CHAPTER 14 ALTERNATIVE MARKETING APPROACHES: NATURAL GAS PURCHASING FROM THE PERSPECTIVE OF AN INDUSTRIAL END-USER AND END-USER TAKE-OR PAY CONCERNS
| Jurisdiction | United States |
(May 1987)
ALTERNATIVE MARKETING APPROACHES: NATURAL GAS PURCHASING FROM THE PERSPECTIVE OF AN INDUSTRIAL END-USER AND END-USER TAKE-OR PAY CONCERNS
J.R. Simplot Company
Boise, Idaho
INTRODUCTION
If one wants to be involved successfully in any phase of the natural resource industry there are several characteristics one must have or develop quickly:
o TENACITY
o PERSEVERANCE
o IMAGINATION
o FLEXIBILITY
o THE UNDERSTANDING KNOWLEDGE THAT "WHAT GOES AROUND COMES AROUND"
A person cannot merely tread lightly on the periphery of the business, but must wade into its very middle. Only in this manner will they develop an understanding and the experiences which lead to successful negotiations and opportunities.
Certainly governmental and regulatory edicts tend to make us reactive, but in the circles within the industries it is proactive traits that lead to success. These concepts, if valid at all, apply not only to the industrial customer seeking energy for a plant, but also to the interstate transporter, the local distribution company, the producer at the wellhead and the broker that may be in between any of the steps along the way.
A "can do" or at least "we'll try our best to work it out" attitude expressed by everyone will transcend the making or breaking of a particular deal. Old pipeline attitudes, the producers lack of knowledge beyond the wellhead, and the industrial reliance purely upon the local distribution company, are no longer accepted norms for the natural gas industry.
Every consumer of natural gas pays, in some way, for the opportunity to utilize this fuel for residential, commercial, and industrial purposes. The methods of payment may vary from a minimum bill, service charge, or demand-commodity arrangement to
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the producer's desire for a maximum take or pay based upon maximum deliverability of the source.
This section will present a series of concerns with which an end-user, who would transport gas for its own behalf or merely consume system gas, should be familiar.
There are five basic types of contractual agreements that are commonly used by the industrial end-user and/or its pipeline and local distribution company (LDC) suppliers:
1. Long Term Sale
2. Spot Sale
3. Transportation
4. Purchase for Resale
5. Brokerage — Agency
Whether one seeks to transport or not, it is in the user's best interest to understand how natural gas is purchased, transported and sold. The team approach of the major interstate pipeline and the LDC working together on behalf of a capitive end-user has, for the most part, served users well for many years. The opportunities presented now, through deregulation of most gas and the FERC orders to and including Order 436, have made and will continue, for those who desire it, to make the team sport one in which free agency is the rule.
If an LDC or a particular end-user wants to continue with the "Big Brother" arrangement of the past, that will be their option. If, in fact, they choose to enter the new competitive-firm-interruptible world of gas-to-gas and gas-to-alternative sources competition they may truly be the master of their own destiny and benefit from a new scenario of risk and reward opportunities.
PREPARATION PRIOR TO END-USER CONTRACT COMMITMENTS
When acquiring a gas supply and determining ability to receive volumes of gas an industrial end-user must take a comprehensive inventory of the energy needs of a particular facility.
Your Facility
A. What are the Current Energy Uses?
1. Size — Volume — Quality, at what Pressures
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2. How Satisfied
a. By whom — reliability of deliverability and rate change occurrence and direction.
b. What fuel and at what quality.
c. At what rate patterns — energy, consumption, trend (Seasonal, etc)
B. History
1. Consumption
2. Pricing
3. Consumption Trend Pattern
4. Any alternative energy devices have or are currently being used.
C. Future Energy Needs
1. Purpose by source, including alternates
2. Consumption trend pattern and flexibility to change
3. Plant Economics under all energy pricing scenarios
4. Economics
D. Know the Location of Your Plant Relative to the Following:
1. Who is the nearest local gas distribution company?
2. What facilities to your plant if any?
3. What facilities necessary to satisfy current and future loads?
4. Use Maps
Locate areas of production and producers
Carriers
Be knowledgeable yourself about potential transportation routes.
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GENERAL UNDERSTANDING
A. The pricing and supply posture of your LDC relative to you as a system-supply customer.
B. The general take or pay arrangements between your pipeline supplier and its source and the LDC.
C. The space availability of the pipelines and that of the LDC. Along with all the variables that can affect space such as:
1. Weather
2. FERC Rulings
3. State PUC attitudes
4. Operational & Mechanical
5. How long it takes to get the pipeline and LDC to negotiate and move a contract through the signature stage.
6. Pipeline attitudinal problems that may result in slowness and stalling.
D. The characteristics and profile of the sellers and, again, the transporters.
1. Small vs. large company.
2. The number and type of wells from which×cubic feet are to be produced.
3. Seasonal effects on the producer.
4. Financial status of the producer.
5. Contractual arrangements being made with other producers in the same area.
6. What does it take and what has it taken, for producers to be released from existing contracts in order to make sales.
TYPE OF PURCHASED GAS
Should you utilize Sales and/or Transportation gas supplies?
1. Where are the best savings?
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2. Where is the greatest reliability of service?
3. Can you have transportation with sales backup?
4. Is transportation firm or interruptible?
If you chose to transport and desire firm service you should already know if it is available, at what cost, and how to apply. Be sure you understand under what conditions you can still be curtailed.
BALANCING
The mechanics of gas flowing to the plant including accounting and measurement simply frightens end-users. It may appear complicated at first, but it can be understood to the point of feeling comfortable.
Visit your LDC gas dispatching center and explore the ways in which they balance with their suppliers and how you can balance with them. Determine if you can swing on them and if they can backstop you.
Discuss the same subjects with the pipelines. Remember, your goal may be to utilize 100% transported gas.
INTERVENTION
Do not hesitate to intervene in FERC and State PUC rate hearings when they concern your gas supply. Do it individually and/or with end-user industry trade groups. Ask for fair cost of service ratemaking where your class of customers is not being subsidized, nor does it subsidize any other customer classes.
Ask for transportation rates that are unbundled. Pay for storage only if you use it. Work toward a scenario where the LDC makes its money selling or moving energy rather than on the plant in the ground. You will find that a five cent per thousand cubic feet savings in transportation costs will be significant. Get involved and stay involved!
LEVERS
Developing negotiation levers prior to commencing negotiations is of paramount importance. Even if you can't find a lever, do some inventive reasoning and thinking as to why the pipeline or LDC should want to deal with you on your terms. In other words, why is it in their best interest or what is in it for them? Do not expect them to explain it to you.
A lever may take many forms, a few of which are:
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1. The ability to switch to an alternate fuel.
2. Legitimately prepared and presented studies on the cost effectiveness of the capital investment and operating costs necessary to switch to an altenate fuel.
3. Bypass and/or the threat to change.
4. Opposition to their return-on-equity proposals to the State PUC's.
5. Let the LDC or pipeline or their marketing affiliate arrange the transportation, supply, and system management.
6. File a complaint and ask for a hearing with the PUC.
CONTRACT TERMS
After you have made a thorough assessment of your facility and needs then you can begin to assemble your desires for contract terms with the LDC and pipelines.
The first step is to discuss flexible supply strategies that are responsive to a range of market conditions. Your tradeoffs may fall between security of supply and being at the competitive, leading edge of the market. Therefore, one must...
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