Physical Gas Trading

Orlando AlvarezVice President, Eastern U.S.BP Energy, NA Gas & Power

Kevin BassTrading ManagerBP Energy, NA Gas & Power

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

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

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.

Getting Gas Safely To You

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

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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2018

Bcf/

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EIA Demand Forecast

US Natural Gas Markets

Pre 1978 - Value Chain Regulation

* * *

* Regulated Pricing

Producers Pipelines Local Distribution Companies

End Users

US Natural Gas Markets

Pipelines

Marketers

Current - Transportation, distribution and storage services unbundled. Emergence of wholesale marketers

**

*

*Producers Industrials

LDCs

ElectricUtilities

Generators

End Users

* Regulated Pricing

04/13/23 11

LNG

DW GOM

Alaska/Beaufort

bp – part of the solution

Onshore

Supply Solutions

E. Canada

West LNG

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

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

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

E&P

Gas Transport

Export

L N G

End Users• Power Gen.• City Gas• Large Ind.

LNG Chain

LNG ImportRegas

Gas Transport

LNG LiquefactionFacility

Natural Gas Pipelines and Major Trading Points

Source: EIA

Transportation Market Cycles

High Differentials

Low Differentials

Build PipelinesIncreasing Supply

and Demand

Regional Prices

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Alberta Rockies Henry HubCalifornia Chicago New York

Alberta

Rockies

California

Chicago

Henry Hub

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New York

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

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

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

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

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

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)

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

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)

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

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

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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5.305.405.505.605.705.805.906.006.106.206.30

ContangoBackwardation

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.

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¢

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.