U.S. utilities buy into shale wells to hedge against price rises

Electric substation
Source: DollarPhotoClub

Florida Power & Light (FPL) has joined a number of U.S. utility companies investing in the American shale gas boom in an attempt to hedge themselves against future gas price volatility – Risk.net reported today.

In June, FPL proposed to partner with Lousiana-based PetroQuest Energy to develop up to 38 gas wells in the Woodford Shale in Oklahoma. The deal – which is still subject to approval by FPL’s state regulator, the Florida Public Service Commission (PSC) – will allow FPL to acquire gas at production, rather than market, prices for the next 30 years, on terms that are more favourable than they could obtain by using derivatives. The company calculates that the deal will save FPL an estimated $107 million over the lifetime of the wells.

As far as price is concerned, the company projects that the effective cost of gas it will procure through its Woodford Shale assets will remain below $6 per million British thermal units (/MMBtu) until 2035. By comparison, FPL forecasts the US market price of gas will break through $6/MMBtu in 2020 and continue growing until it reaches $8.83/MMBtu in 2030 and $10.65/MMBtu in 2035.

On the other hand, shale gas wells deplete much more rapidly than conventional resources. It is believed that production from the Woodford assets will peak in 2016 at about 46 million cubic feet per day, which is only about 3% of FPL’s average daily gas consumption.

This is why, FPL is asking the Florida PSC to approve guidelines for future natural gas production projects, which would let the company move more quickly next time an investment opportunity arises, without waiting months for regulatory approval. Sam Forrest, vice-president of energy marketing and trading at FPL, says that the ultimate goal is to execute more deals with producers and layer on additional sources of supply. “If the commission will allow us to do so, we would like to do more,” he says.

Investing in shale gas production is becoming more and more popular among American utilities companies. The FPL deal follows a string of similar deals, which include a Montana-based NorthWestern Energy and NW Natural, an Oregon-based local gas distributor, as well as municipalities in California and the southeastern U.S.

Owned by Florida-based NextEra Energy, FPL serves 4.7 million customers and is one of the largest gas consumers in the US, with 65% of its electricity coming from gas-fired generation.

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