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, Louisiana.

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 marketing.

"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 marketing.

US methanol prices averaged $1.22/gal in the week ending Jan. 18, according to data from pricing service Platts.

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 supplies.

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.

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