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LNG Markets _ Price Volatility

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									LNG Markets & Price Volatility
           Jean-Pierre Mateille
  General Manager, Gas & Power Trading
           Total Gas & Power
      LNG14 Conference, Doha, March 22nd, 2004


                      22 March 2004
    LNG Markets and Price Volatility



                         Price determination in gas markets

                         The portfolio approach

                         Management of price risks

                         Concluding remarks




LNG 14 – 22 March 2004
                                              2
    LNG Markets and Price Volatility



                         Price determination in gas markets

                         The portfolio approach

                         Management of price risks

                         Concluding remarks




LNG 14 – 22 March 2004
                                              3
    Price determination


             LNG markets are not isolated : LNG prices depend ultimately on
             regional gas markets

             Long-term gas price drivers :
                         marginal cost of supplying markets
                         pattern of demand growth : generation, domestic, GDP
                         government policies : conservation, supply security...
             Short-term gas price drivers :
                         day-to-day uncertainty on local supply/demand balance: gas
                         production & transportation, weather, power generation…
                         availability of “tools” : storage, flexibility, fuel switching,...
                         positioning of each market participant


LNG 14 – 22 March 2004
                                                     4
          Price determination over time (US market)


               long-term trends                   seasonal                                short-term (days)
                                       4,50
                                                                        7.00
          10                                                            6.80
           9                           4,00                             6.60
           8                                                            6.40
                                       3,50
           7                                                            6.20
$/mmbtu




           6
                                       3,00                             6.00
           5
                                                                        5.80
           4                           2,50
           3                                                            5.60
           2                           2,00                             5.40
           1   Henry Hub – 5 yrs              Henry Hub – 1 yr          5.20              Prompt Month Nymex
           0                           1,50
                                                                        5.00
                                         déc-01 avr-02 août-02 déc-02




                                                                               02/03/03

                                                                                           02/08/03

                                                                                                      02/13/03

                                                                                                                 02/18/03

                                                                                                                            02/23/03
                                        • weather / temperature
           • gas supply options
                                        • competing fuels / markets            • weather / temperature
           • economic growth
                                        • storage / interconnections           • local market balance
           • political / environment
                                        • industry confidence


LNG 14 – 22 March 2004
                                                         5
    Price formation in UK gas market

             The National Transmission System (NTS) and the National
             Balancing Point (NBP)
                         any licensed shipper can buy and sell gas in the high pressure
                         network (NTS) under the Network Code
                         within the NTS, natural gas is exchanged at a virtual trading
                         hub (NBP)
                         capacity must be booked or purchased through auctions to
                         enter into and exit from the NBP
                         NBP price is the immediately negotiable value for a given
                         delivery period (day-, week-, month-ahead…)
             Most UK gas is traded at fixed price at the NBP



LNG 14 – 22 March 2004
                                                  6
       UK National Transmission System (NTS) and
       National Balancing Point (NBP)
Demand:                                 Supply:
 VLDMC (Very Large Daily Metered          Production fields
 Customers)                               NBP purchases                                         St. Fergus
 DM (Daily Metered sites)                 Storage (off take)
 NDM (Non-daily metered sites)            Interconnector
 NBP sales                                Future LNG imports                                                Terminals
 Storage (injection)                                                                                        Compressors
 Interconnector                                                                                             Regulators
                                                   Local                                                     LNG Terminal
                              Exit Points
                              Capacity Booking     Distribution                                              Projects
                                                   Zones                                                 6300 km Pipelines
  Entry Points                                                                                     Teesside
  Capacity Auctions
                                                                                                                Rough
                                                                                    Barrow
                                                 LDZ
                                                                                 Burton Point            Easington
                       NBP                                     Customers                                  Theddlethorpe
                                                 LDZ
                      National
                                                                                                                   Bacton
                     Balancing                   LDZ
                       Point
                                                                           Milford Heaven
                                                 LDZ
                                                                                                              Isle of Grain
Capacity Trading        Gas Trading    Capacity Trading


   LNG 14 – 22 March 2004
                                                                           7
    Recent price developments in the UK
         Spot UK gas prices remain high and above 2001 highs
         Gas Year 2004 is assessed at ~ 24.6 p/th (12.5 €/MWH ~ 4.5 $/MMBTU)
         How do spot gas prices compare with long term contract prices ?
                                               Front Gas Year: GY2002-GY2004                      SHORT DERIVATIVES,
                         SHORT                                                                    INCREASED DEMAND,
                         DERIVS, 40-                                                              COLDEST OCT SINCE 92,
            26.00                                                 INTERCONNECTOR
                         50P/th                                                                   OFFSHORE RELIABILITY
                                                                   UNRELIABILITY         IMPACT
                         prompt, inc.
                                        9-11                        & CONFUSION            OF
            25.00        OIL PX
                                                                                         WAR &
                                                    ENRON                                  OIL
                                                    COLLAPSES
            24.00
                                                                               TXU
                                                                               DEBACLE
            23.00


            22.00


            21.00


            20.00


            19.00                                  POST 9-11
                                                   GLOBAL
                                                   ENERGY SLUMP
            18.00


            17.00

                               2001                                2002                            2003




LNG 14 – 22 March 2004
                                                                      8
    Price formation in Continental Europe

             Over 90% of continental demand is imported from Russia, Algeria
             and Norway
                         long-term natural gas compete with LNG imports
                         crude oil and oil products indexation interact with spot gas
                         emergence of continental spot trading hubs (Zeebrugge)
             Dynamic linkage UK / Europe (Interconnector)

             Growing distortion between
                 long-term horizon of supplies, and
                 short-term horizon of demand : most customers make
                 competitive supply tenders every year
             Market players must constantly balance portfolio


LNG 14 – 22 March 2004
                                                   9
           How do spot prices compare with LT contract prices ?
             Continental European gas prices remain oil driven
             Spot prices are influenced by short term supply/demand distortions (UK switch to import)
             Contrary to recent history today’s spot prices (NBP or ZHUB) are above Long Term oil
             indexed contract prices
             LNG supply contracts must compete in this market
         5.00
         4.50
                                                                                         GY03
         4.00
         3.50
         3.00                                                                            CAL04
         2.50
                                                                        3 p/th ~
         2.00
                                                                       1.5 €/MWh
P/TH




                                                                                         GY04
         1.50                                                        0.5 $/MMBTU
         1.00
         0.50
                                                                                         CAL05
         0.00
        -0.50
        -1.00
        -1.50
        -2.00

       LNG 14 – 22 March 2004
                                                      10
    LNG Markets and Price Volatility



                         Price determination in gas markets

                         The portfolio approach

                         Management of price risks

                         Concluding remarks




LNG 14 – 22 March 2004
                                              11
    The global market

             LNG is the only physical link between world gas markets
                         LNG participates in the global equilibrium of gas prices
                         direct influence is however difficult to demonstrate
                         conversely flows of LNG are directly influenced by variations in
                         regional gas prices, leading to arbitrage opportunities

             Aspiring leading market players will need to
                         balance the right mix of gas and LNG supplies
                         secure access to logistics assets (regas terminals, pipes, ships)
                         access end-user markets
                         be active in most gas and LNG markets
                         develop sophisticated risk management expertise (hedging)


LNG 14 – 22 March 2004
                                                   12
    Integrated Oil Companies as LNG buyers


        IOCs have been traditional players in upstream markets and LNG
        liquefaction

        IOCs are becoming purchasers of LNG
                  leverage their gas reserves and allow for faster launch of
                  upstream project by securing outlets
                  IOCs are developing a strong marketing base, with direct access
                  to end-user markets
                  credit worthiness
                  expertise in technical, commercial and financial matters, as well
                  as risk management (Oil, Gas, Power, FOREX)




LNG 14 – 22 March 2004
                                              13
    Why developing a portfolio ?


             In today’s complex environment, back-to-back deals will become
             exceptional

             Market players hold a set of purchase and sale commitments that
             cannot fully match

             Portfolio
                         manage sum of purchase and sale commitments, and adjust
                         base load and swing supplies to demand
                         manage time horizon discrepancies
                         aggregate risks using a unique “rule book”
                         take advantage of correlations between price formulas
                         minimize cost of commercial operations and logistics


LNG 14 – 22 March 2004
                                                14
    How TOTAL portfolio aggregates flows & risks in Europe
         LNG is a long term business (15 yrs +)
         Trading is perceived as a short term activity (1 day +)
         Retail & Marketing are medium term businesses (1 yr +)
         Portfolio management conciliates these different time horizons

    Production UK                                                           Marketing UK

     Production Norway                            Trading                Marketing FRANCE

   LNG & Gas contracts                                                    Marketing SPAIN
                                                    Spot
      accrual accounting
     FAS 133 compliance                mark to market accounting           accrual accounting
       LT absolute price risk          short to medium term price risk     market share
       production performance issues   transportation & capacity risk      commercial margin
                                       supply / demand adequation          credit worthiness issues
                                       oil vs. natural gas                 balancing risk
                                       FOREX exposure

LNG 14 – 22 March 2004
                                                    15
    TOTAL European Gas Marketing Assets

                                                           Leading supplier
                                                  UK        to I&C market
     As of 2004, TOTAL
                                               6.7 BCM
     end-user European                         20% I&C
      demand amounts
        to 17 BCM/y
                                                                NWE
                                                               1 BCM

                          Cross-border
                                                        FRANCE
                         pipeline project
                                                         8 BCM
                                                    17% market share


                                     SPAIN                              1/3 Equity in
                                    1.3 BCM                            FOS 2 terminal
                                 6% market share
            4th marketer
              in Spain

LNG 14 – 22 March 2004
                                                    16
The Gas & LNG portfolio of TOTAL in the Atlantic basin

                                    Norway          UK          Norway
                                  LNG supply     Gas supply    Gas supply

                                                                       Netherlands
                                                    UK                 Gas supply
                                               Gas marketing

                                                   France & NWE           France
                                                   Gas marketing         Gas supply
               US                            Spain Gas
          Gas marketing                      marketing
   US                        LNG
                                                            Algeria
Gas supply                 arbitrage                      LNG supply         Mid East
                                                           Algeria          LNG supply
         Mexico
      Gas marketing                                       Gas supply


                                               Nigeria
                                             LNG supply

The building blocks of a worldwide portfolio are progressively put in place
LNG 14 – 22 March 2004
                                        17
    LNG Markets and Price Volatility



                         Price determination in gas markets

                         The portfolio approach

                         Management of price risks

                         Concluding remarks




LNG 14 – 22 March 2004
                                              18
    The best hedge ? The right formula !


        A right price formula initially
                  LNG price formula must be representative of the fair value of
                  gas in the target market
                  versus alternative competing supplies (gas or LNG)

        A right price formula during contract’s life
                  long term take-or-pay and price reviews are linked
                  price review mechanism is of utmost importance to guarantee
                  that the contract will remain balanced
                  LNG price formula must remain representative of gas prices




LNG 14 – 22 March 2004
                                              19
    The representation of risks

             Mark-to-market
                         flows & risks are recorded when commitment is taken
                         exposure can then be evaluated and categorized against set
                         of references, driven by market standards
                         contracts are said to be “marked to the market”
                         examples of such references: Henry Hub in the US, NBP in
                         the UK, oil-indexed prices in Continental Europe

             At portfolio level, mark-to-market exposure of all contracts, LNG
             as well as pipeline gas, can be aggregated
                         identification of overall risk
                         implementation of appropriate hedging strategy


LNG 14 – 22 March 2004
                                                 20
    Risk management in LNG markets


             Risk management over long-term horizon
                  the “right” formula
                  price review mechanism

             Risk management over mid-term horizon
                  adequation between expected import flow and market
                  market risks are evaluated when the annual delivery
                  programme is known
                  buyer can decide to take hedging and corrective action for
                  exchange rates, oil vs. gas, crude vs. products

             Risk-management over short-term horizon
                 day-to-day adjustment to schedules and actual physical flows


LNG 14 – 22 March 2004
                                           21
  LNG competition (LNG vs. LT gas - FRANCE Zone North)
                         high crack                            LNG vs. LT
                                                               Natural Gas
                                                          + (LNG < LT gas)
                                                                                      1 BCM/y ~ 15,000 bl/d refining margin risk
          CRACK




                                      market


                       - (LNG > LT gas)                                                                                high crack
                                                                    low crack




                  15       20         25                  30         35          40
                                           BRENT ($/bl)
                                                                                                                                    low crack
$/MMBTU




                                                                                           Pipe gas in North Zone $/MMBTU (high crack spread)

                                                                                           LNG delivered in North Zone $/MMBTU

                                                                                           Pipe gas in North Zone $/MMBTU (base case)

                                                                                           Pipe gas in North Zone $/MMBTU (low crack spread)




                                                                                Brent $/bbl

LNG 14 – 22 March 2004
                                                                                      22
    LNG Markets and Price Volatility



                         Price determination in gas markets

                         The portfolio approach

                         Management of price risks

                         Concluding remarks




LNG 14 – 22 March 2004
                                              23
    Concluding remarks



                 LNG markets have achieved a maturity comparable to gas
                 markets in North West Europe and North America

                 For IOCs acting as buyers, LNG purchases are now an
                 integral part of their global gas portfolio supplying their
                 marketing affiliates

                 Mastering the technicalities of markets is a key part of the
                 commercial expertise required to be a successful player in
                 LNG markets




LNG 14 – 22 March 2004
                                               24

								
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