In May 1988, an article in SAM reviewed the concept of buying natural gas on the short-term commodity or spot market as a way of saving money. With the deregulation of the natural gas industry since then, resorts have even better opportunities to buy low-cost natural gas on the spot market or spot gas, instead of higher priced gas from the local utility or sales gas.
Spot gas prices are lower than sales gas because the contract term is shorter. Weather, production rates and foreign competition are some of the factors that affect availability and the cost of supplying gas. Suppliers have more confidence in predicting the effect of these factors on natural gas prices over the short term and therefore offer lower prices to customers willing to lock into short-term and long-term contracts because they must guarantee supplies to all residential, commercial and industrial customers.
Fluctuations in spot gas prices change both spot-gas and sales-gas prices. Sales gas prices will not track spot price exactly because utilities purchase their gas with a combination of short-term (spot), medium-term and long-term gas supplies. The gas utility or a gas marketer can perform a cost analysis to determine the economic benefit of purchasing spot gas based on total annual gas consumption and peak-day gas usage. Suppliers will generally offer lower prices to customers requesting larger deliveries of gas.
Spot gas prices are cyclical and, with summer approaching and gas demand low, spot-market prices also are dropping. This makes summer a good time to lock in a low annual gas rate for savings during the winter heating season. More and more shrewd resort managers are doing just that and making appreciable saving on their energy bills.
One western resort’s maneuvers during the summer of 1992 illustrates this technique. The resort, with a 24-meter total load of 80,922 thousand cubic feet of gas (MCF) per year, asked its gas utility to analyze the spot market and its gas usage patterns. Individual charges for each metered location determined an economic break-even point that indicated spot gas would be profitable for the resort’s six largest facilities or metered loads, for a total of 51,233 MCF per year.
At July 1992 spot prices for a load of 51,233 MCF, the resort could expect to buy spot gas at $1.42 to $2.03 per MCF, including commodity and interconnecting pipeline charges. At this price, with the addition of local transportation, backup capacity and supply charges, the resort could save $15,000 to $30,000 or 10 to 15 percent over their current sales gas price of $3.12 per MCF.
The resort contracted with the gas utility to act as its agent in securing competitive bids for spot gas from a supplier. In August of 1992, the utility issued a Request for Proposal (RFP) on behalf of the resort and contracted 22 suppliers and marketers. After a two-week open-bid period, the utility received eight bids for spot gas with prices ranging from $2.04 to $2.41 per MCF, slightly higher than the spot gas prices forecast in July 1992. The resort contracted with the supplier offering the low bid of $2.04 per MCF for a term of one year and realized a savings of over $16,000 in the first 12 months.
What the Terms Mean
- Transport Gas is “Unbundled” gas purchases, so called because the customer pays separate delivery costs to the local distribution company (LDC, i.e., the gas utility), transportation costs to the pipeline company and supply costs to the natural gas supplier or producer.
- Spot Gas is considered short-term gas and is normally purchased for a period of 30 days to one year.
- Contract Gas is purchased for periods of one to five years.
- Sales Gas is a bundled gas purchase, where supply, transportation and delivery costs are combined into one price and purchased directly from the local distribution company.
- MCF = 1,000 cubic feet.
How the Spot Market Works
There are several steps and contracts involved in the spot-market purchase process in addition to the Supplier Contract. The customer will work with the utility (the distribution company), the pipeline (the transmission company) and the supplier (the production company).
Once it has been determined that there is a significant incentive for purchasing spot gas, a Request for Transportation Service from the utility should be initiated. This request includes an estimated peak-day nomination or what the highest gas usage will be on any one day during the coming year. Final delivery costs will depend on whether the customer requests a firm or an interruptible gas supply. Most ski resorts and resort lodges demand firm gas supply so operations are never interrupted. Firm gas supplies can be purchased most economically when requesting an interruptible gas supply from the producer and a firm backup supply and firm transportation service from the utility.
The utility will use the peak day amount as a basis for calculating backup supply and capacity reservation charges on the distribution system. Firm backup service may be contracted with the utility through a Firm Transportation Agreement and Firm Backup Agreement. If transporting to multiple facilities, the utility may also require a Telephone Installation and Maintenance Agreement. This agreement guarantees that the utility will be able to receive 15-minute interval gas usage information from their tele-metering devices attached to the resort’s gas meters. The utility will deliver the gas from the interconnecting pipeline to the customer at a distribution price per MCF. The utility’s earnings margin typically lies in the distribution price, making it indifferent as to whether the customer purchases spot or sales gas.
When purchasing spot gas, the supplier will require a monthly and daily nomination of anticipated gas usage so it can put adequate supplies into the transmission and distribution system to meet the customer’s requirements. Because this is an imperfect process and a customer may not use the amount of gas supplied by the supplier, balancing is done to adjust for over- and under-supplies on the system. Gas transportation and supply contracts with the utility, pipeline and supplier will provide for an adjustment period to allow the balancing process to occur. The customer may contract directly with the pipeline company in a separate Pipeline Transmission Agreement, but the supplier generally prefers to hold this contract to simplify monthly and daily nominations and balancing activities.
The customer may receive up to three bills for gas service: one from the utility for distribution, delivery and firm backup capacity and supply, one from the pipeline for transmission and one from the supplier for gas supplies. All three charges will be based on the actual gas consumption read by the utility at the customer’s meter point.
Playing the Market
It is always prudent to solicit competitive bids from suppliers when shopping for spot gas. The bids may seem confusing, as suppliers offer monthly price schedules, summer and winter pricing, different pricing for actual versus estimated gas usage, etc. As a newcomer to the spot gas market, it is recommended that bids be solicited through a purchasing agent who is familiar with the various types of offers made by natural gas suppliers. The agent, who may be a gas marketer or a local utility representative, will assist in soliciting and summarizing the bids, selecting a supplier and preparing the agreement between the supplier and the resort. Agency fees are generally five percent of the estimated annual savings with spot gas. The customer may elect to solicit its own bids in following years once familiar with the bidding process.
Analysts predict that weather patterns will have significant influence on natural gas prices during the first quarter of 1993. The industry should also have made a complete recovery from the partial supply shortage caused by Hurricane Andrew storm damage by early 1993. As demand declines with the coming of warm weather, gas prices should fall in May 1993 and then resume a gradual upward trend toward the end of the year. Because natural gas prices typically follow the decrease in demand with warm weather, buyers are advised to enter into spot-market gas-purchase contracts during the spring and summer when prices are typically at their lowest point.
Natural Gas Spot Prices in 1992
Consider the events that affected spot gas prices in the Rocky Mountain Region in 1992:
- Spot prices for natural gas fell to $1.05 per MMbtu in February of 1992.
- The drop in prices forced high-cost gas producers to halt production.
- This maneuver allowed the remaining producers to lift spot prices during March to about $1.50 per MMbtu in the Rocky Mountain area.
- In late August, Hurricane Andrew damaged natural gas drilling platforms in the Gulf of Mexico. Natural gas prices climbed 70 percent on the spot market.
- As a result of the damage and reduced deliveries, spot prices jumped again, on a local and national basis to as high as $2.30 per MMbtu.
Similar price scenarios are seen in gas delivery regions across the country.
