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NatGas Price Reporting Agencies Seeing Greater Index Participation

The number and volume of natural gas transactions -- according to FERC Form 552 submissions from up to 680 respondents -- were in decline during 2008 to 2014 and flattened in 2015. However, that trend has improved somewhat in 2016, executives with two price reporting agencies (PRA) said in Houston on Tuesday.

Last year was “pretty good” for price index reporting, NGI Executive Publisher Dexter Steis said during a forum at the New Risk in Energy conference. On a deals basis, reporting to NGI in the day-ahead market is up by about 3.3%, and the bidweek market is up by almost 1%. Volume was still a little bit flat, he said citing NGI internal data for 2016 because the Commission has yet to release its form 552 report for calendar year 2016.

More overall transacted volumes and a greater number of transactions have been part of a tide that has lifted all boats, Steis said. “So we’ve seen more reportable transactions and then more reported transactions in the PRAs.”

Since 2008, NGI’s price indexes have been made more robust by the inclusion of transaction data from Intercontinental Exchange (ICE) through a protocol that maximizes the amount of relevant data available for use in the NGI indexes while matching and removing those deal reports from ICE that are duplicative to what NGIreceives from the companies who report to NGI directly.

Last November, Platts struck an agreement with ICE and expects to be including ICE data in its indexes in the coming months.

Platts’ Mark Callahan, editorial director for power and generating fuels pricing, said that while 2012-2014 was “not a great time” for PRAs, 2015 saw some stabilization. Last year was a good year with volumes up 5%.

So far this year, Callahan said volumes reported have been fairly flat compared with 2016. This has been true of the daily indexes. For the monthlies, the theme has been similar to that of the 2012-2014 period, he said. There are still decreases, but they have been a bit smaller, he said.

Well over a decade since price reporting became a headline issue in the natural gas industry, it’s still around.

“After about 15 years or so, I can’t believe we’re still talking about price indices and price creation,” said Deloitte’s Michael Prokop, moderator of the conference panel. “Back then, when industry realized there was a problem, trading was being halted or stunted and we got together and fixed it is what we did...put together best practices and figured it out and worked very closely with the regulator…”

About 80% of natural gas transactions reported to the Federal Energy Regulatory Commission on Form 552 depend on price indices, with the remaining 20% or so being fixed-price and physical basis deals eligible to be reported to index publishers.

That ratio of index deals to fixed-price has grown over the last eight years -- from about 3.5 times to a ratio of almost eight-to-one, said Cornerstone Research Vice President Greg Leonard, whose firm publishes an annual report on the Commission’s Form 552 data. “Eight times as many deals depend on the indices than go into the indices,” he said.

The migration toward greater reliance on index deals is due to a constellation of factors, according to Steis. Lower price volatility in recent years -- thanks largely to shale gas abundance -- has made fixed price deals less attractive compared with the alternative of just doing index deals.

More independent gas producers -- thank the shales again -- means that a greater share of the producing community is focusing on just completing wells and not worried about marketing gas with fixed-price deals, as larger producers with marketing shops might do. Index deals are also easier for utilities to justify in front of their state regulatory commissions, Steis added. And also, banks have left the physical gas market following the financial collapse and reforms under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Finally, the indexes are victims of their own success, Steis said. “I think it’s precisely because the indexes are so dependable, reliable and accurate that people do index deals,” he said. “I’m not sure what we can really do about that.”

Of those doing fixed price deals, fewer have been reporting them to publishers, Leonard said. “If you look over time, the fraction of companies that actually report their fixed-price physical gas has been declining pretty significantly since 2008,” he said. “In 2008, just under two-thirds of companies that transacted fixed-price physical gas made reports to the index publishers. Whereas last year for the first time it was just under half... basically half...this is by volume.”

The greatest inhibitor of reporting fixed-price deals, panelists seemed to agree, is the perception of regulatory risk, and sometimes that risk is more than just a perception.

Prokop said when Deloitte reviews the price reporting practices of client companies, it finds that many are doing a great job with great technology and practices. Malicious behavior has not been about in some time, he said. However, not all companies are in compliance with regulations developed following the natural gas marketer meltdown and price reporting scandals of yesteryear.

Responding to those who say they don’t want to report, and ask “why should I report,”

NGI’sSteis pointed out that “right now there’s a voluntary system of price reporting. But the Energy Policy Act of 2005 gave FERC certain powers to mandate a system with greater levels of transparency should they deem it necessary. Right now if you report, we ask for location, price, volumes, flow dates, trade date, counterparties optional. So that’s what we receive.

“If it becomes a mandated system, the question becomes what manner of information would be required to be reported? Would the Commission require counterparties or profit loss information, trigger deals, EFPs, index trades? This becomes a slippery regulatory slope.

“So I would thank the folks who are being good corporate citizens and reporting under the voluntary system. And I would ask those who have made the decision to not report, to re-evaluate.”

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