Monday, 25 January 2010

First day at work

Caught a bus to work this morning, but unfortunately it was apparently the slow bus (many stops) and so took around an hour before I got to work! I was quite surprised as it really doesn’t look that far on the map, but I am told there is a fast bus which goes directly to the office so will have to look out for that one. Also it is a bit complex as some busses only run in the mornings and then again in the afternoon, so got to figure out the times so I do not get stuck at work!

For the next couple of weeks my job will just be to learn as much as possible. They have set up a lot of meetings with different people where they will tell me what they are doing. I was quite surprised at how complex some of the things they are doing are. The team is basically involved in 6 areas:

1)    End-user
2)    Storage
3)    Infrastructure
4)    Gas-to-Power
5)    LNG
6)    Long-term Gas contracts

End-user is the sales of gas directly to large industrial users bypassing the energy companies. Our team must give a fair assessment of the price to charge as well as the value of various flexibility options (min and max daily take, annual quotas, etc). This is only done for large customers whose scale can justify the investment as Statoil is not in the residential customer space.

In the Storage area, our team is there to evaluate the feasibility of developing new storage areas, as well as the fair value for renting storage to or from other companies. There are quite a few different ways to do this – the most common being to hollow out a salt cavern underground. The factors in the evaluation is the injection and withdrawal rates (and hence our ability to take advantage of short term price spikes), the cost of the machines, the cavern shrinkage rate, etc.

Infrastructure mainly involves the development of new pipelines, the main one now in development being the trans-Adriatic pipeline (TAP) which will take gas from Azerbaijan (where the gas is produced but where prices are very low) to Italy (and the European markets where prices are high) through Turkey and Greece. Statoil is a large shareholder in this project, though there are other companies proposing other pipeline routes, so it is still to be seen which one will be accepted. It’s a huge project involving many countries, so is quite political. Our team is supposed to evaluate the projects economics to see if the huge investment can be made back given our forecast of gas prices.

Gas-to-Power is the area I will be involved in. As the name says, this is basically capturing the spread between gas prices and electricity prices (less the cost of CO2 permits) by building gas turbines in various European countries which one can switch on and off depending on the price movement (called a spark spread). The complex part is really trying to build a model that can capture all the relevant data like volatility, correlations as well as the constraints of the actually power station (how long does it take to start up, how efficient is it to convert the gas to power, start-up times etc).

LNG (liquefied natural gas) is the process whereby natural gas is purified, cooled and compressed  (I think to around 1/600 its original volume) and then either stored or put on ships to sell to countries where the price is high. The big advantage here is that we don’t need the physical pipeline, but can “quickly” ship our gas over large distances (i.e. to Asia) whenever we spot that there is a shortage and hence a high price Here we must calculate the values of the geographical arbitrage (price difference between countries) by evaluating the revenue that can be obtained less the cost of the liquefaction process and its transportation costs as well as the time lag factor.

Finally long-term gas contracts are the bread and butter of Statoil and account for something like 85% of our gas. The gas market is not so developed as oil and outside of the US and the UK, there are not big trading markets. Instead, price formulas are negotiated with the big energy distribution companies in Europe (i.e. EON in Germany, GDF Suez in France, British Gas in UK, etc). Historically these have been linked to the price of oil and various condensates, but since 2008, the prices (oil vs its equivalent on the US/UK spot market) have started to move apart which means that the companies are paying theoretically more than what they could have if they bought directly on the market. Lucky for them, the contract we negotiate have some price review clauses in them which means they can renegotiate if the price changes dramatically. Our team is then called in to calculate what the price should be, and how can we adjust the other parts in the formula (flexibility options) so we capture as much value as possible. Usually one does not want to change the price (as this can be very difficult to negotiate up again later), but rather offer things such as a lower annual required volume, a temperature option (i.e. if the temperature changes by more than 5C from the normal at that time of year, then the quota are adjusted). This can be quite valuable for a company but the difficulty is on us to evaluate how valuable giving away such flexibility is, as we will have to hold that much extra gas just in case a company decides to use its flexibility.

Whew, that’s quite a long description. Each member of the team is put into three focus areas. Mine are Gas-to-Power, LNG and infrastructure.

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