Officials say energy price volatility, credit risk here to stay

Washington  (Platts)--9Jul2004

Energy industry officials Friday said volatility in gas and power markets will
not ease anytime soon, but they added that such a scenario is not necessarily
bad for the industry. For the next 4-5 years at least, "volatility looks like
it's here to stay," said Tim Bullock, president of BP's North America Gas and
Power division. Price volatility for electricity is much higher than in gas
markets but some degree of volatility is beneficial because it sends price
signals to the industry to fix the problems that create it, whether they are
market structure issues or credit issues, Bullock said. For a risk management
company, "volatility is good" because it generates business from companies
that want to hedge their risks, added Brett Humphreys, managing director of
Risk Capital Management Partners. He told a Washington conference that "credit
risk is here to stay" too, and how companies manage that risk will be more
important in the years to come.

Bullock also discussed the declining natural gas production capability in the
North America's traditional producing regions, saying it will be "almost
impossible" to stop production declines. "We're having to run faster and
faster to stay in place" so "we better find other areas of production," said
Brad Leach, senior director of electricity and gas research for the New York
Mercantile Exchange. Liquefied natural gas is the best solution for short-term
price volatility because it will only be imported when prices support it,
Bullock said. The economics of running an LNG import facility will be tricky
because companies face the prospect of having unused terminals for much of the
year, he said. Bullock estimated the total capacity of planned import
facilities is 34 Bcf, but said much of that capacity will not be built because
of siting issues.

This story was first published in Platts real-time news and market reporting
service Platts Electricity Alert (http://electricityalert.platts.com ).

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