Gas Traders Can Ease the Cost and Complexities of Managing Transactions On Multiple Pipelines

- By Andrew Bruce

Originally published on UtiliPoint’s site

Despite continued supply and price volatility, natural gas will remain the favored fuel for the foreseeable future, with domestic production peeking at about 21.6 Tcf in 2019 according to EIA estimates. The Energy Policy Act of 2005, along with strong gas demand and pricing are attracting new investments in pipeline infrastructure as well as a slew of new physical gas market participants. Many of these companies, which include exploration and production companies and financial institutions, are not only trading physical gas, they are beginning to manage their own pipeline scheduling, as well.

Scheduling is a function that both plans the movement of the commodity but also tracks and accounts for that movement. So for example, a company may plan to move a volume of natural gas along a pipeline but it needs to have the legal right to do so and then communicate back and forth with the pipeline on issues such as the actual volumes delivered and shipped, the transportation costs and any losses in volume that take place on the pipeline and so on.

For those companies managing a handful of transactions over one or two pipelines, this is a manageable process that can be supported by manual spreadsheets and bulletin boards. However, those companies with larger transaction volumes over multiple pipelines, face an expensive, resource-intensive support process, because individual pipeline have specific transaction sets and unique implementations of the NAESB EDI (Electronic Data Interchange) communications standards. Presently, there are more than 400 pipelines in North America and the list continues to grow as new pipelines are slated to come on stream.

"The architecture for EDI has been something many gas traders have been slow to embrace," explains Lisa Blackwood, Head of North American Consulting for The Structure Group. "Typically these companies have supported growth by throwing more schedulers into their resource pools. These schedulers individually logon to each pipeline bulletin and manually key in each nomination. All the return processing is typically manual as well — reading statements and keying in values to kick off the volume management process." According to Blackwood, some of the larger gas traders that have tried automating the nomination process, have spent millions of dollars to get only a few of their high volume pipelines automated, and typically, just to support one-way communications (nominations from their shop to the pipeline).

To further complicate the problem Doug Daugherty, Director, Product Management, Triple Point Technology point noted that, "There are difficult natural gas scheduling challenges caused by a convoluted interstate and intrastate pipeline system, multiple nomination models, intricate FERC regulations, and complexities such as capacity management, storage management, balancing, book-outs, parking and lending," Doug further added that, "A sophisticated scheduling system, such as Triple Point's, coupled with an out of the box pipeline EDI solution is absolutely required for any organization moving natural gas in this fast changing, highly volatile market."

A few weeks ago at a press conference at GasMart, The Structure Group announced the release of Structure nMarket® Gas. According to the company, it is the first packaged software product that is pre-configured 'out of the box' to comply with specific pipeline transaction standards for nominations, scheduled quantities, allocation/balancing statements, and invoices. In addition, nMarket Gas has bi-directional integration capabilities with all the major trading, scheduling, risk and accounting systems. This would allow a gas market participant to standardize on a single software platform across multiple pipelines — without having to custom configure transactions for each individual pipeline.

Integration

The importance of an overall IT infrastructure or architecture that provides integration and flexibility to the wholesale trading function is demonstrated by the total number and heterogeneity of the different software applications used to support the wholesale energy marketing business functions. Every respondent to recent UtiliPoint studies, no matter of what size and complexity, run multiple different systems and modules including Excel spreadsheets, internally developed systems and software licensed from vendors. The number of systems in use by respondents ranged from three to 13 separate applications for electric power and one to ten for natural gas. Discounting the use of internally developed systems and/or Excel-based solutions, less than one third of the respondents utilized a single vendor to supply the key components of its solution (deal capture through scheduling to invoicing) while the remainder utilized a multi-vendor strategy. Even when a primary vendor-based solution was used, other applications were also often required for specific business functions.

Better Accounting

Continued price volatility should also be a wake-up call to Gas traders that they need to tighten up on their transaction accounting. Although power traders have developed sophisticated shadow settlement calculations for ISO/RTO transactions, this is something that gas accountants have not focused on in the past due to the lack of available software tools to automate this process, and the demands of simply supporting volume management and counter-party settlement. Higher prices and transaction volumes present an opportunity for gas trading to leave money on the table or erode their profits with the inability to properly substantiate inaccurate pipeline charges. According to Blackwood, Structure nMarket Gas contains all the rate sets for all pipeline services and when linked with the deal capture system, will house the negotiated transport rates to provide the ability to shadow all pipeline invoices.

Replacement Rates

While gas trading complexities may still pale in comparison to wholesale power trading, it is clear that gas traders can reap substantial benefits by better automating their transaction management systems. And while the Energy Trading and Risk Management (ETRM) vendor community has been relatively quiet in gas markets over the past several years UtilPoint Studies have shown that there is still a significant interest in reinvesting in ETRM systems on the part of the potential buyers. For example, the studies found that users would like to replace 30% of electric power and 48% of natural gas installed ETRM software applications. For electric power ETRM users, some 23% expected to replace within 2-years as compared to 18% for natural gas ETRM users. Conversely, 55% of electric power ETRM users had no plans to replace while just 21% of natural gas ETRM users had no plans to replace.

These replacement rates seem remarkably high when compared to replacement rates in other software categories across the energy industry. For example, UtiliPoint found a Customer Information Systems (CIS) replacement rate of around 16 percent in 2004 and that reflected increased demand for CIS software over previous years (2003: 10 percent; 2002: 5 percent).

It will be interesting to watch the vendors in this space bring to market new innovations in response to the new market dynamics.

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