The abundant information available about North American natural gas flows in the pipeline grid already has transformed the physical gas market, and its influence over the entire energy complex will only build in the coming year, two long-time industry experts assert.

Vince Kaminski, who has authored several books and articles about energy risks and energy trading, teaches energy finance and energy derivatives at the Jesse H. Jones Graduate School of Management at Rice University in Houston. Kaminski years ago led a team of about 50 analysts at Enron Corp. that developed quantitative models to support the company's once-heralded energy trading business. Kaminski openly criticized the company's financial practices, and he eventually left the business arena to teach others about energy trading.

Kaminski has studied the gas pipeline information flows in the North American natural gas market for some time. He partnered with Rusty Braziel, managing director for Golden, CO-based Bentek Energy LLC, to trace where the gas flows are going and how they are being used. Bentek, in business since 1985, provides daily energy market intelligence and issues reports about how gas is moving, where constraints are or may be developing and how those supply/demand factors impact prices.

The two men sat down recently with NGI to talk about how advances in pipeline gas flow data have, among other things, leveled the playing field among physical and financial gas market players. One discovery: the Energy Information Agency's (EIA) Thursday gas storage report apparently has a smaller impact on the market than it did just a year ago.

Today, said Kaminski, "there's more of a predictability of certainty around those EIA numbers, primarily due to the progress of flow data by Bentek and others. This information has removed a lot of uncertainty that surrounded the storage forecasts. Most forecasters use models...to look at the low level of aggregation by different regions, and they now can get much more precise data."

Gain in Storage Predictability

Kaminski and Braziel's indepth study, which traced not only months of EIA Thursday gas inventory storage reports but also intra-day volumetric gas flows, found that the volatility in natural gas prices seen at the time of EIA's release of inventory statistics has decreased substantially in recent months. Consumption of natural gas is characterized by seasonal patterns, but production flows tend to be distributed uniformly over time. Because of the tight interaction between physical gas and other related markets -- financial gas, power and other energy commodities -- they found that the improved use of data has exerted an influence over the entire energy marketplace.

No objective measure was found of a causal relationship between the recent reduction in intra-day volatility and the improvement in inventory forecasting using gas flow data. However, they said the analysis of gas flows, combined with their "interactions" with market participants "seems to confirm this conclusion."

According to the study, overall volatility following the EIA storage report has trended downward, "with the trend showing dramatic downward acceleration over the last 12 months." Volatility "is a manifestation of uncertainty and decreases as a market becomes more efficient and transparent. As the accuracy of storage forecasts -- aided by the use of volumetric flow data -- has improved, market uncertainty about the EIA storage data has been reduced." Overall Thursday gas price volatility, averaged over respective calendar months, fell "significantly" over the past year.

"What's happened in the gas market is that the world is not quite as focused on what the [storage] number is, 20 or 30 Bcf higher or a withdrawal of 50 or 100 Bcf," said Braziel. "It is more interested in why did it happen, where it happened and what company was involved...where is storage that can still be filled. It's more than one single number..."

Improved accuracy in forecasting gas storage inventories has allowed gas traders to have access to "much more detailed" information than they used to get, Kaminski said. "The trading companies are asking, 'what will be the reaction to the storage number?' But the real question is how will the rest of the trading community react? They need information, they need a lower level of aggregation."

The gas market is now focused on "why things happen, which regions contributed to the injections, which to withdrawals, which firms behind those numbers knew more to reach a set of data," Braziel added. "You just cannot participate in the markets unless you have access to this kind of information anymore. At one time, physical players had a substantial advantage over retail players, but as advanced as the modeling process has become, the hedge funds know every bit as much as the big physical gas players."

FERC Orders More Data

At its last meeting last year, the Federal Energy Regulatory Commission (FERC) approved a final rule and proposed a new rule to increase transparency in the wholesale markets for physical natural gas (see NGI, Dec. 24, 2007). The final rule will require certain natural gas market participants to file information annually on their physical natural gas transactions, and it will introduce a new annual reporting requirement, Form No. 552, requiring any buyer or seller of more than 2.2 million MMBtu/d of physical gas each year to report aggregate volumes of relevant transactions.

Each market participant under the rule will have to report the previous year's total volume of sales and purchases; the volumes of transactions that were priced at fixed prices; and the volumes of transactions that were reportable to price index publishers.

In its Notice of Proposed Rulemaking (NOPR), FERC is seeking public comment on a plan to require both interstate and certain major, noninterstate pipelines to post daily information on capacity, actual flows and scheduled flows. Under the proposed rule, FERC would require the covered pipes to post on a daily basis capacity, scheduled flow information and actual flow information. The proposal would facilitate transparency of price and availability of natural gas by providing a complete picture of daily supply and demand information across the United States, according to the Commission.

"I think this would be a good thing for the marketplace," Braziel said. "There is a significant portion of the market that's not reported by our service or other services because of the data associated with intrastate pipes [especially in Texas], which don't have to report. To the extent of that, what happens in the intrastate market remains opaque.

"Transparency is good," Braziel said. "If you subscribe to that notion of a more rational market, more transparency is a good thing."

Kaminski said there's "no question" that FERC wants to use the new gas market data "to determine if people are playing games in the physical market to influence the financial market at one particular meter or one particular hub or how highly constrained gas flows and capacities are in a region. They are going on the assumption that FERC's enforcement division should pay attention to this. I'm very happy with their use of this data. That sort of analysis, generally speaking, is to determine the intrastate flows...where they came from.

"If we see flows through the meter, we don't know if it's a chain of two markets or 12 that participated in the supply chain," Kaminski said. "We cannot validate the physical gas...This creates a level playing field for everybody. It rewards people who work hard, who do their homework...It gives better access to information that is controlling part of the infrastructure."

Many trading operations are investing "significant resources" into developing proprietary models based on volumetric flow data, according to Braziel and Kaminski. And information vendors, like Bentek, are creating new tools and technologies to process and analyze the data. All of this will lead to reduced market uncertainties, which will result in improved market transparency and "dampened market volatility."

"I think the many developments point toward a market which would be dominated by relatively big trading corporations," said Kaminski. "One of the reasons is that energy markets are becoming increasingly integrated and robust. Productivity in an isolated market has gone increasingly now to markets that are real, and the shocks propagate from one market to another. It helps to be a big trading corporation, which has access to information flowing from the energy complex, the ability to implement sophisticated models using huge amounts of data. This favors big operations.

Data Filters Down

"At the same time, what we see are that local players will be able to acquire substantial data just to understand the local conditions in their market," he said. "In July we saw natural gas prices in the Rockies got down to a penny...lower...due to highly specific developments. The stars aligned in a certain way. If local players have access to local information, and we see it coming, they would have the information available."

Better information, said Kaminski, "will, of course, benefit huge players, but it also will help the niche players to compete."

Braziel added that he envisions more regional information mattering to gas traders. "This will put the regional players on the same level playing field." That way, he said, players have access to where the constraints are coming from, where or where not pipes will be built and how much it matters in their day-to-day activities.

The dynamics of the North American gas market have shifted every time new gas pipes have been constructed, Braziel acknowledged. For example, Bentek CEO Porter Bennett said in November that the anticipated ramp-up of the Rockies Express Pipeline "will cause a dramatic realignment of flow patterns and dramatically alter the basis relationships throughout the U.S." (see NGI, Nov. 12, 2007). The gas market, he said, "does not fully appreciate the magnitude of the changes that lie ahead."

Bentek gas flow data also indicate that Texas -- and Perryville, LA -- likely will experience dramatic changes in 2008 because of a surge in gas flowing from the Barnett Shale and East Texas, new liquefied natural gas imports and the deepwater Gulf of Mexico Independence Hub (see NGI, Dec. 17, 2007). Gas originating in Texas and flowing to other states via interstate pipes increased to a record high 10 Bcf/d the weekend of Dec. 8-9, Bentek reported.

A lot of the gas, said Braziel, has been moving eastward toward Perryville on CenterPoint Energy's new Carthage-to-Perryville pipeline (CP Line). CenterPoint flows had been averaging 1.4 Bcf/d in December, compared with 0.3 Bcf/d for the same period of 2006.

"One of the big stories for 2008 will be in what we call the Southeast Gulf region," said Braziel. "This is a swath of territory that runs from the eastern side of Texas all the way to Alabama, through Mississippi and the Florida area. That's where a number of new pipes are being built, plus LNG is coming in, plus the Independence Hub, all into the Henry Hub and the Perryville Hub. A lot of people will be talking about Perryville. That's the area that we'll be watching [this] year."

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