Industry conference session

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
A Wild Ride
Henry Hub Natural Gas Prices

Source Inside FERC
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
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

5
Natural Gas Characteristics

• Natural gas is Americas natural wonder.
• Natural gas is the cleanest and most efficient
  fossil fuel.
• Natural gas is safe, reliable and its made in
  America.

6
Getting Gas Safely To You
7
Uses of Natural Gas

• 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
8
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.

9
US Natural Gas Markets
Pre 1978 - Value Chain Regulation



Producers
Pipelines
End Users
Local Distribution Companies
Regulated Pricing
10
US Natural Gas Markets
Current - Transportation, distribution and
storage services unbundled. Emergence of
wholesale marketers
Pipelines


LDCs

End Users
Marketers

Producers
Industrials

Electric Utilities
Generators
Regulated Pricing
11
Supply Solutions
Alaska/Beaufort
E. Canada
Onshore
DW GOM
West LNG
LNG
bp part of the solution
12
Gulf of Mexico Projects
13
OKEANOS Gas Pipeline
14
Typical LNG Liquefaction Flow Diagram
Fuel from Feed
Regeneration Gas
FEED PRETREATMENT
15
LNG Chain
End Users
EP

Power Gen.

City Gas

Large Ind.
Gas
Transport
Gas
Transport
Export
LNG Liquefaction
LNG Import
Regas
Facility
16
Natural Gas Pipelines and Major Trading Points
Source EIA
17
Transportation Market Cycles
High Differentials
Increasing Supply and Demand
Build Pipelines
Low Differentials
18
Regional Prices
Alberta


Rockies


Chicago
New York
California

Henry Hub

19
BP Eastern North American Gas Assets
Sable Island 45 MMCF/D
TCPL (Waddington) 69,000/D
MNE 45,000/D
Iroquois (Z2) 29,275/D
CNG (Leidy) 28,420/D
24 BCF
Tennessee 10,000/D
AGT, Irq TCO, Empire, DTI, NFGS, Transco, TET,
TGP 723,538/D
Cove Pt. 330 MMCF/D
TGP, TET, CGT,TGT 120,000/D
1.2 BCF
Gulf Onshore 300 MMCF/D
Destin 230,000/D
Gulf Offshore 1,400 MMCF/D
Gulf Coast Offshore
20
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

21
Natural Gas Pricing
S M T
W Th F
S

• 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 Settlement
FOM March Cash Trading
Feb 24 25 26
27 28 March 1
22
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

23
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
24
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)

25
Converting NYMEX Priced Natural Gas to Index
Basis Swap
Supplier (physical gas)
BP
Bank/Broker (financial)
NYMEX 85
Gas
INDEX
NYMEX 90

• BP buys supply at NYMEX related pricing
• BP sells basis swap to convert to synthetic index

Example 2
26
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)

27
Converting FOM Index to Daily (Gas Daily Swap)

• Producer wants Index for gas
• BP wants to pay daily price
• BP sells gas daily swap

Paper Counterparty
Gas Daily
Swap
FOM Index
Daily Prices
Producer
BP
Gas
FOM Index
Example 3
28
Converting Daily Priced Supply to Fixed Price
(Swing Swap)
BP
Customer
Daily Prices
Gas
Swing Swap

Daily Prices
1.80

• Customer wants daily price
• BP wants fixed price
• BP sells swing swap

Bank
Example 4
29
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.

30
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.

31
Physical Spread

Daily Suppliers

• 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

Daily Gas Price
Gas
Supplier (physical gas)
BP
NYMEX
NYMEX
Gas
Henry Hub
Gas
Tennessee
NYMEX -16
Daily Gas Price
Gas
Daily Customers
BP makes money when daily spreads are below
16
Example 5
32
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.