Re-creating the natural gas market through direct producer-consumer connections is going to be difficult for both sides, as they incorporate into their planning the functions once performed by the middle-man trading sector. In addition to price, the term and the credit arrangements tied to a supply contract are key factors a gas buyer needs to consider when negotiating, according to representatives of industrials and local distribution companies (LDCs) who spoke Wednesday at the LDC Forum in Chicago sponsored by Interchange Energy.

The Gas Buyers Forum came a day after leading producers discussed their re-entry into the marketing business (see related story). While the producers have gone a long way to take up the slack left following the disappearance of many mega-marketers, buyers also are taking on additional responsibilities.

“When gas went to $10 is when I went to management and said we had to get into managing price risk,” said Michele Kidd, purchasing group manager for global energy at Procter and Gamble (P&G).

And producers aren’t helping their cause requiring “onerous creditworthiness terms,” despite her firm’s impressive credit rating, Kidd said. P&G’s 42 Bcf annual gas usage in North America ranks the company behind the steel producers in the hierarchy of industrial users, and the company has a AAA credit rating and stable 24/7 365 day-a-year load as enticements to earn the business of this international company with billion dollar brands.

Why should P&G tie up assets in order to provide suppliers with a letter of credit, she asked. “We have some suppliers that we have been doing business for a long time that understand who we are, but as new suppliers come on line and on stream, we have to negotiate…. and we are not afraid to walk away from a deal.”

Providing their Public Utility Commissions sign off on the deal, LDCs such as Peoples Gas Light & Coke are willing to look at longer-term supply agreements in order to procure the lowest price possible. “We want to do everything possible to get the lowest price for our natural gas supply and we are willing to entertain longer term contracts to in order to get that done,” said David Wear, manager, gas supply administration.

Specifically, Wear suggested that a supplier or producer that is tied into an LNG supply chain could look to Peoples as a longer-term deal prospect. “In return, [they] would let us share in some of that value.”

As for balancing spot purchases versus the use of storage gas to meet winter demand, Wear straddled the fence. “Any time we can stay out of the daily market, it might help to ease some of these [price] spikes. Conversely, if all the gas is in storage fields controlled by individual LDCs and not available to the broader market, it can lead to inefficiencies and ultimately to greater price volatility, he reasoned.

In addition to longer-term deals, cost-based supply contracts are intriguing for gas buyers, the panel agreed. However, at present, there does not appear to be producers or marketers bending over backward to provide these sorts of contract terms. “We have not seen any interest,” said Wear. “We are going to continue to ask and hopefully it will fall on someone’s interested ears at some point.”

Meanwhile, P&G’s Kidd shared her not so stellar experience with what she called a cost-plus regional margin deal negotiated about six years ago. “We were two years into a 10-year deal with a supplier who had not managed or hedged. They went out of business and reneged on the contract and we were back in the market.”

Another area that P&G has a strong opinion on is price reporting. While endorsing a voluntary price reporting system consistent with the views of the Process Gas Consumers, Kidd noted that she views her pricing information as extremely sensitive. “We do not support mandatory reporting that might require me — an industrial — to divulge competitive information that I would not want [companies] like Kimberly Clark to find out….. I do believe in the [current] reporting system and feel it is the right vehicle to deliver market transparency.” As evidence of the intense competition and narrow margins in the paper products market, Kidd would not even reveal what percentage of her baseload purchases are typically done on index.

The LDC buyers on the panel were a little more forthcoming about their use of published indexes. Nicor said that it backs the current voluntary reporting process and is contributing its few non-index deals to index publishers. Peoples Gas echoed that sentiment. “We are also largely index buyers and that is because we are taking the approach to do our forward pricing in the financial market as opposed to the physical market,” said Wear. On the issue of price reporting, Peoples Gas supports the AGA’s consensus to provide transaction-level details, but not counterparty information to the index publishers.

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