Liquidity at the citygates has become a problem for industrial buyers with the disappearance of large trading companies, and the middleman buyer for Ford Motor, General Electric and DaimlerChyrsler, among others, is going back to the field for his supplies.

“In the eighties industrials bought in the field from producers and then had to transport their gas,” Brandon S. Hayes, president of Kimball Resources told NGI. “In the nineties the aggregators evolved, transactions moved to the citygates, and we started buying there. Now, with a lot of aggregators leaving the business, the citygate markets have changed. There’s not as many players or sources of supply. We’re shifting from the citygates back to the fields; we’re going back to the eighties.”

Hayes said most of his clients participated in a large auction Kimball held for year-long contracts in which they picked up $175 million in gas contracts. Those contracts started last June. But, for clients that did not participate and are looking to sign up supplies now, “we’re seeing some liquidity issues.” And Hayes currently is exploring more contacts with producers, preparing for next June when the majority of the industrial contracts expire. “What I’m going to have to do is get back out there to the producers.” The large industrials “want to re-establish relationships with producers.”

Hayes already has contacted some producers. He noted that Shell and BP actively market their own gas, and he will be trying to line up others with equity gas, such as Apache and Anadarko. Kimball Resources will manage the transportation for the end users as they did years ago. And he pointed out that even before the Enron debacle “we had become concerned and separated the physical contracts from the financial hedges.” The financial departments of the large companies now handle the hedging, while Kimball works on physical supplies for the companies.

Besides the dearth of citygate aggregators, there is the credit issue; “it’s become huge. The credit departments have taken over the business.” Hayes said that even the large buyers such as Ford and GE are being asked to submit audited financials or letters of credit or prepayments before a transaction can be approved. Once a buyer and seller agree on a quote, it goes back to the respective credit departments for approval. “Try that with a commodity whose price changes every three seconds.”

Hayes noted that NAESB has come up with a generic middle of the road contract which buyers would like to use, but “sellers all want to amend it,” particularly in reference to the credit ratings.

“We may get to a cash market where buyers have to pay in advance. Instead of the supplier being the creditor, the consumer becomes the creditor.”

Hayes also said the industrials “are screaming for a pricing mechanism other than one that is Nymex-based. The problem with basing a physical natural gas transaction on Nymex is that the fundamentals of supply and demand don’t weigh on Nymex. Fundamentals have less and less of a role, while technicals have more,” Hayes said, questioning whether Nymex was manipulated. The current price above $4 is an example, “when we have about 3 Tcf in the ground, the weather forecast for the Midwest is 5% above normal, and demand is down — the auto companies have their plants shut down one week a month, the steel industry is down. The fundamentals of supply and demand indicate a softening market, not prices above $4.” Hayes said the industrials believe other market-measuring devices, such as published price indices, are also influenced by Nymex trading.

Houston-based Kimball Resources is working on a different kind of pricing, offering producers a return on their actual investment. This would work if a producer would document its actual finding and development costs. The producer would then be paid his costs, plus a return on investment of 25% to 30%. “We’ve initiated some conversations with producers on this and there’s interest. It would be similar to a prepayment, like buying reserves at a predetermined price, delivered over a period of time.” Hayes can be contacted at 713-783-7723 or at bhayes@kimballresources.com.

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