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Statoil Hedging for Producers, End-Users

Statoil Hedging for Producers, End-Users

Resistance to hedging has declined significantly among independent producers. But now that they're hedging, some companies are doing the wrong thing at the wrong time, according to executives at Statoil Energy.

"So many times we see producers go out and hedge at exactly the wrong moment or go out and miss great opportunities to lock in a good price simply because there are two fundamental factors that tend to drive people. One is fear and the other is greed," said David Simpson, a risk management services director in Statoil's Houston office who joined the company recently from Total. "When prices are up the typical response is that they're continuing to go up.. When prices do come off, they still think they're going back up and a lot of times they get into locking in the prices not only well below where they could have locked it in but now they're looking at a hedge to lock in a disastrous result on the down side."

Statoil has three operating divisions in the United States. Statoil North America is the crude oil trading arm of the company in Stamford, CT. Statoil U.S. Exploration is based in Houston and operates the company's offshore E&P program. And Statoil Energy, based in Alexandria, VA, with offices in Houston and elsewhere, is involved in marketing, trading and price risk management. Gas trading amounts to about 2.5 Bcf/d in physical volume. Adding financial volumes to that yields a figure about four times as large. The company says about 98% of its trading is financial. Statoil Energy has about 30 counterparties currently and looks to double that some time down the road, executives said. More than 525 transactions have been done since the price risk management group's formation.

Statoil got into risk management to take advantage of its trading and marketing capabilities. As Statoil is an E&P company, executives say they have a good understanding of what producers are looking for in hedging.

One reason producers hedge is to appease their bankers, noted David Glover, who joined Statoil from Enron to help form the Risk Management Services Group in the fall of 1998. "Another thing that risk management services provides for producers is that they can get a competitive advantage over their counterparties. If they have a good hedging program in place and prices drop dramatically, the producer who did not hedge at all can be hurting and may have trouble meeting their debt obligations. If that's the case, they may end up having to sell some assets at a fire sale price. The hedging producer is in good shape to take advantage of that."

While Statoil Energy's price risk management business has focused on producers, there's growth to be had on the end-user side. That's why the company recently hired John Race, formerly of Enron Capital & Trade, to market financial products to the transportation industry and other end-use customers. "The producer, almost 100% of their revenue is going to be dependent on the commodity price. As we know, energy commodities are some of the most volatile and most variable prices in the world. When you look at an industrial customer, end-use customer, we do have a difference in that for most of them energy is a portion of their total costs, so there are some unique challenges that you face when you're working with the end use customer as well."

Targets of Statoil Energy's end-user marketing effort include large end-users and unbundling LDCs, who if they remain in the merchant function will have commodity price exposure they won't be able to pass through to ratepayers.

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