When natural gas buyers and sellers get together at an industry conference, it's a good bet that many will have been on either side of numerous deals throughout their careers. Bill Griffith, Midwest regional director for BP Gas & Power, told GasMart 2007 attendees in Chicago Friday that many of his gas customers have worked in the energy patch on the marketing and trading side. "They're pretty smart; they know all our stories," he quipped.
Paul Ciesielski, Mittal Steel USA manager of natural gas and liquids, is one gas buyer who has spent a good deal of time selling the stuff, too. "I was one of you folks once, and I'm proud of it," he told an audience in which a few members surely would have liked to sell him some gas. Mittal is the world's largest steel producer. Mittal USA has 23 plants in the United States, which touch 20 pipelines and work with 14 utilities, "some of them better than others," Ciesielski said.
But more to the point, Mittal USA burns 100 Bcf/year and spent about $1 billion on gas last year, so gas marketers are likely to listen to Ciesielski when he says he wants to understand his bill. "Try to keep your billing as simple as possible... Just tell us how much we owe you. We'll try to send you a check."
With prices as high and volatile as they have been in the last couple of years, constructive relationships among buyers and sellers are more important than ever. "Energy was never something the company focused a lot of attention on, and then we saw $15 natural gas," said John Grass, Tyson Foods vice president of commodity trading and risk management.
Tyson has 145 facilities in 25 states concentrated mainly in the Upper Midwest and Southeast. Recently the company took a more aggressive stance on managing commodity risk, starting a commodity risk management department. In July, Tyson will go live with new risk management software. And that's not just for gas. In the company's view, chicken nuggets are a commodity, too, as well as many other of its business inputs and outputs, Grass said. He noted that because of gas price volatility it's harder to hedge energy purchases than many of the company's other commodity transactions.
Grass said Tyson generally buys its baseload gas supplies at first-of-month index prices. One-year contracts are typical, and futures and swaps are the financial risk management tools most commonly used. Because its numerous facilities tend to be small, Tyson often deals with what Grass described as niche marketers. Whether a marketer is large or small, the counterparty's credit standing is always scrutinized, he said.
Lately, Tyson has seen gas market-style volatility creeping into corn markets because of demands placed on the commodity by ethanol producers. "We're very closely following the energy market these days," Grass said.
The GasMart panelists agreed that rising energy prices in the United States are a serious issue when it comes to global competitiveness. However, Ciesielski was the only one who said his company has moved operations or allocated production abroad because of energy prices. "It has affected our industry, no doubt about it."
Grass said Tyson can't move domestic operations out of the United States because it can't ship its poultry and other products back to the United States. However, Tyson exports to Brazil are somewhat disadvantaged when competing against locally produced products because of Brazil's lower energy costs, he said.
Tony Adamo, strategic sourcing manager for chemical producer FMC Corp., said that at this point his company has not moved any U.S. production overseas because of energy prices. Adamo, who's had his current position for about a year, said that in that time he's seen a lot of change in the energy markets, particularly the greater availability of products for managing risk. "We use a lot of different products, but we try to keep it simple," he said.
The ultimate goal of hedging often is not obtaining the lowest price. Jack Neale, energy procurement manager for Corn Products International, said most of his company's gas purchases (10 Bcf/year in North America) are hedged at Nymex Henry Hub prices. Corn Products uses swaps, calls and collars to reduce volatility, provide budget consistency and achieve the lowest cost for its gas, in that order.
Corn Products' hedging program is "fairly mechanized." Objectives are quarterly and the company will generally contract out one to two years. "We try to have the volatility work for us whenever we can," Neale said.
Gas marketers that would like to serve some of Corn Products' demand should provide accurate bills, respond to inquiries in a timely manner and offer daily market letters as well as flexible contract terms and conditions, Neale said. What they shouldn't do is ignore requests for bids ("at least provide a no-bid response"). Nor should they get too pushy about getting on the bid list as nonnegotiable credit and volume parameters may be what is keeping them off the list in the first place.
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