Centaurus, Carlyle Carve Gas Caverns as Traders Bet Prices Rise
By Joe Carroll
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June 4 (Bloomberg) -- John Arnold turned $8 million into $1.5 billion in the past six years by betting on natural-gas prices. Now the former Enron Corp. trader is seeking his next fortune under a Colorado cow pasture.
Arnold's Centaurus Advisors hedge fund and the Carlyle Group buyout firm are digging natural-gas storage caverns 2,500 feet (760 meters) under scrub grass on Rocky Mountain ranches and cypress trees in Louisiana swamps.
Storage demand is surging as new pipelines and import terminals expand supplies of natural gas, this year's second best-performing commodity after coal. Speculators buy and store the fuel when costs are low and sell as prices rise during cold snaps or heat waves in major U.S. cities.
``If gas is $12 but you think it's going to $15 next winter, you can put it in storage now,'' says Jim Tobin, a U.S. Energy Department analyst, quoting prices for a million British thermal units. ``Maybe it cost you a buck in storage fees, so that's a $2 profit, assuming you called it right.''
U.S. storage growth hasn't kept pace as demand has climbed from gas-fired power plants, the fuel's biggest consumers, Energy Department figures show. Storage capacity climbed 4.4 percent in 10 years, trailing a 69 percent rise in power-plant consumption as gas replaced coal to reduce emissions linked to global warming.
The U.S. has 397 natural-gas facilities that can hold about 8.33 trillion cubic feet of gas, up from 7.98 trillion a decade ago, the Energy Department says. Investors bet that storage will do well even as imports of liquefied natural gas slow and the industry needs to win approval for new pipelines.
Cattle Crossing
``There's a lot of investment interest now in storage because natural-gas demand is growing and the infrastructure for it hasn't kept up,'' says John Sherman, chief executive officer of Kansas City, Missouri-based Inergy LP, an operator of caverns in New York and Pennsylvania.
Arnold, 34, is focusing on a patch of tumbleweeds and scrub grass beyond a barbed-wire fence at the end of a dirt road 80 miles (129 kilometers) northeast of Denver. Signs warn of cattle crossing. Centaurus's NGS Energy Fund LP is spending $100 million to blast an underground cavern into a subterranean layer of salt capable of holding the equivalent of 600 aircraft carriers.
``We're not betting natural-gas prices are going to go up or down,'' says Laura Luce, president of Westport, Connecticut- based NGS, who formerly built storage in Michigan and Louisiana for Sempra Energy. ``We're selling insurance.''
Storage Demand
Arnold, who declined to be interviewed for this story, was the youngest member of Forbes magazine's list of the 400 richest Americans last year, with an estimated net worth of $1.5 billion. He left Enron in 2002 and started Houston-based Centaurus, profiting from price fluctuations by using futures contracts and other financial instruments to bet on supply and demand.
Inergy's monthly price to store 1,000 cubic feet of natural gas has climbed 23 percent in the past two years to 19 cents. Its Stagecoach cavern near Binghamton, New York, is booked through 2014 by customers including New York-based Consolidated Edison Inc. Inergy says it plans to almost double capacity within 18 months at a cavern 275 miles northwest of Manhattan.
Utilities, speculators and fuel brokers plan to tap Rocky Mountains gas, which fell to a record low 5 cents a million British thermal units in September 2007. The Rockies will overtake the Gulf Coast as the largest U.S. gas source this year, the government estimates.
Louisiana Halt
A shortage of pipelines to haul fuel out of the mountains led to a glut in Denver and Salt Lake City last year, says Stuart Nance, vice president of marketing at Houston-based gas producer Ultra Petroleum Corp. When gas was a nickel in the Rockies, New York City prices were $6.50 a million Btu.
Transportation capacity is expanding. Kinder Morgan Energy Partners LP, based in Houston, is leading a 1,678-mile Rockies Express pipeline project to haul 1.8 billion cubic feet of gas a day, equal to 14 percent of U.S. household demand, to Chicago and New York from Colorado and Wyoming.
TransCanada Corp. of Calgary and Tulsa, Oklahoma-based pipeline owner Williams Cos. say they may build a conduit to carry Rocky Mountains gas to the West Coast.
``This'll create the ability to take the lowest-priced supplies here in the Rockies and move them,'' Nance says.
Not every gas-storage bet pays off. Carlyle, based in Washington, and buyout firm Riverstone Holdings LLC of New York wrongly expected demand for storage to blossom at their project near Starks, Louisiana. Imports of liquefied natural gas are 54 percent lower than the Energy Department forecast, data compiled by Bloomberg show.
``All of this LNG that was supposed to be coming into the U.S. isn't because the rest of the world will pay more,'' says Wil VanLoh, co-founder of Houston-based Quantum Energy Partners, a $3.2 billion private-equity firm. Now he's putting $100 million into storage in the Rockies and the Northeast.
``We're very bullish on storage in the Rockies,'' VanLoh says. ``The more volatile gas prices are, the more premium you have to pay for storage.'' |
