Signs of a recovery in fixed-price reporting in the natural gas market were evident in the recent March bidweek gas trading period as the number of fixed-price deals reported to Natural Gas Intelligence jumped 9% from the previous month to 1,951 transactions. Total transactions have soared 41% in the last five months, while total gas volumes reported have jumped 36% over the same period to about 12.1 Bcf/d. That compares with only 3.9 Bcf/d at its low point in November 2002.

The increase in price reporting is partly attributable to improvements in the reporting system over the last year. With prodding from the Federal Energy Regulatory Commission index publishers are doing a better job collecting prices and producers, marketers, utility companies and end users increasingly are participating in the surveys and have standardized the reporting process. But there are other indications that the increase in price reporting also may be the result of more transactions taking place in the market.

Cinergy’s Bruce Sukaly, chief commercial officer in natural gas marketing, said it’s hard to measure the increase in market liquidity, but there is some pretty good evidence of a recovery from the slump of the past two years. There are more market players now than there were a year ago, and competition has increased significantly, he said.

“I know the market has gotten more competitive for transactions than it was a year ago. That’s for sure,” said Sukaly. “There are more people bidding on deals than there were a year ago. Even one- to five-year deals, the bread and butter stuff, is more competitive than it was a year ago. There are more people and they are more aggressive.”

However, Sukaly also said the basis market still appears weakened and some spot locations remain illiquid.

The gas market was severely injured over the last two years by a perfect storm of negative events that started with Enron’s collapse and continued with a credit crisis, additional bankruptcies, a power supply glut and multiple legal settlements of charges of false gas price reporting to trade publications.

A tightness in gas supply also hindered the market. “In general liquidity is coming back into the market,” said another major market player. “If you compare the period including the second half of 2002 and the first half of 2003 against the current market, things are definitely getting better,”. But because gas supply is still tight, “if there’s a squeeze, liquidity can dry up very rapidly at certain points.”

Gas trading struggled all of last year with fixed-price trading volumes during monthly bidweeks averaging about 8-9 Bcf/d, and transactions reported to NGI hovering close to 1,400/bidweek. But then in February, transactions jumped to nearly 1,800, while volumes rose to 11.8 Bcf/d. In March, the market confirmed the February increase and continued to show improvement.

According to the results of NGI’s Bidweek survey for March of monthly baseload deals, the number of Tier 1 spot price locations, or points where more than 100,000 MMBtu/d was reported, grew to 40 points from only 27 in the last November’s bidweek. Meanwhile, the number of Tier 3 points, where less than 25,000 MMBtu/d was received, dropped to only 11 locations from a peak of 25 in January.

Substantial increases were seen at Chicago Citygate, where volumes jumped 96% from January bidweek to about 727,000 MMBtu/d in March. In the Midcontinent region, Panhandle Eastern volumes soared 84% since January to 283,000 MMBtu/d in the March bidweek. Many other points also showed significant volume growth, including Southern California Border (up 45% since January), Henry Hub (up 29%), Dominion (up 11%) and El Paso San Juan Non-Bondad (up 10%).

In addition, there were a total of 81 spot market points with a published price index during March bidweek, compared to a recent low of 75 in January, only 71 last July and 68 in November 2002.

NGI was not alone in seeing improvements. IntercontinentalExchange (ICE), for example, had a record amount of gas trading done on its system for March.

ICE COO Chuck Vice said bidweek trading was up 5% for March after being up 20% in February from the previous month. “I think February was up considerably from the previous peak that we had, and then this month was another record as well, but only slightly over the previous month,” said Vice, adding that there are about 250 companies now trading gas on the exchange.

Nevertheless, Vice wasn’t quite ready to say a market recovery is upon us. “During bidweek we are a healthy portion of the market, but not a large enough portion that I can look at our information and draw a conclusion about the overall trend in the market,” he said.

“These things also are seasonal. During the winter heating season you are going to see more gas traded during the bidweeks. Either liquidity is increasing or ICE’s share of that market is increasing. I can’t tell you which is true or if both are true.” Only time will tell, he said.

One element of the slow growth of the market after Enron is that it is an entirely different — much more careful — market, one trader said. One of the bigger challenges to trading today is the paperwork and legal work involved in getting enabling agreements in place to establish creditworthy counterparties.

“Most counterparties are very cognizant of risk in contracting. They want ISDA, NAESB or EEI agreements — the mainstay enabling agreements for gas-power trading — all in place these days before they’ll transact. Unless they’re very comfortable with your company, you’ve got to have the enabling agreements. That takes time.

“It’s a very significant barrier to entry,” the trader said. “Everyone is challenged by this; we’re challenged as well in the sense that our customers have higher expectations. We have to get paperwork done before they’ll transact. It makes it harder to grow a business.”

“Some of the producers have trouble with the guarantees. They have their own force majeure clauses to protect their risk. They’re sticking to their guns on force majeure, and a lot of customers are reticent to accept that unless they get a discount.”

If FERC were to order mandatory price reporting, “that would be another barrier to entry,” the trader said. “It would make it tougher on companies looking to get into trading and tougher on customers because the cost of lengthy market reporting would be added into the price.” The marketer criticized traders who use the published indexes, but don’t contribute to them. “They’re getting a free ride; they’re not supporting the system.”

Producers also “are looking at the asset management contracts that the major marketers used to do for customers, but so far they don’t have the necessary risk management tools. They are groping to put those together; it’s a long term strategy.”

To handle the credit problem, “you’ll find people being as creative as possible, using master netting agreements across business lines, both power and gas. The weighted average credit rating of our portfolio of customers is probably right on the cusp of investment grade.” Overall in the market, the credit squeeze basically means deals are shorter. “It’s just harder to do longer term deals.”

Beyond the difficulties of getting trading agreements in place, new market entrants tread cautiously because of the market pressures and price volatility, the trader said. “Trading physical gas is a tough business. Because there aren’t as many market participants, the market can get very illiquid, very fast.”

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