CEE Interstate Natural Gas Quality Specifications and Interchangeability
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Transcript of 1 BP & Interstate Municipal Gas Agency Natural Gas Market Overview and Risk Management Discussion...
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BP & Interstate Municipal Gas AgencyNatural Gas Market Overview and Risk Management DiscussionApril 30th, 2008
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Market
Overview
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Market Overview• Near term supply outlook from traditional Canadian sources
– Higher valued crude oil- NG staying home for syn-crude production
• US Rockies and non-conventional supply availability set to grow – Significant supply growth in near term possible if pipeline capacity in place 1bcf/day
to Mid-Continent 1.8/day to East Ohio in early 2009– Tight sands/coal bed methane
• LNG import capabilities growing, but must compete in global market– US market currently trading at a significant discount to Europe– Asian demand competing with Europe
• Independence Hub shut-in currently 28bcf, expected to reach 40bcf
• Economic conditions, both in the U.S. and Global demand, has driven money into commodities across the board
– Demand destruction will be sector specific
• Storage level slightly below 5 yr avg 1.25 tcf, total storage capacity closer to 4 tcf now versus traditional 5 yr ago 3.5 tcf
• Drilling can shift more to oil vs. gas if oil price remains at a premium to nat gas
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Market Overview Continued
• Longer term supply outlook from traditional Canadian sources– McKenzie Delta Gas– Alaska delayed again (BP/ConocoPhillips forge ahead with Denali)
• Carbon Tax- Uncertainty around the use of coal in power generation – Longer term projects are turning to coal, due to uncertainty around
tax and emission requirements associated with coal
• LNG liquefaction capabilities growing, projects continue to be announced but delays– Questions around longer term geo-political stability surrounding
LNG as a supply source
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The Weak US$ Effect on Commodity Prices
• The US$ is trading at a greater and greater discount to other world currencies, (vs.Euro shown)
• As US currency weakens, commodities offer a hedge opportunity
• RH graph shows Euro/US$ exchange rate vs. CRB commodities index in gold
• Some effects of the weak US$
– Investment $$ move to commodities as hedge to currency risk
– OPEC’s income is reduced, compelling to keep production low and increase price
– Higher oil prices worsen US current account deficit, putting more downward pressure on dollar
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Marketable Gas Production
Gas Rig Activity
HH
Rigs vs. Henry Hub vs. Production
RigsBcfd &
$US/MMbtu
August and September 2007 Forecasts from EIA STEO Sources: Baker Hughes, EIA
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Canadian Supply: Rigs
In Canada:
• Service costs out of line with commodity price
• Costs up 50% - 200%
• E & P companies scale back 2007 gas drilling plans
• Budgets diverted to higher return crude projects
• Slowdown for service companies
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200
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9/29/06 12/29/06 3/30/07 6/29/07 9/28/07
Active R
igs
Gas Rig Count
Previous Year
Source: Baker Hughes
Canadian Gas Rig Count as of 10/05/07: 198
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Competing Fuel Prices
Competing Fuels Prices
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J an-04 J ul-04 J an-05 J ul-05 J an-06 J ul-06 J an-07 J ul-07 J an-08 J ul-08 J an-09 J ul-09
US
$/M
MB
tu
HHHO No.2 FO #6 LS: NY FO #6 HS: Gulf Cushing WTI
Forward Historical
Source: NYMEX/BP EVO MAR 6, 2008 Note: Historicals are monthly settle prices
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U.S. LNG Imports by Terminal
Source: DOE, Office of Fossil Energy
Everett
Cove Point
Elba Island
Lake Charles
Energy BridgeNymex currently trading at a significant discount to European gas
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Risk Management
Discussion
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What is Risk Management
Risk Management is Trading Uncertainty for Certainty
Risk Management
Prices in a Defined Range
Unknown Known
Strictly Confidential – for BP client use only
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Risk Management with a Strategic Vision
- Price risk management is best applied:- Consistently- Under guidelines of a corporate mandate- With knowledge of the underlying market
BP has the ability to equip you with the knowledge and
information you need to formulate a long-term strategic
risk management program, and the customized financial
products you need to execute such a program.
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A Framework for Energy Risk Mgt.
CompanyObjectives:• Budgets• Cash Flow• Returns• Prudence• Volatility• Competitive
Advantage
Assess CorporateRisk Profile, Develop Policy
Develop Strategy
Create Benchmarks
AndReview
QuantifyRisk
DevelopMarketOutlook
• Risks include
• Price
• Credit
• Operational
• Interest Rate
• FX
• Regulatory
• Assess market factors
• Supply
• Demand
• Liquidity
• Other Market Factors
Things to
Consider
• Product Types
• Volume
• Term
• Liquidity
• Flexibility
• Internal Control
• Contracts
• Define:
• Acceptable Benchmarks
• Assessment
• Criteria
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Hedging Example- 3 Year Rolling Purchase Plan
%of Hedge Volumes Hedged
Cal 2009
Cal 2010
Cal 2011
Cal 2012
Cal 2013
By End of Month:
Dec-2008 100% 50% 25% 0%
Dec-2009 100% 50% 25% 0%
Dec-2010 100% 50% 25%
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1/3/1/3 – 2/3 Portfolio Approach to Hedging
Gas Requirements
1/3Fixed Price
1/3 Options
1/3 Index
In a Falling MarketFixed Price = loserOptions = winnerIndex = winner
In a Rising MarketFixed Price = winnerOptions = winnerIndex = loser
*At all times you have 67% of the expected hedge volumes mitigated to the market, while 67% is participating in a falling market.
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Financial Risk
Management Discussion
Confidential Information 17
Strictly Confidential – for BP client use only
energy risk energy risk
2008 2007#1 Natural Gas Dealer #2 Natural Gas Dealer
Top 3 Rankings in 9 of 10 North America categories
Top 3 Rankings in 6 of 10 North America categories
energy risk energy risk
2006 2005#1 Natural Gas Dealer #2 Natural Gas Dealer
Top 3 Rankings in 6 of 10North America categories
Top 3 Rankings in 11 of 18 North America categories
Leading Energy Risk Management Provider
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Price and Volatility can guide decisions as to which hedge product to apply.
Strategy assumes an ongoing price risk management program and a market that has a mean-reverting nature:
Hedge Product Decision MatrixIn
crea
sing
Pri
ce
Increasing Volatility
BUY SWAPS BUY COLLARS
BUY BASIS
BUY SWAPS or ENHANCED COLLARSBUY CAPS
BALANCE PORTFOLIO: Execute underweighted Floor, Swap or Collar
Confidential Information 19
Strictly Confidential – for BP client use only
Winter (Nov8-Mar9) Structure Examples- Nymex*
NYMEX Swap Price Strike Price/Premium
Costless Collar $11.85 $10.85Put /$14.00Call $0.00
Participating Swap 50% $11.85 $13.30 $0.00
3-Way Collar $11.85$9.50Put/
$11.85Call/$14.25Call $0.00
3-Way Collar-Leveraged $11.85Sell 2x$8.75 Put/ Buy 1x
$11.40Call/Sell 1x $14.00Call $0.00
ATM Call Spread $11.85 $11.85Call /$13.40Call $0.50
Call Spread-$.50 of retention $11.85 $12.35Call /$14.25 Call $0.50
NYMEX Minus w/$8.50 floor $11.85$8.50 Floor no upside
protection NYMEX-$.35
Natural Gas Structured Products
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Consumer Costless Collar- Nymex Nov08-Mar09
Strictly Confidential – for BP client use only
Description
End user limits their upside price exposure
Commonly structured as value neutral
DetailsBuy Cap / Sell FloorCurrent Market 11.85
End user chooses a range: opportunity given on the downside is used to fund the cost of the upside price protection
Scenarios
If market price is above $14.00, end user pays $14.00 If market price is between $10.85 and $14.00, end user pays marketIf market price is below $10.85, end user pays $10.85
Price
Market Price Your Price Cap Floor
$10.85 Floor
$14.00 Cap
Current Swap 11.85/MMBtu
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50% Participating Swap- Nov08-Mar09
Trade Ideas Strictly Confidential – for BP client use only
DescriptionProvides price protection from rising prices while offering flexibility to participate in downside movements
DetailsMaximum cost of gas known todayCostless structure Ability to participate if market fundamentals changeOnly receive 50% of downward market moveCan set % of participation
ScenariosIf market price is above $13.30, end user price is $13.30If market price falls or stays below $13.85, 50% of volume is priced at $13.30 and remaining 50% priced at market
Market Price
Your Price
$13.30/MMBtu
Time
50% volume
50% volumeP
rice
Current Swap $11.85/MMBtu
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Consumer Three-Way Collar- Nov08-
Mar09
Trade Ideas Strictly Confidential – for BP client use only
Description
End user limits their upside price exposure below a Costless Collar
End user participates in a range of downward price movements.
End user gives up protection in well above-market prices to gain a lower initial upside price protection
Structured as value neutral.
DetailsSell Cap 1/ Buy Cap 2 / Sell Floor
Current Swap is $11.85
End user receives additional premium for selling a call which creates better initial range economics vs the costless collar
Scenarios
If market price is above $14.25, end user price is market price minus $2.40If market price is between $11.85 and $14.25 end user pays $11.85If market price is between $9.50 and $11.85, end user pays market priceIf market price is below $9.50, end user pays $9.50
Price
Market Price Your Price Cap 1 Cap 2 Floor 1
$ 14.25
$ 11.85
$9.50
Sell Cap 1
Buy Cap 2
Sell Floor
Current Swap $11.85/MMBtu
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Leveraged- Consumer Three-Way Collar- Nov08-Mar09
Trade Ideas Strictly Confidential – for BP client use only
Description
End user limits their upside price exposure below a Costless Collar
End user participates in a range of downward price movements.
End user gives up protection in well above-market prices to gain a lower initial upside price protection
Structured as value neutral.
DetailsSell 1x Cap 1/ Buy 1x Cap 2 / Sell 2x Floor
Current Swap is $11.85
End user receives additional premium for selling a call which creates better initial range economics vs the costless collar
Scenarios
If market price is above $14.00, end user price is market price minus $2.60If market price is between $11.40 and $14.00 end user pays $11.40If market price is between $8.75 and $11.40, end user pays market priceIf market price is below $8.75, end user pays $8.75 on two times the volume
Price
Market Price Your Price Cap 1 Cap 2 Floor 1
$ 14.00
$ 11.40
$8.75
Sell Cap 1
Buy Cap 2
Sell Floor
Current Swap $11.85/MMBtu
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At-the-Money Call Spread Nov08-Mar09
Objective
End user limits their upside price exposure with protection starting at lower call strike
End user participates in all downward price movements.
End user gives up protection in well above-market prices to gain a lower initial upside price protection
End user Collar Mechanics:Sell Cap 1/ Buy Cap 2
End user pays $.50 for coverage between $11.85 and $13.40
Trade Ideas
ScenariosIf market price is above $13.40, end user price is market price minus $1.55If market price is between $11.85 and $13.40 end user pays $11.85If market price is below $11.85, end user pays market price
Strictly Confidential – for BP client use only
price
Market Call 1 StrikeCall 2 Strike Consumer Price
Current swap $11.00
$13.40
$11.85
Sell cap 1
Buy cap 2
25
Call Spread w/$.50 of Retention Nov08-Mar09
Objective
End user limits their upside price exposure with protection starting at lower call strike
End user participates in all downward price movements.
End user gives up protection in well above-market prices to gain a lower initial upside price protection
End user Collar Mechanics:Sell Cap 1/ Buy Cap 2
End user pays $.50 for coverage between $12.35 and $14.25
Trade Ideas
ScenariosIf market price is above $14.25, end user price is market price minus $1.90If market price is between $12.35 and $14.25 end user pays $12.35If market price is below $12.35, end user pays market price
Strictly Confidential – for BP client use only
price
Market Call 1 StrikeCall 2 Strike Consumer Price
Sell cap 1
Buy cap 2
$14.25
$12.35
Current swap $11.85
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• Swap
• Basis Swap
• Index Swap
• Swing Swap
• Participating Swap
• European Call
• European Put
• Asian Call
• Asian Put
• Collar
• Bounded Swap Collar
• Range Forwards
• Participating Collar
• Three Way
• Double Down
• Extendable
• Index w/Floor
• Heat Rate Swaps & Options
•Straddles
• Tiered Volume Restructure
• Weather Contingent GD Option
• Time Spread
• Binary Options
• Call Swaption
• Put Swaption
• Deferred Premium Structures
Transactions immediately executable from the Financial Products Desk:
Transactions are easily tailored for client needs: Varied volumes by period; Varied Strikes for month; Settlement adjustments; etc…
All structures are priced NPV per appropriate discounting per counterparty credit status
Risk Management Structures Delivered