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
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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