Analysis: Pickens must wait for payday on energy bill

NEW YORK Fri Jul 30, 2010 12:34pm EDT

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NEW YORK (Reuters) - T.Boone Pickens' proposal to run more U.S. vehicles on natural gas got a boost in Congress this week, but the energy billionaire must wait a few years before profiting from any investments linked to the plan.

An energy bill introduced on Tuesday by Senate Majority Leader Harry Reid would provide subsidies for natural gas-fired trucks and municipal vehicles, an idea long championed by Pickens as a way to curb U.S. dependence on foreign oil.

Pickens told Reuters during a January interview: "I'm long natural gas, not in 2010, but out beyond 2010." He noted that his position was influenced by high U.S. natural gas reserves.

A Senate vote on the legislation, which includes subsidies for natural gas vehicles up to 18-wheelers and construction of filling stations, is expected shortly. But before becoming law, the bill must also pass in the House of Representatives.

Hedge fund managers and analysts said it was too early to tell whether the bill would support a long position in natural gas. Building infrastructure for natural gas-fueled transport could take years.

Prices for natural gas futures contracts beyond mid-2011 could get a boost "if there is any traction, or perceived traction to this plan," said Mike Guido, head of hedge fund sales in commodities for Macquarie Bank in New York. "It could lend a bid further out the curve, but there's not much of an impact for the next 12 months." (Graphic: link.reuters.com/det32n )

Pickens' Clean Energy Fuels Corp. which supplies natural gas to some of the small fleet of existing vehicles, also stands to benefit.

Pickens was unavailable for comment, but spokesman Jay Rosser said: "The notion that Boone's in this to make money is nonsensical. Remember, he has spent well over $60 million on the Pickens Plan campaign," adding that his intention is to avoid saddling future generations "with such a national security or economic burden."

Rosser did not provide information about Pickens' current holdings in the gas market but said his firm, BP Capital, has held both long and short positions in the natural gas market this year.

Natural gas prices settled at $4.82 per mmBtu on Thursday, up about 23 percent since May's lows, but far below the peak of more than $13 reached in July 2008.

SHORT-TERM TRADE CHOPPY

Hedge fund managers say it would not make sense to take a long position on natural gas based on the current status of the legislation. They said a shift to gas as a transportation fuel would probably create a choppy price environment as supply and demand duke it out. Hedge funds generally exploit such volatile price environments and welcome them as opposed to steadier prices based on more predictable supply and demand.

"Within a couple of years, you've gone from people saying there is short supply to now an oversupply," said Fraser McKenzie, head of research at 47 Degrees North Capital Management LP in Pfaeffikon, Switzerland, which has about $250 million invested in hedge funds, many in the energy space.

He added that a program to use natural gas for transport would have "hidden side effects. Any time you're subsidizing something means you're creating an artificial circumstance, which is also good for more aggressive short-term hedging."

Any rise in prices would encourage companies to put more rigs to work. "A $1-$2 increase would be met with a wall of production," said James Cordier, president and head trader of Liberty Trading Group in Tampa, Fla. "Seven dollar natural gas would be short-lived and quite a sale."

A LONG WAY TO GO

Pickens has only advocated for trucks and municipal fleets to run on gas. The bill includes cars and trucks. But without Middle East imports of liquefied natural gas, the United States would probably lack enough gas to fuel all its vehicles.

The United States currently consumes around 63 billion cubic feet per day of natural gas, or 23 trillion cubic feet per year. Industrial demand accounts for 30 percent of that total. Only another 1.9 tcf is expected by 2035, according to U.S. Energy Information Administration projections.

Fueling the roughly 245 million cars on U.S. roads would require 44.5 bcfd, according to U.S. Federal Highway Administration data and estimates from analysts with Bentek Energy in Denver, Colo. Add another 8.9 bcfd for the 2.2 million long-haul trucks.

Opponents of the plan to build a fleet of vehicles that use natural gas as fuel include manufacturers who use gas as a raw material. They warn the extra demand for gas would make their products more costly for consumers.

"Plastics are made from fossil fuels like natural gas," said Paul Cicio, executive director of the Industrial Energy Consumers of America. "When the price of gas goes up, the price of plastic, glass, aluminum goes up. Natural gas is too valuable a fuel to be used in a car."

(Additional reporting by Barani Krishnan; Editing by David Gregorio)

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