NGL Feb Value Trade
Lessons Learned
BP Confidential
February Trade Strategy
• Entering Feb, NAGP owned nearly 50% of available
physical propane bbls at the TET location
• Feb-March spread was trading at a 6 cent premium
• Two key fundamentals led to the belief that the FebMar spread would widen by month end:
– Need to maintain a minimum inventory level of apx. 2
million bbls at TET
– High level of imports hedged with paper TET swaps
• View was that gulf coast propane would become
short as importers went to the market to cover hedges
• Strategy was to sell a portion of the acquired bbls at a
higher Feb price, rolling the balance to March
BP Confidential
TET Propane Inventory
TET System C3 Inventory
12,000
10,000
April/May 1.6 mln
held
6,000
4,000
2,000
End Feb 2.1 mln
held
BP Confidential
2/04
1/04
12/03
11/03
10/03
9/03
8/03
7/03
6/03
5/03
4/03
0
3/03
MBBLS
8,000
Feb-04 TET Hedged Imports by Location
Gulf Coast:
East Coast:
Mexico:
2,741 MBBLS
1,642 MBBLS
852 MBBLS
Total:
5,235 MBBLS
BP Confidential
Date
2003
BP Confidential
2/27
2/25
2/23
2/21
2/19
2/17
2/15
2/13
2/11
2/9
2/7
2/5
2/3
2/1
1/30
1/28
1/26
1/24
1/22
1/20
1/18
1/16
1/14
1/12
1/10
1/8
1/6
1/4
1/2
Spread (cpg)
February / March TET C3 Spread: 2003
Feb / Mar TET C3 Spread
50
45
40
35
30
25
20
15
10
5
0
Expected outcome at trade entry
• Peak BP TET Inventory build:
4 mln bbls
• TET Minimum Dead Stock:
1.6 – 2 mln bbls
• Volume Sold in February:
40% - 60% (1.6 – 2.4)
• Feb/March backwardation:
20 – 30 cents/gal
• Profit/Loss:
- $5M to + $15M
(20% chance of loss)
BP Confidential
Possible Value of Trade
70
60
50
40
MM $'s P/L
30
20
Expected Value of Trade
10
(10)
(20)
(30)
10
0%
20%
20
40%
60%
80%
Backw ardation
100%
BP Confidential
30
40
February 2004 Timeline
2004 Position Summary v. TEPPCO Inventory v. C3 Price
8,000
35
7,000
30
6,000
25
4,000
15
3,000
10
2,000
TEPPCO Inv.
Feb C3 Position
BP Confidential
Feb / Mar Spread
2/26
2/24
2/22
2/20
2/18
2/16
2/14
2/12
2/10
2/8
2/6
2/4
2/2
1/31
1/29
1/27
1/25
1/23
1/21
1/19
1/17
1/15
1/13
0
1/11
1/9
5
1/7
1,000
(CPG)
20
TEPPCO Pipeline goes dow n
1/5
(MBBLS)
5,000
February Weather Summary
Difference in HDD 2003 vs 2004
200
150
HDD
100
50
0
-50
-100
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Day In February
Boston
Washington DC
BP Confidential
Cleveland
La Guardia
25
26
27
28
29
Actual Outcome
• Peak BP TET Inventory build:
-Peak BP Build:
5.1 mln bbls
• TET Minimum Dead Stock:
-Actual Dead Stock:
1.6 – 2 mln bbls
.7 mln bbls
• Volume Sold in February:
-Actual February Sales:
• Feb/March backwardation:
-Final Feb/March Spread:
• Profit/Loss:
4 mln bbls
40% - 60% (1.6 – 2.4)
17% ( .9 mln bbls)
20 – 30 cents/gal
34 cents/gal
($5M) to + $15M (20% chance of loss)
-MTM Trade Loss:
($10M)
BP Confidential
Possible Value of Trade
70
60
50
40
MM $'s P/L
30
20
Expected Value of Trade
10
(10)
Outcome of Trade
(20)
(30)
10
0%
20%
20
40%
60%
80%
Backw ardation
100%
BP Confidential
30
40
Lessons Learned
BP Confidential
Trading Strategy
• Method to establish dead stock level flawed
• Too much focus on year to year similarities, not enough on differences
(e.g nat gas price)
•Lack of system levers a significant disadvantage (e.g no TET marketing
position)
•Transparency of TET inventory position (Inventory reports & OTC)
•Use of a potential weather hedge (short Z6 market)
•Extend trading play across all TET grades
•Spread limit on ability to short March/April
•Aggregating group position in advance - critical
•Use of index sales as opposed to fixed price
BP Confidential
Controls
• MVAR limit
– Calc’s based on 90-day volatility of Feb-Mar spread
– MVAR averaged just over $1 M throughout March
– No change in MVAR associated with trade strategy
• Calendar Spread limit
– Calculated based on minimum of net monthly longs and shorts
– Calendar spread limited by net shorts not Feb length
– Stayed within limit by increasing flat price exposure in Feb
– Well within total flat price + calendar limit of 7 MMBBL’s
– Calendar spread limit prevented using additional shorts as
downside protection
BP Confidential
Controls (Continued)
• Rolling unsold barrels
– Typical process for marking inventory is 100% at prompt
– Barrels that can’t be sold during the month are marked at prompt
during the month, and then rolled at the end of the month
– Following this protocol would have shown unrealistic gains in
daily P&L
– Bench chose to do 2 mid-month rolls rather than wait until the
end of the month
– These rolls were done manually, resulting in calculation errors
that had to be corrected several days later
BP Confidential
Compliance: Key risks
• Regulatory - No violations under current
framework, but could increase the risk of
regulatory intervention
• Legal/credit – No specific legal concerns
identified, but could increase the risk of an
“aggrieved short” failing to make payment or
filing a claim for damages
• Reputational – Primary risk.
BP Confidential
Compliance: Lessons Learned
• Involve compliance group early. Only consulted once
initial play was on, and exit would have resulted in
significant financial loss.
• Education is required. The potential risks were unclear to
those making decisions on the bench.
• Reputational issues outside of NAGP should be
considered and key stakeholders consulted.
• A credit strategy is critical. As Feb price and volume
increased many counterparties exceeded their credit limit,
reducing NAGP’s ability to liquidate physical inventory
BP Confidential
Communication with NGLBU
Primary concerns of BU:
• Financial losses from trading
– BU was unaware of potential for a $10M loss
– Not informed when “sizable” positions are on
– Concerned over applicability of current DOA’s
• Reputational risk
– NAGP only consulted internal compliance group,
no dialogue with NGLBU over compliance issues
– BU is concerned about “regulatory issues”
– Having to answer customer questions
BP Confidential
Communication with NGLBU
Primary concerns of BU (continued):
• Assurance that trading team has access to all
information and optionality within the BU that can be
used to increase chance of success
– Information from within BU could have helped
NAGP better understand dead stock flexibility
– Use of physical optionality within asset base
• BU Indirect financial impacts on business
– Did Feb price spike have a negative impact on
liftings which cost the BU money?
To be discussed separately
BP Confidential
Actions going forward
•
•
•
•
Peer Review – Done
Hire new NGL Risk Manager – Done
Compliance/regulatory training for NGL’s – Requested
Evaluating control “trigger points” that would
necessitate discussion between NAGP and NGLBU – In
progress
• Implement weekly meetings with Marketing & Logistics
to review trading positions and share opportunities –
Pending
• Review NAGP DOA’s, establish clear accountabilities,
implement improved communication protocols Pending
BP Confidential
Back-up Slides
BP Confidential
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2/
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3/
2/
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3/
4/
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3/
6/
04
3/
8/
04
Price CPG
Residential & Wholesale C3 Prices
Propane Prices
175
155
135
115
95
75
55
Date
Residential
BP Confidential
Wholesale
2003
BP Confidential
Date
2004
2/27
2/25
2/23
2/21
2/19
2/17
2/15
2/13
2/11
2/9
2/7
2/5
2/3
2/1
1/30
1/28
1/26
1/24
1/22
1/20
1/18
1/16
1/14
1/12
1/10
1/8
1/6
1/4
1/2
Spread (cpg)
February / March TET C3 Spread: 2003 v. 2004
Feb / Mar TET C3 Spread
50
45
40
35
30
25
20
15
10
5
0
C3 Supply & Demand: 2003 v. 2004
6,000
5,000
4,625
4,000
3,425
3,000
2,290
1,768
2,000
1,486
1,000
(1,000)
(804)
(1,200)
(2,000)
(2,029)
(3,000)
(4,000)
(3,797)
(5,000)
Dec
2004 Chem Demand v. 2003
Jan
2004 Imports / (Exports) v. 2003
BP Confidential
Feb
Net Supply / (Demand) Delta
Position Summary
Feb TET C3 Position
6 ,0 0 0
5,0 0 0
MBBLS
4 ,0 0 0
3 ,0 0 0
2 ,0 0 0
1,0 0 0
-
long feb/mar
long feb c3/wti
long feb
feb c3
BP Confidential
Date
Possible Value of Trade
70
60
50
40
MM $'s P/L
30
20
10
(10)
(20)
(30)
10
0%
20%
20
40%
60%
80%
Backw ardation
100%
BP Confidential
30
40
Feb-04 TET C3: as a % of Crude
Feb-04 TET C3 as a % of Crude
110%
100%
90%
80%
70%
TET C3
Average
BP Confidential
Max
Min
2/23/04
2/16/04
2/9/04
2/2/04
1/26/04
1/19/04
1/12/04
1/5/04
12/29/03
12/22/03
12/15/03
12/8/03
12/1/03
60%
BP Confidential
Date
3/22/2004
3/15/2004
3/8/2004
3/1/2004
7
2/23/2004
2/16/2004
2/9/2004
2/2/2004
1/26/2004
1/19/2004
1/12/2004
1/5/2004
Spread in cpg
Mar / Apr C3 Spread
March/April Spread C3
8
Mar vs Apr C3
6
5
4
3
2
1
0
PIRA C3 Inventory Chart: Total US
BP Confidential
PIRA C3 Inventory Chart: Gulf Coast
BP Confidential