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Price Index Surveys Rebounding; Transparency Improved, Panel Says

The voluntary reporting guidelines put in place by FERC to ensure the integrity of U.S. natural gas published price indices has resulted in a restructured system which appears to have restored market confidence, a panel of energy experts said last week in Houston.

In a panel discussion sponsored by the Minerals Management Service (MMS), the editors of two major gas index publishers joined five government and industry professionals to answer the question of whether the indices now have sufficient liquidity, transparency and accuracy to represent the true value of natural gas.

Jim Allison, ConocoPhillips' regional risk manager for natural gas and power in North America, said all evidence points to a system that works. He credited the voluntary guidelines put in place by the Federal Energy Regulatory Commission in 2003 (see NGI, June 30, 2003).

Allison admitted that it took some time before his company, one of North America's largest wholesale gas marketers, joined in the publishers' market surveys. The conversion came after his traders called one of the index publishers to complain about the Chicago index. The publisher pointed out that the index calculations might be improved if ConocoPhillips, one of the largest traders, contributed information to the survey.

"With the procedural controls in place, there has been a revolution in how reporting is done," said Allison. "My traders think this is a very good change, indeed." He revealed that ConocoPhillips is a heavy buyer, as well as a seller of natural gas. Of the approximately 10 Bcf/d the company sells, only 1.5 Bcf/d is its own production. The other 8.5 Bcf/d ConocoPhillips buys from others and resells.

The workshop on price indices was held by the MMS just before the agency's annual industry awards luncheon and ceremony in Houston. It was in response to comments on a recent MMS rulemaking as to whether or not index pricing is appropriate as a basis for federal royalty valuation. Currently the agency has approved certain indexes published by NGI and Platts for use in valuing gas produced on Indian lands and in royalty-in-kind auctions.

Confidence in the system has been key, said Stephen J. Harvey, deputy director of FERC's Office of Market Oversight and Investigations. Confidence has returned not only in price formation, he said, but also in the functioning of the market. "We lived through 2000 and 2001. That jarred people."

However, once FERC stepped in and issued guidelines, the market began to slowly rebuild. Industry confidence in the price indices last year was seven on a scale of one to 10, and it is most likely even higher today. Now, it's important to continue building on that success, Harvey said. "It's critical that we have as many people reporting as possible" Late last year FERC issued a report on the price survey process, commending the improvement shown (see Daily GPI, Nov. 19, 2004).

Mark Stultz, representing the Natural Gas Supply Association, pointed out that FERC's own survey of market participants showed they rated indexes a seven on a 1-10 scale. Another strong endorsement for the indexes that was revealed by the government's survey is that 90% of the market uses indexes to price their physical transactions and these deals represent half to three-quarters of all gas sales and purchases.

Ellen Beswick, publisher of Natural Gas Intelligence, credited FERC with restoring confidence in the system. "Because of all the various investigations, the pressure of the Congress and public opinion, FERC has had the muscle to pressure companies to participate in the surveys, to respond as to whether they submit data to publishers, and to standardize how they report," she said.

NGI now has about 50 companies participating in its restructured survey, including most of the largest buyers and sellers. The publisher continues to sign up others and expects to add new participants in the next month. Only a fraction of the companies reporting are the same companies that were reporting in 2000. Volumes reported in the monthly survey hit a new high of over 20 Bcf/d with 2,895 transactions April 1, and have more than quadrupled since the low point in November 2002.

The quality of the data also has improved. The revised survey format, which requires participating companies to submit all their reportable transaction level data from the back office instead of from the trading desk, and holds company officials accountable for the data submissions, has made a world of difference, said Beswick.

"We didn't have enough leverage to make these kinds of rules," she said. "Our only leverage consisted of refusing to use the data submitted. But FERC does have that leverage. Even though its directives are couched as 'guidelines,' not mandates, the agency has a funny way of making them stick."

Larry Foster, Platts' global editorial director of Power, joined in applauding FERC's work on the price surveys. The changes, he said, have positively affected index publishers. He noted that in the FERC staff report last year, the amount of data reported to publishers had increased, and the quality of reporting had significantly improved.

Platts also responded to a criticism that "publishers should provide more information on liquidity at individual points," Foster said. By last August, Platts began reporting volumes and the number of transactions at all pricing points, except for the least liquid points. NGI began reporting volumes and the number of transactions at all pricing points a month later in September 2004.

"The amount of detail captured in the survey has increased dramatically," Foster said. Platts' monthly survey volumes and transactions also reached a new high in April of more than 21 Bcf/d and 3,179 transactions. "The marketplace is pretty comfortable with what we do."

Another improvement to the system, said Beswick, is that there now is a "very real 'penalty of law' threat to submitting bad information. Before all the investigations broke, no one had ever been prosecuted for giving false information to publishers.

"There was no law on the books, nor any case law that addressed the situation," she said. "We, as publishers, couldn't say, 'If you give us bad information, you will go to jail.'" Now, the threat is "very clear...and the industry has seen companies paying multimillions of dollars in settlements, and traders led away in handcuffs. It's quite a...lesson." With more transparency and accountability, "the markets have matured and the surveys have matured along with them."

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