April 2012, Vol. 239 No. 4

Features

Tenaska Marketing Ventures Sets Gold Standard In Gas Trading

In many ways the world of natural gas trading bears little resemblance to the halcyon days of the 2000-2001 period when the business began an infamous meltdown because of the questionable practices some companies were applying.

For those trading companies that stayed the course and refused to deviate from their original strategies, they have enjoyed a gradual climb that has enabled them to become leading earners for their corporate bottom line. That’s a good reason why Tenaska Marketing Ventures (TMV) has again been singled out for first place in Capacity Center’s annual Top 20 of natural gas pipeline capacity trading company rankings. This marks the third year in a row that the Omaha, NE-based company came in first. TMV is an affiliate of Tenaska, one of the nation’s largest independent power producers.

Boston-based Capacity Trading Company (CapacityCenter.com) monitors and collects capacity and operational information on all interstate pipelines. The 12-month period through September 2011 was the second straight year that the total volume of pipeline capacity traded by the Top 20 increased, coming in a remarkable 143% over 2010 volumes, topping it by 12 Bcf/d.

“In 2011 we saw a continuation of two key trends in capacity trading from the previous year,” said Greg Lander, president of Capacity Center. “The first trend is the increased volume level of capacity deals traded. The second trend is the ongoing concentration of capacity trading activity by the Top 20 trading firms. In 2011, 66% of non-affiliate deals were traded by the Top 20, an increase from the 53% traded by the Top 20 in 2010. Further, 56% of the volume traded by the Top 20 was traded by the Top 5.

“Interestingly, the grouping of trading firms in positions 11 through 20 was tight with only 160 MDth/d equivalent separating number 11 from number 20,” Lander said.

More than 170 entities traded over 20 Bcf/d on a daily equivalent basis through September 2011, an increase from the 15.3 Bcf/d traded over the same period in 2010. While total traded capacity in 2011 approached 23 Bcf/d, Capacity Center excluded for ranking purposes the nearly 5 Bcf/d traded between affiliates.

TMV repeated as the No. 1 capacity trading company in 2011 as it nearly doubled its daily equivalent traded from 1.4 Bcf/d to more than 2.5 Bcf/d. The Top 5 are rounded out by BP and Sequent, each rising by one spot to second and third respectively, Macquarie rising by 11 spots to number 4, and Amerada Hess dropping three spots to number 5. TMV did 78% more volume than BP, although BP did more than twice as many deals.

Several new players cracked the Top 20 including, NRG Power Marketing (10), Southern Company (11), Interstate Gas Supply (IGS) an Ohio-based retail marketer (14) and Repsol, the LNG importer (18) which vaulted into the Top 20 by moving up 42 spots as Canadian imported LNG came fully on-stream in 2011. Among those dropping out of the Top 20 were Atmos Energy’s regulated operations, Minnesota Energy, and Southstar (all three dropping out due to the exclusion of affiliated transactions). These were joined by Total, FPL and J Aron.

For TMV, which celebrated its 20th anniversary in 2011, it’s just another day at the office. With offices in Calgary, Alberta, Dallas, TX and Denver, CO as well as its Omaha headquarters, TMV covers nearly all of North America, transporting gas on virtually every major pipeline system. In 2010, TMV was also named a winner of Mastio & Company’s 13th Natural Gas Marketer Customer Value and Loyalty Study.

In 2010 Tenaska’s gross operating revenues were $10 billion and its assets were $3.2 billion. Forbes magazine ranked Tenaska 25th among the largest privately held U.S. companies, based on 2010 revenues, and thanks in large part to the revenues provided by the marketing arm.

Fred Hunzeker is the president of TMV, having joined the company in its start-up. He is justly proud that they successfully weathered the storm that forever changed the trading business.

“It’s amazing when you think about all of the cycles we’ve been through and the people who have entered and exited our business. I don’t think we can find any of the other leading people in the business who are under the same ownership today as they were 20 years, like we are,” he told P&GJ.

TMV markets about 6 Bcf/d of natural gas – about 10% of the U.S. market – and has remained in Capacity Center’s Top 10 rankings for the past nine years. TMV is atypical from the others on the list because it is independent and privately held by Tenaska while the others are either affiliated with a large producer, utility, bank or international corporation.

What difference does that make?

“We would tell our customers that they should have less conflicts of interest with us,” Hunzeker explained. “Being independent we’re truly able to represent our customers, so they shouldn’t have to worry about whether we have another agenda that helps our production or our utility.

“Our strategy is that we are, and always have been, very physically focusing on touching and moving the actual gas molecule – working with those who either produce, transport, store or the customer who consumes it.”

By either controlling or managing those physical assets (the vast majority are non-Tenaska assets), TMV can trade around them and extract the inefficiencies in the marketplace that exist around that capacity and share the value with its customers. Other trading companies say they can do likewise but probably also run proprietary trading shops and are trying to profit from the volatility in the market by taking risks, Hunzeker said. That’s why relationship-building is an essential ingredient of TMV’s success.

“It depends on your strategy,” Hunzeker explained. “We’re not just sitting at a desk, trying to pick the direction of the market and profit from that. If that’s your strategy, then relationships are not very important. In our business, we’re moving molecules and helping to solve customers’ needs. So relationships are very important for us.”
TMV’s skill in creating specialized solutions for customers of nearly any size and its intimate knowledge of the market enable it to outperform nationally focused companies and deliver faster service, more market opportunities, and reliable, cost-effective energy supplies, he said. In addition to providing value, that means managing risk for utilities, pipelines, producers and large industrial users.

Technology made some changes inevitable in the business, leading to even greater transparency. Where most gas was once traded by phone, traders now rely on online platforms. IntercontinentalExchange (ICE) is the premiere Internet-based platform, designed to provide an efficient market structure for OTC energy commodity trading. Established in May 2000, ICE represents some of the world’s largest energy traders and is said to offer traders better price transparency, more efficiency, greater liquidity and lower costs than manual trading.

TMV employs about 140 people with more than 40 involved directly with commercial transactions. The average experience of those 140 is about 15 to 20 years with more than half of that time spent with TMV. This is what they do: a power plant has to sign up for firm capacity for a peak summer day but it happens the weather isn’t that hot so the plant is not dispatched. That transport capacity sit empty. TMV, meanwhile, has figured a way to utilize that capacity for those days when the client doesn’t ship to their plant.

That reduces the inefficiency they would otherwise face from not using all of their contracted capacity. This provides a value to their client which TMV also shares in as payment for its service. In addition to managing transport, TMV may help them lease gas storage so that if the weather is indeed a scorcher, TMV can pull the needed gas out of storage and get it to them on very short notice.

“It’s nothing they (clients) couldn’t do themselves; it’s just whether they’re geared up to do it or do they choose to outsource it. It could be assets that we help someone manage or ones where we contract for it and provide to the client as part of our service,” Hunzeker said.

The ongoing shale revolution throughout North America has caused the biggest change in years to the trading sector.

“For quite a number of years we were in a relatively balanced marketplace where we were even possibly supply-short. Many of those calling us were very concerned how they were going to get gas and at the right place. A lot of work had to be done to help them acquire supply. There were also quite a few pipeline bottlenecks so we had a big price spread across the country because in a lot of places there wasn’t enough capacity to move gas easily away from an area,” he said.

Now it’s a whole new ball game.

“The technology to extract these shale gases has been perfected at a cost level that can continue, so the gas is going to be there. This has caused an enormous growth in supply and a lot of infrastructure has been built to move it. As a result, we’ve gone from a balanced situation where you faced not having enough gas or in the right place to where there’s plenty of gas and pipe to move it. With that has come lower volatility and lower prices. That’s the big change,” Hunzeker said.

Has it made gas trading easier or more difficult?

“Both,” he responded. “The people that trade on volatility don’t necessarily want to move the molecule but want to bet on whether prices are going to go up or down or perhaps on the spread between an area that is going to get wider or tighter. It’s probably made trading more difficult for them because it’s basically flattened out all those prices.

“Being a physical player trying to move all those molecules, it hasn’t made it more or less difficult, but certainly different because the people in the marketplace have needs that may have changed. Before, it may have been the buyer who was struggling to get supply; now, it might be other way around – the producer may have a struggle making sure his gas flows. Pipelines have also changed from an everything-is-sold-out situation because there wasn’t enough pipe to where in some cases today they’re struggling with uncontracted capacity.”

Few believe that today’s below $3 per Mcf price range will be sustainable. Hunzeker said producers are looking to the $4-5 range in hopes of equalizing demand with the right price. There are still some bottlenecks caused by the shale plays that need to be worked out – particularly in the Marcellus – and pipeline activity should continue at a brisk pace as the industry works to resolve those constraints.

Another major change facing gas traders involves federal Environmental Protection Agency rules on power generation that are leading to more coal plant retirements.
“We expect the growth in the business to be not so much in gas utility growth, but in power generation. We feel well-positioned with our physical platform to help either existing or new market entrants with their gas needs. This is going to require physical players like us because there is a market-balancing role that is essential.

“The customers might change or their exact needs might change, but we’re still going to be helping to balance and manage their gas volume and/or their pricing risk. After 20 years, we’re still doing basically the same thing for our clients,” Hunzeker concluded.