Greg Lander, Skipping Stone
In spite of what has befallen the stocks of energy trading, marketing, producing, distribution and processing firms in the natural gas market (particularly in the capacity trading business), recent statistics demonstrate that the natural gas pipeline capacity release market continues to thrive.
 Greg Lander, Skipping Stone |
Our research, using publicly available data obtained through CapacityCenter.com, showed that the total volume of 2001 gas capacity traded was 15.6 TCF or nearly 75 percent of the capacity necessary to deliver the country's 22 TCF of annual gas demand.
To understand this statistic, it is important to know a little about capacity trading. Capacity trading is the trading of a contract for physical receipt and physical delivery of a quantity of gas at a future time for a price per unit (per MMBtu or Dth) per day during the term. Its corollary in the paper trading market is "basis." However, unlike a basis contract, which may assure a price (or settles against published indices), a capacity contract assures firm delivery of the gas to locations covered by, or in the path of, the contract.
This 15.6 TCF in total of 2001 capacity was traded over the period between 1995 and the end of 2001. Trading prior to 2001 covering capacity that became effective and/or expired within 2001 was included in this total. This is very significant in that it shows a distinct upward trend in capacity transactions from a total 1996 volume of approximately one TCF.
A look into the future
A snapshot of the overall size and contours of the capacity market shows that before January 1, 2002 there had been nearly 10,000 deals done on a forward basis for 2002 capacity. Of these, 5,700 were done prior to 2001, and 4,300 were done in 2001 for 2002 capacity.
The total volume of 2002 forward capacity traded was 12.6 TCF. Nearly half (6.287 TCF) was traded in 2001 for 2002 forward capacity.
The first quarter of 2002 shows continued activity in the capacity release market. There were 3,900 deals traded involving 1.9 TCF of 2002 capacity in the first quarter of 2002. Adding this to the 12.6 TCF of 2002 capacity traded before the start of 2002 brought the total of 2002 capacity traded to 14.5 TCF after the first quarter.
During the second quarter the quantity of 2002 capacity traded in 2002 for 2002 rose 25 percent over the previous quarter to 2.4 TCF, bringing the total of 2002 capacity traded within 2002 to 4.3 TCF and the overall total 2002 capacity traded through the first half of the year to 16.9 TCF. The number of deals trading 2002 capacity had now passed the 17,750 mark, reaching 10,000 before the beginning of 2002 and another 7,750 to date in 2002.
During the first half of the year, there was 4.3 TCF in prompt market trading, or trading in 2002 of capacity effective and able to be used for part or all of the remainder of 2002. It is interesting to observe that the second quarter of 2002 alone experienced trading of 5.0 TCF of forward period (effective after 1/1/2003) capacity, more than doubling the 2.0 TCF of forward market trading in the first quarter of 2001. Also the volume of forward capacity trading outpaced the 1.8 TCF of prompt trades in the first quarter of 2001. This means that while the prompt period, physical trading of near-term capacity continues to grow, the out-market trading has certainly not re-trenched and, instead, has continued on pace with a total volume of post-2002 capacity trades thus far in 2002 of 7.0 TCF.
At of the end of the second quarter, trading in 2002 capacity is running 8 percent ahead of the end-of-year quantity of 2001 capacity traded, with 16.9 TCF of 2002 capacity traded to date, compared to 15.6 TCF for all 2001 capacity traded through the end of 2001.
Quantity vs. quality
While the quantity of both prompt and forward capacity traded increased from the first to second quarters, the number of transactions has remained essentially unchanged. In the first quarter there were some 3,900 individual transactions recorded while the second quarter posted 3,850 deals.
The quantity of traded capacity continues to increase in spite of, and possibly even due to, the unfavorable light being cast on pure paper trading (OTCs, basis swaps, etc.) due in part to counter-party credit concerns. These concerns appear much less dominant when trading the physical capacity acquired through a contract with the pipeline, as opposed to a financial swap with a credit-questionable counter-party. The additional advantage of holding the physical, forward capacity is that it does not change in price nor cause the holder to pay out more than the contracted-for amount at any time in the future.
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As expected, for all 2001 capacity traded, the top 25 capacity traders (see Table 1) did 49 percent of the transactions comprising 72 percent of the 15.6 TCF traded. Significantly, the forward market for 2002 was even more concentrated where the top 25 traders completed 80 percent of the forward deals.
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Another interesting correlation was that activity was predominant on the pipelines leading to the East Coast and Midwest namely Transco, Texas Eastern, Tennessee, Columbia, Dominion and Algonquin. Also noteworthy was Southern Natural, which was the third most-traded pipeline due largely to the retail unbundling in Georgia (see Table 2).
One other interesting trend emerged looking at the top 15 pipelines whose capacity was the most-traded on a forward basis. The third table identifies those pipelines whose 2003 and beyond capacity has already been traded in 2002. (This does not count any capacity that was traded in 2001 and before for 2003, only what has traded thus far in 2002.)
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Here the Northeast is clearly the region where long-term forward contracts for capacity predominate. Interestingly, a few very large, very long-term deals brought Trailblazer and Kern River into the top 15 on a forward contract basis.
The bottom line
What does all this mean? Companies are firming up their access to capacity and in many cases shedding or turning their capacity over to asset managers. In either case, with nearly a third of the annual consumption capacity traded thus far in 2002 for 2003, the complexion of the capacity utilization market is bound to be affected. As ever more gas-fired power plants are added to a moderately expanding infrastructure, the source for that supply will come largely from non-traditional capacity holders. While certainly some large independent wholesale generators, such as Duke Energy Marketing and Trading, are among the purchasers of capacity in the secondary market, there is a notable absence of the other independent generation entities among the ranks of capacity purchasers.
Greg Lander is principal in logistics practice at Skipping Stone. He is a founding member of the Gas Industry Standards Board and is chairman of both their interpretations subcommittee and their triage subcommittee. He can be reached at glander@skippingstone.com.
CapacityCenter.com is an energy logistics, e-commerce company that maintains a comprehensive historical database and real-time pipeline and capacity release information. It was designed and built by Skipping Stone.
