physical gas trading orlando alvarez
TRANSCRIPT
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Physical Gas Trading
Orlando AlvarezVice President, Eastern U.S.BP Energy, NA Gas & Power
Kevin BassTrading ManagerBP Energy, NA Gas & Power
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A Wild Ride
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Henry Hub Natural Gas Prices
Source: Inside FERC
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An Even Wilder Ride Out West
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Henry Hub
California Border
$/mmbtuCold early winter weather coupled with power plant outages, low hydro generation, gas pipeline maintenance and low gas storage led to record spot prices in the Western region
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Agenda
•Natural Gas – “What, How, and Why”– Characteristics
– Supply and Transportation
– Fundamental Analysis
•Physical Trading Characteristics– Pricing (Monthly Index, Final Settle / Basis, Daily)
– Capacity Release
– Credit Risk
•Financial Trading– Nymex
– Paper Basis
– Swaps
– Spreads
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Natural Gas Characteristics
• Natural gas is America’s natural wonder.
• Natural gas is the cleanest and most efficient fossil fuel.
• Natural gas is safe, reliable and it’s made in America.
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Getting Gas Safely To You
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Uses of Natural Gas
Coal23%
Nuclear8%
Nat Gas23%
Renewable4%
Hydro3%
Oil39%
Natural Gas Usage
• Core Heating (37.3%)
Residential/Commercial
• Industrial Processes (33.1%)
– Fertilizer Manufacturing
– Food Processing
– Steel Making
• Electric Generation (21.2%)
• Lease, Plant and Pipeline Fuel (8.4%)
US Energy Sources
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Future Natural Gas Demand
• Demand for gas is expected to continue to grow led by power generation.
• Over 90% of new generation projects are gas-fired.
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Bcf/
d
EIA Demand Forecast
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US Natural Gas Markets
Pre 1978 - Value Chain Regulation
* * *
* Regulated Pricing
Producers Pipelines Local Distribution Companies
End Users
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US Natural Gas Markets
Pipelines
Marketers
Current - Transportation, distribution and storage services unbundled. Emergence of wholesale marketers
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*Producers Industrials
LDCs
ElectricUtilities
Generators
End Users
* Regulated Pricing
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04/13/23 11
LNG
DW GOM
Alaska/Beaufort
bp – part of the solution
Onshore
Supply Solutions
E. Canada
West LNG
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EuropaEuropa
UrsaUrsa
TroikaTroika
MarsMars
DianaDiana
HooverHoover
PompanoPompano MarlinMarlin
CrosbyCrosby
NakikaNakika
KingKingKingKing’’ss
NeptuneNeptune
MicaMica
Crazy HorseCrazy Horse
AtlantisAtlantisHolsteinHolstein
Mad DogMad Dog
Ram PowellRam Powell NileNile
Deepwater Gulf of MexicoDeepwater Gulf of Mexico
AmberjackAmberjack
AspenAspen
MC 764MC 764 PrincessPrincessPeakPeakHorn Horn MtnMtn
EuropaEuropa
UrsaUrsa
TroikaTroika
MarsMars
DianaDiana
HooverHoover
PompanoPompano MarlinMarlin
CrosbyCrosby
NakikaNakika
KingKingKingKing’’ss
NeptuneNeptune
MicaMica
Crazy HorseCrazy Horse
AtlantisAtlantisHolsteinHolstein
Mad DogMad Dog
Ram PowellRam Powell NileNile
Deepwater Gulf of MexicoDeepwater Gulf of Mexico
AmberjackAmberjack
AspenAspen
MC 764MC 764 PrincessPrincessPeakPeakHorn Horn MtnMtn
ProducingNear Term ProjectsMajor Projects
Gulf of Mexico Projects
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Texas Louisiana
Mississippi
Alabama
6000’
1500’
Na Kika - 6350’
Crazy Horse – 6044’
Main Pass 260
Pascagoula
Existing 36” Destin Pipeline
Planned 24” Okeanos Gas Pipeline
New Orleans
OKEANOS Gas Pipeline
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Liquefaction and
Refrigeration
Liquefactionand
Refrigeration
Feed GasCompression
Acid GasRemoval
Dehydration MercuryRemoval
LNG Storageand
Loading
Fuel System
Boil-OffGas
Scrub ColumnBottoms
Fuel from Feed
FEED PRETREATMENT
NGLRecovery(Optional)
Regeneration Gas
FeedGasfrom
Pipeline
CO2
Typical LNG Liquefaction Flow Diagram
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E&P
Gas Transport
Export
L N G
End Users• Power Gen.• City Gas• Large Ind.
LNG Chain
LNG ImportRegas
Gas Transport
LNG LiquefactionFacility
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Natural Gas Pipelines and Major Trading Points
Source: EIA
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Transportation Market Cycles
High Differentials
Low Differentials
Build PipelinesIncreasing Supply
and Demand
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Regional Prices
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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Alberta Rockies Henry HubCalifornia Chicago New York
Alberta
Rockies
California
Chicago
Henry Hub
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New York
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BP Eastern North American Gas Assets
Gulf Coast Offshore
CNG (Leidy)28,420/D
Iroquois (Z2)29,275/D
TCPL(Waddington)
69,000/D
MN&E45,000/D
Gulf Offshore1,400 MMCF/D
Cove Pt.330 MMCF/D
Sable Island45 MMCF/D
Destin230,000/D
1.2 BCF
TGP, TET,CGT,TGT120,000/D
AGT, Irq TCO,Empire, DTI, NFGS,Transco, TET, TGP
723,538/D
Tennessee 10,000/D
24 BCF
Gulf Onshore300 MMCF/D
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Natural Gas Storage
• Injection – April thru October
• Market area storage owned primarily by end use customers, and regulated by interstate pipeline tariffs. Old reservoirs with limited flexibility
• Production area storage, usually salt dome caverns, used for trading / market arbitrage.
• Withdrawals – November thru March
US Natural gas Supply and Demand
4045505560657075808590
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BC
F/D
ConsumptionProduction + ImportsStorage
Withdrawals
Storage Injections
Storage Injections
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Natural Gas Pricing
• Bidweek Cycle
• Gas Commodity Pricing– First-of-Month Index
– Nymex Final Settlement / Basis trades
– Fixed Price Deals and Hedging
– Gas Daily prices
• Financial Instruments Supporting Physical– Index Swaps
– Fixed for Float Swaps
– Physical and Paper Basis
– Swing Swaps
Options
Settlement
Futures
SettlementFOM March Cash Trading
S M T W Th F S
Feb 24 25 26 27 28 March 1
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First of the Month Index
• Most common pricing used by end user – used as benchmark by some customers
• Market price
• Premium / Discount associated with Index – dependent on monthly market conditions (Ex. 1)
• Average of physical deals transacted during last three business days prior to month of sale
• Inside Ferc most commonly used – prices sent in by different market sectors for publishing
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Determining Index Premiums/Discounts
Physical
Transco Z3
Bid Ask
+ 0.02 +0.03
Paper
Transco Z3
Bid Ask
+0.01 +0.02
Market is: Index flat Bid - Index + 2¢ Offered
Example 1
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Pricing based on Final Settlement – “Basis Trades”
• NYMEX Final Settlement – 3rd Business day prior
• Basis quotes from brokers, marketing companies, and electronic trading systems. Primarily at liquid points.
• Increased volatility in market area basis vs. supply basins, primarily due to transportation economics and demand profile
• Basis swaps used to convert to FOM Index (Ex. 2)
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Converting NYMEX Priced Natural Gas to Index
Supplier
(physical gas)BP
Bank/Broker (financial)
NYMEX +90¢
NYMEX +85¢
INDEX
Gas
Example 2
• BP buys supply at NYMEX related pricing
• BP sells basis swap to convert to synthetic index
Basis
Swap
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Daily Pricing
• Daily volatility can be significant, especially in peak heating or cooling season
• Pricing only at liquid points or hubs
• Gas Daily publication most commonly used
• Gas Daily or Swing Swaps used to manage risk (Ex. 3 and 4)
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Converting FOM Index to Daily (Gas Daily Swap)
Producer BP
Paper Counterparty
FOM Index
DailyPrices
Gas
FOMIndex
• Producer wants Index for gas
• BP wants to pay daily price
• BP sells gas daily swap
Example 3
Gas Daily
Swap
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Converting Daily Priced Supply to Fixed Price (Swing Swap)
BP
Bank
Customer
Daily Prices
Gas
DailyPrices $1.80
• Customer wants daily price
• BP wants fixed price
• BP sells swing swap
Example 4
Swing
Swap
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Calendar Spreads
• Buying and selling future calendar months
• Requires market view
• Historical analysis key indicator
• Fundamental analysis, i.e. weather forecast, storage balance, nuclear plant maintenance schedules, etc.
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2.50
2.60
2.70
2.80
2.90
Mar Apr May Jun Jul Aug Sept Oct Nov
5.305.405.505.605.705.805.906.006.106.206.30
ContangoBackwardation
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Basis Spreads – Physical or Financial
• Buy one locational basis, sell another (Ex. 5)
• Historical analysis required
• Fundamentals reviewed, I.e. supply / demand forecasts, pipeline constraints, storage balances, nuclear plant outages, capacity release in the market, etc.
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Physical Spread
Supplier
(physical gas)BP NYMEX
NYMEX -16¢
NYMEX
Gas
Gas
Daily
Customers
DailyGasPrice
Gas
Example 5
Daily
Suppliers
DailyGasPrice
Gas
Henry HubTennessee
•BP buys NYMEX based gas at one location
•BP sells NYMEX based gas at another location
•BP takes long and short into daily market to capture spread
BP makes money when daily spreads are below 16¢
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Summary
• Market is responsive – understanding of fundamentals imperative for successful trading
• Timely Information = $$$$
• Financial instruments offer flexibility and risk management
• Volatile and liquid market
• Innovative product offerings for growing customer needs. Marketing companies must be engaged and open to new ideas.