Resistance to hedging has declined significantly amongindependent producers. But now that they’re hedging, some companiesare doing the wrong thing at the wrong time, according toexecutives at Statoil Energy.

“So many times we see producers go out and hedge at exactly thewrong moment or go out and miss great opportunities to lock in agood price simply because there are two fundamental factors thattend to drive people. One is fear and the other is greed,” saidDavid Simpson, a risk management services director in Statoil’sHouston office who joined the company recently from Total. “Whenprices are up the typical response is that they’re continuing to goup.. When prices do come off, they still think they’re going backup and a lot of times they get into locking in the prices not onlywell below where they could have locked it in but now they’relooking at a hedge to lock in a disastrous result on the downside.”

Statoil has three operating divisions in the United States.Statoil North America is the crude oil trading arm of the companyin Stamford, CT. Statoil U.S. Exploration is based in Houston andoperates the company’s offshore E&P program. And StatoilEnergy, based in Alexandria, VA, with offices in Houston andelsewhere, is involved in marketing, trading and price riskmanagement. Gas trading amounts to about 2.5 Bcf/d in physicalvolume. Adding financial volumes to that yields a figure about fourtimes as large. The company says about 98% of its trading isfinancial. Statoil Energy has about 30 counterparties currently andlooks to double that some time down the road, executives said. Morethan 525 transactions have been done since the price riskmanagement group’s formation.

Statoil got into risk management to take advantage of itstrading and marketing capabilities. As Statoil is an E&Pcompany, executives say they have a good understanding of whatproducers are looking for in hedging.

One reason producers hedge is to appease their bankers, notedDavid Glover, who joined Statoil from Enron to help form the RiskManagement Services Group in the fall of 1998. “Another thing thatrisk management services provides for producers is that they canget a competitive advantage over their counterparties. If they havea good hedging program in place and prices drop dramatically, theproducer who did not hedge at all can be hurting and may havetrouble meeting their debt obligations. If that’s the case, theymay end up having to sell some assets at a fire sale price. Thehedging producer is in good shape to take advantage of that.”

While Statoil Energy’s price risk management business hasfocused on producers, there’s growth to be had on the end-userside. That’s why the company recently hired John Race, formerly ofEnron Capital & Trade, to market financial products to thetransportation industry and other end-use customers. “The producer,almost 100% of their revenue is going to be dependent on thecommodity price. As we know, energy commodities are some of themost volatile and most variable prices in the world. When you lookat an industrial customer, end-use customer, we do have adifference in that for most of them energy is a portion of theirtotal costs, so there are some unique challenges that you face whenyou’re working with the end use customer as well.”

Targets of Statoil Energy’s end-user marketing effort includelarge end-users and unbundling LDCs, who if they remain in themerchant function will have commodity price exposure they won’t beable to pass through to ratepayers.

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