Daily GPI / NGI All News Access

FERC Report Says Gas Market Performed Solidly Under Stress

FERC Report Says Gas Market Performed Solidly Under Stress

While market liquidity declined, which corresponded to a decline in use of risk management tools, energy markets managed serious challenges and made marginal improvements during the period spanning from January 2002 through June 2003, according to FERC's second annual "State of the Energy Markets" report.

Federal Energy Regulatory Commission's Office of Market Oversight and Investigations (OMOI) reported its findings for both the natural gas and electricity markets to the full Commission Thursday. It concluded that the natural gas market during the 18-month period displayed "solid performance, despite stress."

The OMOI found that storage swings reflected tight supplies and contributed to higher prices, while transactions to manage the greater price volatility declined in the face of credit crisis.

Adding to the stress on the market was the fact that the exploration and production response was not robust, despite stronger price signals. Even as prices sprung up, drilling did not respond as fast as one would expect, the OMOI report said. For example, the drilling increase following the price spike in February 2003 was not as great as the spurt in drilling activity after the early 2001 price spike, it noted.

OMOI's Cynthia Wilson, who gave the gas market overview, attributed the lower drilling response in 2003 to two factors: 1) producers, like many other energy companies, were focused on strengthening their balance sheets last year; and 2) limited access. The "prime natural gas areas are not accessible...What's left to drill appears [to be] very marginal."

Commissioner Suedeen Kelly asked whether the OMOI staff thought energy companies might be pulling their money out of gas production to invest in liquefied natural gas (LNG). But OMOI staff didn't explore that angle.

Commissioner Nora Brownell noted that gas producers got burned in 2001 when prices fell dramatically in response to their heightened drilling. Maybe they just got a "little wiser" last year, she said. Going forward, the FERC market monitoring arm expects investment in LNG to augment domestic production.

The report further found that storage investment was small and pipeline investments moderated during the 18-month period. The "negligible expansion" of storage was partly due to regulatory barriers, said OMOI's Wilson. More storage is essential to reduce price volatility, noted Steve Harvey, deputy director of OMOI.

Listing the successes during the period, OMOI noted that gas was delivered on time, there were reasonable levels of investment and a number of alternatives for managing risk. The report added that despite the mass exodus from the marketing segment of the industry, a number of new participants emerged, offsetting the credit crisis. The new participants included producers' marketing affiliates, local distribution companies, financial firms (Goldman Sachs and Morgan-Stanley) and hedge funds.

The report listed a number of challenges, however, including tight gas supply, storage volume swings, higher prices, thinly reported market activity, credit problems and decreased transaction reporting to price index publishers.

On the topic of price reporting, Harvey said, "There does appear to remain a great deal of concern. It seems in general the concern is really less related to the Commission's work...I think [the companies] have seen an attempt in the policy statement and in other activities to take a very sensible course and try to move the industry along in terms of increasing reporting."

However, Harvey noted that there does appear to be a "fair amount of residual concern at the corporate level about the dangers of reporting prices incorrectly," which he believes is being fueled by the headlines related to ongoing Commodity Futures Trade Commission (CFTC) investigations of energy companies for reporting fake data on gas trades to index publications.

This "residual concern" and reduced liquidity caused the number of index-reported transactions to deteriorate significantly during the 18-month period, according to Harvey. A chart revealed that reported transactions to Platts' Gas Daily fell from nearly 250,000 in early 2002 to about 20,000-25,000 in July 2003.

But the "system of reporting today through the trade press is one that is a lot stronger...than the one [in place] two to three years ago, during which time these issues continued to come up in the process of investigation," Harvey said. In fact, an increased number of energy companies recently told FERC they have resumed the reporting of gas transactions to index publishers.

Harvey said the OMOI is about to start the process of putting out its second survey to gauge the energy market's response to FERC's policy statement on reporting.

Overall, the OMOI said it will use its State of the Markets report as a foundation for identifying and monitoring areas of concern. The release of the final report is still a few weeks away.

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.