energy information administration markets, hubs, trading places, and capacity release markets by...
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Energy Information Administration
Markets, Hubs, Trading Places,and Capacity Release Markets
by
John H. Herbert
Energy Information Administration
SummarySummary
This presentation describes new trading environments for natural gas commodity and transportation services. It also identifies the factors that influenced the development of these environments. Actual examples are provided that show how these and other developments can be used to fix the price of gas and to provide other commercial benefits.
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A Lot of Interesting Market Developments
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West Texas Market Centers Interplay West Texas Market Centers Interplay With North and East Texas and With North and East Texas and Loiusiana Market CentersLoiusiana Market Centers
From San Juan Basin
Waha Area Hubs
TECO Hub
Lone Star HubPermian HubDelhi Hub
= Market Center Hub
TX
Buffalo Wallow Hub
OK
To Midwest Markets
Anadarko & AcomaBasins
Katy Area HubsWestern HubTECO HubHouston HubMoss Bluff
Carthage Hub
Gulf Coast Hubs
Henry Hub Louisiana Center Egan Center Texaco Gulf Star Center
LA
AR
To Midwest and Northeast Markets
Perryville Area Hubs
Noram HubOuachita Hub (planned)
To Northeast andSoutheast Markets
Equitable Resorces Hub
= Expansion Direction
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Streamline Auction Market Streamline Auction Market Volume TradedVolume Traded
Jun Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr
0
10
20
30
40
50
1995
Bill
ion
Cub
ic F
eet
1996 19971994
Jul
Energy Information Administration
Energy Exchange Auction Energy Exchange Auction Market -Market -Intra-Alberta (Number of Intra-Alberta (Number of Trades)Trades)
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr
0
100
200
300
400
500
600
700
1995
Tot
al N
umbe
r of
Tra
des
1996 19971994
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Price Risk and Market Centers Price Risk and Market Centers and Hubsand Hubs
How Much Price Risk or Volatility is There?
A Lot!
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Volatilities - NYMEX Natural Gas Volatilities - NYMEX Natural Gas Futures Market, November 1996 To Futures Market, November 1996 To
May 1997May 1997
Nov 1 Nov 18 Dec 5 Dec 20 Jan 8 Jan 23 Feb 7 Feb 25 Mar 12 Mar 27 Apr 14 Apr 29
0
50
100
150
200
1997
Vo
latil
ity
1996
Most commodities average volatilities below 20
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Why Is There So Much Short Why Is There So Much Short Term Price Risk?Term Price Risk?
New Inventory Management Strategies
Fuller Use of Existing Pipeline Capacity
Weather events - there is no commodity in which the demand varies more in the short term
Other Reasons:
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Responses To Short Term Price Responses To Short Term Price VolatilityVolatility
Flexibility in Contracting and in Services - Market Hubs and Centers
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Encouraging Encouraging TradeTrade
Market Hub, Market Centers, and Auction Markets Should Encourage Trade Between Gas Sellers and Buyers Where a Buyer can be a Seller and a Seller can be a Buyer
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Encouraging Encouraging ExchangesExchanges
Capacity Release Markets Should Also Encourage Exchanges. An Increase in the Volume of Capacity Releases Could Indicate an Increase in the Number of Exchanges of the Commodity.
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Encouraging Encouraging ExchangesExchanges
An Increase in the Number of Capacity Exchanges Could Indicate a Decline in the Subscription for Firm Capacity. This Would Exacerbate the Capacity Turnback Problem.
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Constant Trading - Firm Constant Trading - Firm CapacityCapacity
Constant Trading Works Well as Long as a Company Has Firm Capacity
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Constant Trading can Work even Better if Company Trades Pipe Capacity the Same Way it Trades the Commodity
Constant Trading - Pipe Constant Trading - Pipe CapacityCapacity
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Constant Trading - Release Constant Trading - Release CapacityCapacity
Constant Trading Works Best for a Company When the Price of Release Capacity is Independent of the Price of Commodity
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Constant Trading Can Fix or Constant Trading Can Fix or Hedge PriceHedge Price
1. Determine average requirements during some period.
2. Determine whether incremental demands are independent of price.
3. If 2 is satisfied, enter a contract for average requirement during some period at a particular price, say $2.00 MMBtu.
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Constant Trading Can Fix or Constant Trading Can Fix or Hedge PriceHedge Price
4. Then purchase gas when daily requirements are above average requirements.
5. And sell gas when daily requirements are below average requirements.
6. This simple strategy essentially fixes the cost of gas at $2.00 MMBtu.
7. It depends on whether a company has access to a market such as an electronic daily auction market.
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A Numerical Example of A Numerical Example of Constant Trading StrategyConstant Trading Strategy
Day 1 600 Buys 100 Mcf at $2.20 = -$200.00
Day 2 550 Buys 50 Mcf at $2.30 = -$150.00
Day 3 300 Sells 200 Mcf at $2.20 = +$400.00
etc., if the customer has done the work right the +s and -s cancel out and the customer effectively fixes the cost
ActionNeeds
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An Example for Figuring Out the Effective Cost of
Firm Capacity
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To obtain the cost of unused capacity:
Total Cost of Firm Transportation
- Revenues from Capacity Release
Net Cost of Transportation
Transportation Transportation Costs and Cost of Costs and Cost of Unused CapacityUnused Capacity
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-
Total Cost of Firm Transportation
Amount Contracted
Net Transportation Cost
Amount Used
CU = Cost of Unused Capacity per Unit Used
CU =
Transportation Transportation Costs and Cost of Costs and Cost of Unused CapacityUnused Capacity
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Transportation Transportation Costs and Cost of Costs and Cost of Unused CapacityUnused Capacity
An Example,
$100,000
200,000 Mcf-
$0.90 Mcf - $0.50 Mcf = $0.40 Mcf
$90,000
100,000 Mcf
Thus the cost of unused capacity per unit is $0.40 Mcf
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The Volatility The Volatility BargainBargain
Short term volatility is likely to be sustained as long as the bargain that short-term volatility implies a better allocation of the commodity in the short-term, and a better allocation of capital in the mid-term.
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The Volatility The Volatility BargainBargain
Volatility bargain suggests a drop in capital cost per dollar of deliverability when moving from a highly regulated industry to a less regulated industry. This means continued increases in capacity turnbacks unless aggregate demand increases significantly.