BP – Fall 2003

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  • Natural gas is America’s natural wonder That’s why natural gas use has increased by 35% over the last decade, and is projected to grow by 45% by 2015. Natural gas costs less to use in your home than electricity, heating oil, propane or kerosene, On average electricity costs four times more than natural gas. Natural gas is the cleanest and most efficient fossil fuel 99% of the natural gas uw use in the US comes from North America and supplies are abundant. The 2 million-mile underground gas delivery system has an outstanding safety record Natural gas is safe, reliable and it’s made in America. Natural gas is today’s environmental energy choice Most electicity in the US comes from coal which produces far more emissions than natural gas.
  • Nonetheless, we believe that gas demand will grow faster than supply, and present the opportunity to bring new areas, outside the traditional North American supply areas, into play. Some of these new supply areas are likely to include LNG, Northern Frontier (North Slope and Mackenzie Delta) and eastern Canada. Natural gas demand is poised for strong growth, underpinned by growth in the electric generation sector – no surprise to anyone. Despite the recent slate of deferrals and cancellations, gas-fired power plants are still planned to be developed over the next few years, 128 GW is already under construction. If all these are built they could add over 46 BCF/D of demand during peak hours. But what of the short term outlook and activity, particularly in light of some of the recent price developments? This is a market where price works hard – and price movements and volatility are healthy characteristics. Weather, demand, sensitivity of demand to the overall state of the economy and the potential for mobilization in the supply all play into how the market reacts. A key indicator until now has been the drilling rig rate.
  • Bp is a leading part of the North American gas supply solution We are working on a 2-4 Bcf/d pipeline to bring gas from Alaska to the US We are spending nearly $9 B over the next 5 years on Deepwater projects We are expanding our Trinidad Liquifaction facility – currently serving Boston – to up to 7 times its current size, A lot of this gas is targeted at the US We are spending another $1.2 B/yr to maintain and grow our onshore North America supplies. Brand Reference Progressive – Alaska Pipeline Innovative – Deepwater development Green – Increasing gas usage Performance – Doing what we say - Reliability
  • Before 1978 the value chain was highly regulated. Pipelines purchase gas at wellhead and sell to distribution companies at the citygate Prices along the value chain are set by the government, contracts are long term take-or-pay. Price controls at low levels limited the development of supplies - causing shortages Price incentives for non-conventional gas development led to a gas bubble which caused prices to fall when price controls were relaxed. Through a series of policy acts beginning at the wellhead, the market has evolved so that now: Prices at the wellhead and along the value chain are set by market.forces - supply/demand. Pipelines act as carriers only of gas and hold no title to the gas. A wholesale market has developed with marketers buying and selling gas along the value chain. Space in the pipelines are contracted at regulated rates to producers, marketers, distributors and end customers. Local distribution companies still have some price regulation and obligation to serve, although in general they are able price changes to customers - This area is also being deregulated. Surveys of gas sales prices around the country are published daily and monthly. A financial market for gas has developed with an actively traded futures market and many non-physical only players. Gas prices have been volatile but within a range similar to other commodities The power market is in the process of being restructured.and will eventually be similar to gas.
  • Before 1978 the value chain was highly regulated. Pipelines purchase gas at wellhead and sell to distribution companies at the citygate Prices along the value chain are set by the government, contracts are long term take-or-pay. Price controls at low levels limited the development of supplies - causing shortages Price incentives for non-conventional gas development led to a gas bubble which caused prices to fall when price controls were relaxed. Through a series of policy acts beginning at the wellhead, the market has evolved so that now: Prices at the wellhead and along the value chain are set by market.forces - supply/demand. Pipelines act as carriers only of gas and hold no title to the gas. A wholesale market has developed with marketers buying and selling gas along the value chain. Space in the pipelines are contracted at regulated rates to producers, marketers, distributors and end customers. Local distribution companies still have some price regulation and obligation to serve, although in general they are able price changes to customers - This area is also being deregulated. Surveys of gas sales prices around the country are published daily and monthly. A financial market for gas has developed with an actively traded futures market and many non-physical only players. Gas prices have been volatile but within a range similar to other commodities The power market is in the process of being restructured.and will eventually be similar to gas. Shrinking going to stronger balance sheet player i.e. producer/marketer
  • This slide depicts the efficiency of the market. When gas prices increased in 2001, we in fact saw the expected increase in gas rigs, over 1000 at its peak (800 on a 12 month average). The market was also responsive, reducing demand through conservation and alternative fuels, especially in California, once implied regulatory price constraints were lifted from end use customers. Energy catching bad rap….For example: telecom fall out reduced market capitalization (ATT, Worldcom, Lucent, JDS Uniphase, Nortel, etc) by $2.5 trillion with 500,000 layoffs. The dot-com’s by contrast – vaporized $1 trillion . Enron - $63 billion.
  • This last winter season was a wild ride. The market was at an inflexion point – and we’ve heard some of the reasons and issues that led up to the market reacting the way it did But the fact that we are now through that time – and we will be in a different place later in the year as I shall show you – demonstrates the efficiency of the market and the response to the supply- demand imbalance.
  • BP – Fall 2003

    1. 1. Physical Gas Trading Kevin Bass Trading Manager BP Energy, NA Gas & Power
    2. 2. Agenda <ul><li>Natural Gas as Commodity </li></ul><ul><ul><li>Characteristics </li></ul></ul><ul><ul><li>Demand, Supply, and Transportation </li></ul></ul><ul><li>Natural Gas Market </li></ul><ul><ul><li>Market Players </li></ul></ul><ul><ul><li>Market Dynamics </li></ul></ul><ul><li>Natural Gas Pricing </li></ul><ul><ul><li>Pricing (Monthly Index, NYMEX, Daily) </li></ul></ul><ul><ul><li>Financial (support physical) </li></ul></ul><ul><ul><ul><li>Swaps </li></ul></ul></ul><ul><ul><ul><li>Spreads </li></ul></ul></ul>
    3. 3. Natural Gas Characteristics <ul><li>It reduces America’s dependence on oil. </li></ul><ul><li>Natural gas is the cleanest and most efficient fossil fuel. </li></ul><ul><li>Natural gas is safe and reliable. </li></ul>
    4. 4. Natural Gas Demand Profile <ul><li>Demand is expected to continue to grow in all sectors, led by power generation </li></ul>
    5. 5. U.S. Demand Outlook 64.6 Source: EIA, AEO 2003 67.6 74.3 81.1
    6. 6. Seasonality of Natural Gas Demand
    7. 7. Natural Gas Storage <ul><li>Injection – April thru October </li></ul><ul><li>Withdrawals – November thru March </li></ul><ul><li>Market area storage owned primarily by end use customers, and regulated by interstate pipeline tariffs. </li></ul><ul><li>Production area storage , usually salt dome caverns, used for trading / market arbitrage. </li></ul>
    8. 8. Storage Fields for Peak Demand
    9. 9. Current Storage Level (2,944 Bcf) 2001 2002 2000 2003
    10. 10. Producing Basins & Regional Gas Flow
    11. 11. N.A. Supply Demand Outlook Demand ~2% pa <ul><li>Growth </li></ul><ul><li>Existing basins, </li></ul><ul><li>i.e. Rockies </li></ul><ul><li>and San Juan </li></ul><ul><li>Deepwater </li></ul>Existing well supply <ul><li>Growth </li></ul><ul><li>Alaska/Frontier </li></ul><ul><li>LNG </li></ul><ul><li>Unconventional </li></ul>
    12. 12. North America Supply Profile Alaska/ MacKenzie Decline or Sustain Traditional Growth Non-Traditional Growth Western Canada Eastern Canada Rockies Heartland San Juan Atlantic LNG Western LNG Gulf Coast Deepwater Gulf
    13. 13. Hurricane Risk
    14. 14. BP North America Supply Position Trinidad Canada Wyoming San Juan Deep Water GOM Alaska Permian Gulf Coast Louisiana Mid-Continent Gulf Coast South Texas Mackenzie Delta BP is the largest gas producer and reserves holder in North America East Coast Current production Exploration interest
    15. 15. Supply Solutions LNG DW GOM Alaska/Beaufort bp – part of the solution Onshore E. Canada West LNG
    16. 16. U.S. LNG Re-Gasification Terminals * Re-activated August 2003 Source: EIA Current LNG deliveries estimated between 1.4 – 1.6 Bcfd 6.3 2005 1.20 0.63 Lake Charles, LA 18.8 4.0 2.4 Total 4.0 2005 0.86 0.45 Elba Island, GA 5.0 2005 1.00 0.75 Cove Point, MD* 3.5 2005 0.92 0.55 Everett, MA 2001 Storage (Bcf) Year After Expansion (Bcf/d) Sendout Capacity (Bcf/d) Location
    17. 17. Getting Gas Safely To You Producing Wells Compressor Station Processing Plant Compressor Stations Supplemental Fuels (LNG) Industrial Users & Power Plants Commercial Users Residential Users Underground Storage Interstate Transmission Lines Approximately 280,000 Miles in U.S. Distribution Mains (Lines) Approx. One Millions Miles in U.S.
    18. 18. N.G. Pipelines & Key Trading Points Source: EIA
    19. 19. <ul><li>Natural Gas Market </li></ul>
    20. 20. U.S. Natural Gas Markets Pre 1978 - Value Chain Regulation * * * * Regulated Pricing Producers Pipelines Local Distribution Companies End Users
    21. 21. U.S. Natural Gas Markets Pipelines Marketers Current - Transportation, distribution and storage services unbundled. Emergence of wholesale marketers * * * * Producers Industrials LDCs Electric Utilities Generators End Users * Regulated Pricing
    22. 22. Top North America Gas Producers 2002 Production, Source: Company Financial Reports MMcfd Note: Devon volumes do not include Ocean Energy Canada US
    23. 23. Top North America Gas Marketers Source: Gas Daily, S&P ratings as of June 18, 2003
    24. 24. Producers Phillips JV UPR PG&E Pan- Energy Mobil Utilities Trident Chevron Destec Illinova Power Developers Pipelines PacifiCorp Tenneco DeepTech Sonat Coastal PG&E Calpine SkyGen Panda CGCA Vintage Sheridan PGE New Energy Noram SCE Sithe Com Energy Integrated Energy Traders
    25. 25. Market Dynamics Higher Prices Supply Growth Increased Drilling Decreased Demand Lower Prices Decreased Drilling Increased Demand Supply Declines
    26. 26. The Energy Merchant Sector – Then <ul><li>The space vacated by the energy merchants will be filled </li></ul><ul><li>LDC’s have been there, done that </li></ul>AAA BBB Junk Producers IND’s You cannot play the game from this space Financial Strength Business Emphasis BP Physical Financial Banks LDC’S Energy Merchants
    27. 27. The Energy Merchant Sector – Now AAA BBB Junk BP You cannot play the game from this space Business Emphasis Financial Strength New Entrants? <ul><li>It will take time to fill energy merchant gap </li></ul><ul><li>Producers will start to fill, but have capability gap </li></ul><ul><li>Banks moving here, but have infrastructure gap </li></ul>IND’s Physical Financial Banks Producers LDC’S Producers Banks Duke Mirant Reliant Enron Dynegy Williams El Paso Reliant Dynegy Mirant Williams Enron El Paso Duke
    28. 28. Natural Gas Pricing
    29. 29. Regional Prices Alberta Rockies California Chicago Henry Hub * * * * * * New York
    30. 30. A Wild Ride Henry Hub Natural Gas Prices [$/MMBtu]
    31. 31. An Even Wilder Ride in the Northeast $/MMBtu Cold winter, declining storage levels, falling production, and high oil prices increasing both volatility and price.
    32. 32. Natural Gas Pricing <ul><li>Bidweek Cycle </li></ul><ul><li>Gas Commodity Pricing </li></ul><ul><ul><li>First-of-Month Index </li></ul></ul><ul><ul><li>NYMEX Final Settlement / Basis trades </li></ul></ul><ul><ul><li>Fixed Price Deals and Hedging </li></ul></ul><ul><ul><li>Gas Daily prices </li></ul></ul><ul><li>Financial Instruments Supporting Physical </li></ul><ul><ul><li>Index Swaps (premiums/discounts) </li></ul></ul><ul><ul><li>Fixed for Float Swaps </li></ul></ul><ul><ul><li>Basis Swaps </li></ul></ul><ul><ul><li>Swing Swaps </li></ul></ul>Options Settlement Futures Settlement FOM Nov Cash Trading S M T W Th F S Oct 27 28 29 30 31 Nov 1
    33. 33. First of the Month Index <ul><li>Most common pricing used by end user and producer </li></ul><ul><ul><li>used as benchmark by some customers </li></ul></ul><ul><li>Market price </li></ul><ul><li>Premium / Discount associated with Index </li></ul><ul><ul><li>dependent on monthly market conditions </li></ul></ul><ul><li>Average of physical deals transacted during last three business days prior to month of sale </li></ul><ul><li>Inside FERC most commonly used </li></ul><ul><ul><li>prices sent in by different market sectors for publishing </li></ul></ul>
    34. 34. <ul><li>NYMEX Final Settlement – 3 rd Business day prior to month end </li></ul><ul><li>Basis quotes from brokers, marketing companies, and electronic trading systems. Primarily at liquid points. </li></ul><ul><li>Increased volatility in market area basis vs. supply basins, primarily due to transportation economics and demand profile </li></ul><ul><li>Basis swaps used to convert to FOM Index </li></ul>Pricing Based on Final Settlement
    35. 35. Converting NYMEX Priced N.G. to Index Customer (physical gas) BP Bank/Broker (financial) NYMEX +90¢ NYMEX +85¢ INDEX Gas <ul><li>BP sold supply at NYMEX related pricing </li></ul><ul><li>BP buys basis swap to convert to synthetic index </li></ul>Basis Swap
    36. 36. Daily Pricing <ul><li>Daily volatility can be significant, especially in peak heating or cooling season (peaking power plants) </li></ul><ul><li>Pricing only at liquid points or hubs </li></ul><ul><li>Gas Daily publication most commonly used </li></ul><ul><li>Gas Daily or Swing Swaps used to manage risk </li></ul>
    37. 37. Gas Daily Swap Producer BP Counterparty FOM Index Daily Prices Gas FOM Index <ul><li>Producer wants Index for gas </li></ul><ul><li>BP wants to pay daily price </li></ul><ul><li>BP buys gas daily swap </li></ul> Gas Daily Swap <ul><li>Converting FOM Index to Daily </li></ul>
    38. 38. Swing Swap BP Counterparty Customer Daily Prices Gas Daily Prices $1.80 <ul><li>Customer wants daily price </li></ul><ul><li>BP wants fixed price </li></ul><ul><li>BP sells swing swap </li></ul>Swing Swap <ul><li>Converting Daily Price from Customer to Fixed Price </li></ul>
    39. 39. Calendar Spreads <ul><li>Buying and selling future calendar months </li></ul><ul><li>Requires market view </li></ul><ul><li>Historical analysis key indicator </li></ul><ul><li>Fundamental analysis, i.e. weather forecast, storage balance, nuclear plant maintenance schedules, etc. </li></ul>
    40. 40. <ul><li>Buy one locational basis, sell another </li></ul><ul><li>Historical analysis required </li></ul><ul><li>Fundamentals reviewed, I.e. supply / demand forecasts, pipeline constraints, storage balances, nuclear plant outages, capacity release in the market, etc. </li></ul>Basis Spreads
    41. 41. Basis Spread Example Supplier (physical gas) BP NYMEX NYMEX -16¢ NYMEX Gas Gas Daily Customers Daily Gas Price Gas Daily Suppliers Daily Gas Price Gas Henry Hub Tennessee <ul><li>BP buys NYMEX based gas at one location </li></ul><ul><li>BP sells NYMEX based gas at another location </li></ul><ul><li>BP takes long and short into daily market to capture spread </li></ul>BP makes money when daily spreads are below 16¢
    42. 42. Summary <ul><li>Market is responsive – understanding of fundamentals imperative for successful trading </li></ul><ul><li>Timely Information = $$$$ </li></ul><ul><li>Financial instruments offer flexibility and risk management. </li></ul><ul><li>Innovative product offerings for growing customer needs. Marketing companies must be engaged, open to new ideas, and have good credit. </li></ul>

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