Managing Propane Supply & Risk. Angela John BP

Transcription

1 Managing Propane Supply & Risk Angela John BP

2 Disclaimer Copyright. All rights reserved. Contents of this presentation do not necessarily reflect the Company s views. This presentation and its contents have been provided to you for informational purposes only. This information is not advice on or a recommendation of any of the matters described herein or any related commercial transactions. BP is not responsible for any inaccuracies in the information contained herein. BP makes no representations or warranties, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information, assumptions or analysis contained herein or in any supplemental materials, and BP accepts no liability in connection therewith. BP deals and trades in energy related products and may have positions consistent with or different from those implied or suggested by this presentation. This presentation may also contain forward-looking statements. Any statements that are not historical facts, including statements about BP's beliefs or expectations, are forward-looking statements. These statements are based mostly on publicly available information, estimates and projections and you should not place undue reliance on them. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast, suggested or implied in any forward-looking statements in this presentation due to a variety of factors. Factors which could cause actual results to differ from these forward-looking statements may include, without limitation, general economic conditions; conditions in the markets; behavior of customers, suppliers, and competitors; technological developments; the implementation and execution of new processes; and changes to legal, tax, and regulatory rules. The foregoing list of factors should not be construed as exhaustive. BP disclaims any intention or obligation to publicly or privately update or revise any forwardlooking statements, whether as a result of new information, future events, or otherwise. Participants should seek their own advice and guidance from appropriate legal, tax, financial and trading professionals when making decisions as to positions to take in the market. 2

3 Angela John, Director of Structured Products Over 9 years of experience in NGLs developing BP s NGL and chemical producer risk management business NPGA Board member Chair of the Suppliers Section Vice-Chair of the Supply and Logistics Committee 25 years with BP Over 20 years commercial experience in chemicals, refining, oil, natural gas and NGLs Chemical engineer from the University of Houston MBA from Kellogg at Northwestern 3

4 Key Messages The market is more uncertain than ever The market provides the ability to manage risk & reduce volatility Risk management frameworks can be useful tools BP provides liquidity, tools, and ideas to manage risk 4

5 Risk Management Framework Develop objectives Identify risks Monitor Conditions Develop and Execute Plan Reflect and Reassess Budget Certainty Cash Flow Protect Margins Dampen Volatility Competitive Advantage Catastrophe Insurance Commodity Price Credit Operational Interest Rate Regulatory Concerned about propane supply risk? Price risk? Would you like to increase the certainty that your supply cost assumptions are correct? 5

6 Develop Risk Management Objectives Review your supply, operational, and marketing plans Marketing programs offered to your customers? Fixed price? Capped price programs? Optimizing storage? Protect value of inventory Protect price of gas in transit Review your goals Protect margins? Grow business? Cash management Credit 6

7 Proactive Risk Management Proactive risk management is like preventative medicine the immediate benefits are not always obvious and there are often costs involved. Benefits Reduce and/or eliminate price volatility for the customer base Protection against adverse outcomes & catastrophic risk protection Stability of business planning & cash flow Price Risk Management is best applied: Consistently Under guidelines of a corporate or regulatory mandate With knowledge of the underlying marketing Costs May limit a company s upside. In this case, consumers share in falling markets. Option premiums *BP Energy Company is provisionally registered under the US Dodd Frank Act 7

8 Risk Management Framework Develop objectives Identify risks Monitor Conditions Develop and Execute Plan Reflect and Reassess Budget Certainty Cash Flow Returns/Protect Product Margins Dampen Volatility Price Credit Operational Interest Rate Regulatory Supply Demand Liquidity Other Market Factors Competitive Advantage Catastrophe Insurance 8

9 What matters in today s markets? 9

10 C3 Monthly Prices: FEI and NWE prices in general track MB prices pretty well Source: OPIS, Argus, March 2018 Note: FEI and NWE prices were not available before October

11 Global LPG pricing relationships are evolving, what will be the impact to US prices? Source: IHS, Argus, OPIS Source: Baltic / Clarksons, NYMEX, March 2018 International prices depicted in $/MT: March 2018 MB 78 cpg, FEI 90 cpg, NW E 85 cpg Baltic Rate is defined as the freight from Ras Tanura, KSA to Chiba, Japan which is the reference for global LPG shipping 11

12 Long-Term WTI spot price outlooks Source: NYMEX, Various external consultants, 3/22/2018 View of crude demand, competing fuels, supply costs, production, and trade flows will influence long-term outlook of oil prices 12

13 Commodities are more interconnected than ever before Polymers Power Olefins Aromatics Nat gas Naphtha C3 and other NGLs LNG Oil 13

14 Natural Gas, WTI and C3 Forwards: Trends differ by commodity Source: NYMEX, OPIS, 3/22/

15 US Stocks Source: EIA 3/16/

16 MB storage levels and price 16 Source: EIA, OPIS

17 Risk Management Framework Develop objectives Identify risks Monitor Conditions Develop and Execute Plan Reflect and Reassess Budget Certainty Cash Flow Returns/Protect Product Margins Dampen Volatility Competitive Advantage Catastrophe Insurance Price Credit Operational Interest Rate Regulatory Supply Demand Liquidity Other Market Factors Product Types Volume /Term Flexibility Contracts Accounting Credit Operations 17

18 Execute Plan Wholesale physical propane agreement considerations Delivery location and mode Volume Term spot to 5 years Price Fixed price for agreed time period and exact quantity Market index with differential Maximum price Min price obligation Collar floor and ceiling 18

19 Deep North American NGLs Presence Broad Physical Presence Marketing ~250,000 bpd of NGLs Optimize 2+ million barrels of off-hub NGL storage 100,000 bpd fractionation capacity at multiple US Gulf Coast facilities ~160,000 bpd current equity and customer natural gas liquids (NGLs) keep dry commitment ~1,900 NGL railcar fleet Shipper on most major NGL pipelines Established US production base provides supply security and flexibility Marine terminal access to international markets coast to coast Ethane * Propane * Butane * Y-grade * Ethylene * Propylene 19

20 Physical Contracting What do we see? Longer time horizons for contracting 2-3 year supply deals for a portion of portfolio Month average pricing, as well as day of lift Fixed differentials to CW or MB Caps Increased use of NAESB contract 20

21 Execute Plan Traditional Physical Hedging Physical pre-buy Agreement to buy portion of physical supply at fixed price Falling prices can leave you lifting C3 at higher price Allocation issues can cause pre-bought product to be unavailable Physical hedge at MB or CW Buy phys supply at posting or diff to CW or MB Buy MB or CW C3 at a fixed price as hedge Sell MB or CW C3 at an index Flexibility to exit hedge when desired by reversing these transactions 21

22 Execute Plan Financial Hedging Defined as hedging when physical position offsets financial activity Executed as swap under an ISDA or on an exchange Fixed price financial swap Floating price is exchanged for a fixed price for a specific time period Protects against rising prices; opportunity costs if prices decline No upfront premium If you buy a swap from BP, you fix the price against the index If the floating price > fixed price, you will receive an amount equal to the difference of the prices If the floating price < fixed price, then you will pay an amount equal to the difference of the prices 22

23 Options Pay or receive premium like insurance policy maximum price of hedge is known up front Call option right (but not obligation) to buy at the strike price Buying protects a company s risk against rising prices Strike price agreed by buyer and seller and can be a fixed price or an index-related price Hedge for retail price cap programs Example in April 2018, you pay 6 cpg for a 90 cpg strike for Jan 2019 C3 On Jan 31 st, if Jan avg C3 is greater than the strike, you receive the difference between the strike price and the average; if MB Jan avg is 95 cpg, you receive 5 cpg On Jan 31 st, if Jan avg C3 is less than the strike, nothing happens Put options right (but not obligation) to sell at an agreed price Option buyer receives payment when prices fall below the strike price 23

24 Structured Products Tailoring transactions to meet Customer Needs Index Swap Bullet swaps Call Put Collar Index with Floor Index with Cap Deferred Premium Structures Time Spread Participating Swap Extendable Swap Swaption Straddles Three Way Collar 4 Way Collar Target Profit Swap Tiered Volume Restructure Binary Options Call Swaption Put Swaption Discounted Fixed Price with Reopener Basis Swap Varied volumes by period - Varied Strikes for month Varied settlement dates *BP Energy Company is provisionally registered under the US Dodd Frank Act 24

25 Price Ideas Fixed Price Hedge trying to achieve budget or reduce volatility like current price levels consider a simple fixed price hedge May 18-Apr 19 non-tet C3 is ~ 78 cpg consider locking in basis as well through supply contracts provides planning certainty protects against a catastrophic price move Prices are indicative only and subject to change with market conditions. 25

26 Price Idea Minimum price obligation upside protection is less of a concern looking to buy product at a discount to index consider an Index Discount with a minimum price obligation For May 18- Mar19, buy propane at the OPIS average less 2 cpg with a minimum price of 65 cpg. So if OPIS average was 90 cpg, your price would be 88 cpg (OPIS 2 cpg). If OPIS was 60 cpg, your price would be 65 cpg (the minimum price). Prices are indicative only and subject to change with market conditions. 26

27 Price Idea 3-way collar Less concerned that prices will take off want some protection and a discount on your price For May 18 - Apr 19 with a 65 cpg floor and a 90 cpg cap with a 100 cpg reopener, your price would be: 65 cpg, if OPIS settled below 65 cpg; OPIS Month Average, if OPIS Month Average settled between 65 cpg and 90 cpg; 90 cpg, if OPIS month average settled between 90 cpg and 100 cpg. Opis Month average minus 10 cpg, if OPIS settled greater than 100 cpg. Prices are indicative only and subject to change with market conditions. 27

28 Hedging Activity What do we see? Fixed price program hedging Hedging optimization decisions Hedging to reduce risk in acquisition decisions Asset development economic hedging Debt Restructurings 28

29 Risk Management Framework Develop objectives Identify risks Monitor Conditions Develop and Execute Plan Reflect and Reassess Budget Certainty Cash Flow Returns/Protect Product Margins Dampen Volatility Price Credit Operational Interest Rate Regulatory Supply Demand Liquidity Other Market Factors Product Types Volume /Term Flexibility Internal Control Contracts Measures of success Competitive Advantage Catastrophe Insurance Accounting Credit Operations 29

30 Proven expertise in energy risk management We ve grown from a leading physical energy marketer to a recognized industry expert in risk management. We leverage our expertise to help design risk management strategies that fit our customers objectives. We deliver market-leading hedging products and services. In 2013, we became the first integrated oil and gas major to register as Swap Dealer under the US Dodd Frank Act.* *BP Energy Company is provisionally registered under the US Dodd Frank Act 30

31 Turning information into insights We ve developed a deep understanding of the markets. On a 24/7 basis, we Aggregate and analyze millions of data points from basin to burner tip Compile information from 100+ external data sources Interpret data from three terabytes of information with eight billion spreadsheet rows We share our market and regulatory insights to help our stakeholders stay informed. 31

32 Contact Us Photo: BP Houston Trade Floor Angela John Director, NGLs BP Structured Products NGLs and Chemicals Kasib Abdullah VP, NGL Marketing 32 32

33 Back-up Photo: BP Houston Trade Floor 33 33

34 ISDA Contract ISDA (International Swaps and Derivatives Association) fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products Contracts cover all financial commodities The ISDA documents and credit provisions are signed once, then each deal has a confirm under the agreed ISDA dependent on credit agreements 34 34

35 NAESB NGL Contract NAESB (North American Energy Standards Board) developed an NGL standard physical contract; Many industry players, including producers, retailers, end-users, wholesalers, and pipeline companies, participated in the development of the contract Represents both buyers and sellers, on and off-hub, firm and standard deals Intended to replace ST&Cs - standardizes important concerns like title transfer, product quality, Force Majeure (FM), and settlements Copyright protected; NAESB members (including BP) can use the contract with any of their counterparties, regardless of whether the other party is a member The NAESB and special provisions are signed once, then each deal has a confirm under the agreed NAESB 35 35

36 Proud of BP s response as a company We have contingency plans in place to be fully-functional within 24 hours of a disruption or incident. Photo: Steve Gonzales, Houston Chronicle Photo: Marc Morrison Reliability is our top priority 36

37 Many Commodity Choices Refined Products Heating Oil, Gasoline, Diesel, Crack Spreads, 3:2:1, Various Grades of Refined Products Chemicals LLDPE, LDPE, HDPE, PGP, PP, Eth, RGP Ethanol & Agricultural Products Corn, Soybeans Crude WTI, Brent, major global grades, Canadian Heavy, WTI%, WTI differential, Physical, Financial, Options Power Transact in all North American ISOs/RTOs; commodity swaps, standards and exotic options for electricity, heat rates and spark spreads Natural Gas Liquids C2, C3, C4, IC4, C5, Conway, MtB, Edmonton, WTI%, ARA, FEI Natural Gas NYMEX, trades at most Platts pricing points Biogas RIN & LCFS generation from landfill biogas 37

38 Proposed petchem crackers: Multiple facilities under construction for competition by the end of the decade Six new ethylene crackers are now under construction; two have just come online and one restarted; potential for more post CPChem EU under construction 86 kbd 2. XOM BP2 - under construction 86 kbd 3. Dow LHC9 - now online 86 kbd 4. OXY Ingleside - now online 36 kbd 5. Formosa OPL3 - under construction 69 kbd 6. Sasol LA - under construction 2019 now 86 kbd 7. Indorama restart underway 23 kbd 8. Axiall Lotte [LACC] - under construction 57 kbd 9. Shintech under construction 29 kbd Source: Platts Analytics Bentek Energy, * indicates Northeast project 38

39 U.S. LPG export additions: Too much or not enough? Source: Public Announcements; EIA * Projects located in the Northeast 39

40 U.S. NGLs supply: Growth expected to surpass 2014 levels Source: EIA Short Term Energy Outlook, March 2018 Growth to date driven by high oil and NGL prices Growth expected to return as prices recover 40

41 U.S. and Middle East to supply world incremental LPG demand growth from 2017 to 2019? kbd 2,500 Regional Propane Surplus/Deficit Oceania kbd 2,500 Regional Butane Surplus/Deficit 2,000 1,500 1,000 ME surplus growth: 75 CIS Region Africa Middle East 2,000 1,500 1,000 ME surplus growth: 60 NA surplus growth: 47 Oceania CIS Region North Europe Middle East 500 NA surplus growth: 62 North America 500 North America 0 Southeast Asia 0 Southeast Asia (500) FE deficit growth: 157 North Europe (500) Africa (1,000) (1,500) (2,000) Indian Subcontinent South Europe Latin America (1,000) (1,500) (2,000) FE deficit growth: 66 IS deficit growth: 59 Indian Subcontinent South Europe Latin America (2,500) Far East (2,500) Far East Source: IHS Global Market Long Term Supply Demand Outlook May 2017 IHS Markit is a registered trademark of IHS Markit Ltd and/or its affiliates. All other company and product names may be trademarks of their respective owners 2017 IHS Markit Ltd. All rights reserved. 41

42 U.S. to supply world incremental LPG demand growth between now and 2022? Source: IEA 2017, Oil 2017, IEA Publishing. License: 42

43 Questions Angela John BP