Physical Gas Trading   Orlando   Alvarez Vice President, Eastern U.S. BP Energy, NA Gas & Power Kevin Bass Trading Manager...
A Wild Ride Henry Hub Natural Gas Prices  Source: Inside FERC $
An Even Wilder Ride Out West $/mmbtu Cold early winter weather coupled with power plant outages, low hydro generation, gas...
Agenda <ul><li>Natural Gas – “What, How, and Why” </li></ul><ul><ul><li>Characteristics </li></ul></ul><ul><ul><li>Supply ...
Natural Gas Characteristics <ul><li>Natural gas is America’s natural wonder. </li></ul><ul><li>Natural gas is the cleanest...
Getting Gas Safely To You
Uses of Natural Gas <ul><li>Natural Gas Usage </li></ul><ul><li>Core Heating (37.3%) </li></ul><ul><ul><li>Residential/Com...
Future Natural Gas Demand <ul><li>Demand for gas is expected to continue to grow led by power generation. </li></ul><ul><l...
US Natural Gas Markets Pre 1978  -  Value Chain Regulation * * * *  Regulated Pricing Producers Pipelines Local Distributi...
US Natural Gas Markets Pipelines Marketers Current  -  Transportation, distribution and storage services unbundled.    Eme...
Supply Solutions LNG DW GOM Alaska/Beaufort bp  – part of the solution Onshore E. Canada West LNG
Gulf of Mexico Projects Producing Near Term Projects Major Projects
OKEANOS Gas Pipeline Texas Louisiana Mississippi Alabama 6000’ 1500’ Na Kika -  6350’ Crazy Horse – 6044’  Main Pass 260  ...
Fuel from Feed FEED PRETREATMENT Regeneration Gas Typical LNG Liquefaction Flow Diagram Liquefaction  and  Refrigeration L...
E&P Gas Transport Export End Users • Power Gen. • City Gas • Large Ind. LNG Chain LNG Import Regas Gas Transport LNG Lique...
Natural Gas Pipelines  and Major Trading Points Source: EIA
Transportation Market Cycles High Differentials Low  Differentials Build Pipelines Increasing Supply and Demand
Regional Prices Alberta Rockies California Chicago Henry Hub * * * * * * New York
BP Eastern North American Gas Assets Gulf Coast Offshore CNG (Leidy) 28,420/D Iroquois (Z2) 29,275/D TCPL (Waddington) 69,...
Natural Gas Storage  <ul><li>Injection  – April thru October </li></ul><ul><li>Market area storage  owned primarily by end...
Natural Gas Pricing <ul><li>Bidweek Cycle </li></ul><ul><li>Gas Commodity Pricing </li></ul><ul><ul><li>First-of-Month Ind...
First of the Month Index <ul><li>Most common pricing used by end user – used as benchmark by some customers </li></ul><ul>...
Determining Index Premiums/Discounts <ul><li>Physical </li></ul><ul><li>Transco Z3 </li></ul><ul><li>Bid   Ask </li></ul><...
  Pricing based on Final Settlement – “Basis Trades” <ul><li>NYMEX Final Settlement – 3 rd  Business day prior </li></ul><...
Converting NYMEX Priced Natural Gas to Index Supplier  (physical gas) BP Bank/Broker  (financial) NYMEX +90¢ NYMEX +85¢ IN...
Daily Pricing <ul><li>Daily volatility can be significant, especially in peak heating or cooling season </li></ul><ul><li>...
Converting FOM Index to Daily (Gas Daily Swap) Producer BP Paper  Counterparty FOM Index Daily Prices Gas FOM Index <ul><l...
Converting Daily Priced Supply to Fixed Price (Swing Swap) BP Bank Customer Daily Prices Gas Daily Prices $1.80 <ul><li>Cu...
Calendar Spreads <ul><li>Buying and selling future calendar months  </li></ul><ul><li>Requires market view </li></ul><ul><...
  Basis  Spreads  – Physical or Financial <ul><li>Buy one locational basis, sell another (Ex. 5) </li></ul><ul><li>Histori...
Physical Spread Supplier  (physical gas) BP NYMEX NYMEX -16¢ NYMEX Gas Gas Daily Customers Daily Gas Price Gas Example 5 D...
Summary <ul><li>Market is responsive – understanding of fundamentals imperative for successful trading </li></ul><ul><li>T...
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Physical Gas Trading Orlando Alvarez

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  • 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.
  • 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.
  • 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.
  • 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
  • As a new pipeline is built it: Increases demand in the basin for supplies - increasing basin prices Increases supplies in the market for demand - decreasing market prices This lowers price differentials to well below the cost of transportation. Higher basin prices encourages supply development Lower market prices encourages demand growth. As supply and demand outstrip pipeline capacity, price differentials rise to above the cost of the pipeline encouraging new pipeline development
  • Physical Gas Trading Orlando Alvarez

    1. 1. Physical Gas Trading Orlando Alvarez Vice President, Eastern U.S. BP Energy, NA Gas & Power Kevin Bass Trading Manager BP Energy, NA Gas & Power
    2. 2. A Wild Ride Henry Hub Natural Gas Prices Source: Inside FERC $
    3. 3. An Even Wilder Ride Out West $/mmbtu Cold 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
    4. 4. Agenda <ul><li>Natural Gas – “What, How, and Why” </li></ul><ul><ul><li>Characteristics </li></ul></ul><ul><ul><li>Supply and Transportation </li></ul></ul><ul><ul><li>Fundamental Analysis </li></ul></ul><ul><li>Physical Trading Characteristics </li></ul><ul><ul><li>Pricing (Monthly Index, Final Settle / Basis, Daily) </li></ul></ul><ul><ul><li>Capacity Release </li></ul></ul><ul><ul><li>Credit Risk </li></ul></ul><ul><li>Financial Trading </li></ul><ul><ul><li>Nymex </li></ul></ul><ul><ul><li>Paper Basis </li></ul></ul><ul><ul><li>Swaps </li></ul></ul><ul><ul><li>Spreads </li></ul></ul>
    5. 5. Natural Gas Characteristics <ul><li>Natural gas is America’s natural wonder. </li></ul><ul><li>Natural gas is the cleanest and most efficient fossil fuel. </li></ul><ul><li>Natural gas is safe, reliable and it’s made in America. </li></ul>
    6. 6. Getting Gas Safely To You
    7. 7. Uses of Natural Gas <ul><li>Natural Gas Usage </li></ul><ul><li>Core Heating (37.3%) </li></ul><ul><ul><li>Residential/Commercial </li></ul></ul><ul><li>Industrial Processes (33.1%) </li></ul><ul><ul><li>Fertilizer Manufacturing </li></ul></ul><ul><ul><li>Food Processing </li></ul></ul><ul><ul><li>Steel Making </li></ul></ul><ul><li>Electric Generation (21.2%) </li></ul><ul><li>Lease, Plant and Pipeline Fuel (8.4%) </li></ul>US Energy Sources
    8. 8. Future Natural Gas Demand <ul><li>Demand for gas is expected to continue to grow led by power generation. </li></ul><ul><li>Over 90% of new generation projects are gas-fired. </li></ul>
    9. 9. US Natural Gas Markets Pre 1978 - Value Chain Regulation * * * * Regulated Pricing Producers Pipelines Local Distribution Companies End Users
    10. 10. US 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
    11. 11. Supply Solutions LNG DW GOM Alaska/Beaufort bp – part of the solution Onshore E. Canada West LNG
    12. 12. Gulf of Mexico Projects Producing Near Term Projects Major Projects
    13. 13. OKEANOS Gas Pipeline 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
    14. 14. Fuel from Feed FEED PRETREATMENT Regeneration Gas Typical LNG Liquefaction Flow Diagram Liquefaction and Refrigeration Liquefaction and Refrigeration Feed Gas Compression Acid Gas Removal Dehydration Mercury Removal LNG Storage and Loading Fuel System Boil-Off Gas Scrub Column Bottoms NGL Recovery (Optional) Feed Gas from Pipeline CO 2
    15. 15. E&P Gas Transport Export End Users • Power Gen. • City Gas • Large Ind. LNG Chain LNG Import Regas Gas Transport LNG Liquefaction Facility L N G
    16. 16. Natural Gas Pipelines and Major Trading Points Source: EIA
    17. 17. Transportation Market Cycles High Differentials Low Differentials Build Pipelines Increasing Supply and Demand
    18. 18. Regional Prices Alberta Rockies California Chicago Henry Hub * * * * * * New York
    19. 19. 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&E 45,000/D Gulf Offshore 1,400 MMCF/D Cove Pt. 330 MMCF/D Sable Island 45 MMCF/D Destin 230,000/D 1.2 BCF TGP, TET, CGT,TGT 120,000/D AGT, Irq TCO, Empire, DTI, NFGS, Transco, TET, TGP 723,538/D Tennessee 10,000/D 24 BCF Gulf Onshore 300 MMCF/D
    20. 20. Natural Gas Storage <ul><li>Injection – April thru October </li></ul><ul><li>Market area storage owned primarily by end use customers, and regulated by interstate pipeline tariffs. Old reservoirs with limited flexibility </li></ul><ul><li>Production area storage , usually salt dome caverns, used for trading / market arbitrage. </li></ul><ul><li>Withdrawals – November thru March </li></ul>
    21. 21. 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 </li></ul></ul><ul><ul><li>Fixed for Float Swaps </li></ul></ul><ul><ul><li>Physical and Paper Basis </li></ul></ul><ul><ul><li>Swing Swaps </li></ul></ul>Options Settlement Futures Settlement FOM March Cash Trading S M T W Th F S Feb 24 25 26 27 28 March 1
    22. 22. First of the Month Index <ul><li>Most common pricing used by end user – used as benchmark by some customers </li></ul><ul><li>Market price </li></ul><ul><li>Premium / Discount associated with Index – dependent on monthly market conditions (Ex. 1) </li></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 – prices sent in by different market sectors for publishing </li></ul>
    23. 23. Determining Index Premiums/Discounts <ul><li>Physical </li></ul><ul><li>Transco Z3 </li></ul><ul><li>Bid Ask </li></ul><ul><li>+ 0.02 +0.03 </li></ul><ul><li>Paper </li></ul><ul><li>Transco Z3 </li></ul><ul><li>Bid Ask </li></ul><ul><li>+0.01 +0.02 </li></ul>Market is: Index flat Bid - Index + 2¢ Offered Example 1
    24. 24. Pricing based on Final Settlement – “Basis Trades” <ul><li>NYMEX Final Settlement – 3 rd Business day prior </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 (Ex. 2) </li></ul>
    25. 25. Converting NYMEX Priced Natural Gas to Index Supplier (physical gas) BP Bank/Broker (financial) NYMEX +90¢ NYMEX +85¢ INDEX Gas Example 2 <ul><li>BP buys supply at NYMEX related pricing </li></ul><ul><li>BP sells basis swap to convert to synthetic index </li></ul>Basis Swap
    26. 26. Daily Pricing <ul><li>Daily volatility can be significant, especially in peak heating or cooling season </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 (Ex. 3 and 4) </li></ul>
    27. 27. Converting FOM Index to Daily (Gas Daily Swap) Producer BP Paper 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 sells gas daily swap </li></ul>Example 3 Gas Daily Swap
    28. 28. Converting Daily Priced Supply to Fixed Price (Swing Swap) BP Bank 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>Example 4 Swing Swap
    29. 29. 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>
    30. 30. Basis Spreads – Physical or Financial <ul><li>Buy one locational basis, sell another (Ex. 5) </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>
    31. 31. Physical Spread Supplier (physical gas) BP NYMEX NYMEX -16¢ NYMEX Gas Gas Daily Customers Daily Gas Price Gas Example 5 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¢
    32. 32. 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>Volatile and liquid market </li></ul><ul><li>Innovative product offerings for growing customer needs. Marketing companies must be engaged and open to new ideas. </li></ul>

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