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Experience Commitment
SHELL TRADING RISK MANAGEMENT
Achieving Stability Through Hedging
Kevin Hulsey
Copyright of Shell Trading Risk Management, LLC
Disclaimer
This material has been generated by employees of Shell Trading Risk Management, LLC (“STRM”) who are involved in sales and marketing efforts. Accordingly, it should be considered to be a solicitation of derivatives business generally and not aresearch report under the rules of the CFTC and under the Commodity Exchange Act. Notwithstanding the foregoing, this material should not be construed as an offer or the solicitation of an offer to sell or to buy or subscribe for any particular product or services (including, without limitation, any commodities, swaps, securities or other financial instruments). STRM is not soliciting any specific action based on this material. It is for the general information of STRM’s clients. It does not take into account the particular investment objectives, financial conditions, or needs of individual clients. It does not constit ute a recommendation or a suggestion that any investment or strategy referenced herein may be suitable for your company.
These materials are confidential and proprietary to, and may not be reproduced, disseminated or referred to, in whole or in part without the prior consent of STRM. Information presented in this material has been obtained or derived from sources believed by STRM to be reliable, but STRM does not guarantee their accuracy or completeness. STRM assumes no responsibility for verification of the information in these materials, and no representation or warranty is made as to the accuracy or completeness of such information. STRM assumes no obligation to correct or update these materials. These materials do not contain all information that may be required to evaluate any transaction or matter and information may be available to STRM and/or its affiliates that is not reflected herein.
Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your unique circumstances, or otherwise constitutes an opinion or a recommendation to you. STRM is not providing advice regarding the value or advisability of trading in swaps, commodity interests, including futures contracts and commodity options or any other activity which would cause STRM or any of its affiliates to be considered a commodity trading advisor under the U.S. Commodity Exchange Act. This material is not to be relied upon in substitution for the exercise of independent judgment. Any recipient of these materials should conduct its own independent analysis of the matters referred to herein. The recipient should seek advice based on its particular circumstances from its own independent financial, tax, legal, accounting and other professional advisors .
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DEFINITIONS & CAUTIONARY NOTE
Reserves: Our use of the term “reserves” in this presentation means SEC proved oil and gas reserves.
Resources: Our use of the term “resources” in this presentation includes quantities of oil and gas not yet classified as SEC proved oil and gas reserves. Resources are consistent with the Society of Petroleum Engineers (SPE) 2P + 2C definitions.
Discovered and prospective resources: Our use of the term “discovered and prospective resources” are consistent with SPE 2P + 2C + 2U definitions.
Organic: Our use of the term Organic includes SEC proved oil and gas reserves excluding changes resulting from acquisitions, divestments and year-average pricing impact.
Shales: Our use of the term ‘shales’ refers to tight, shale and coal bed methane oil and gas acreage.
Underlying operating cost is defined as operating cost less identified items. A reconciliation can be found in the quarterly results announcement.
The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate legal entities. In this presentation “Shell”, “Shell group” and “Royal Dutch Shell” are sometimes used for convenience where references are made to Royal Dutch Shell plc and its subsidiaries in general. Likewise, the words “we”, “us” and “our” are also used to refer to subsidiaries in general or to those who work for them. These expressions are also used where no useful purpose is served by identifying the particular company or companies. ‘‘Subsidiaries’’, “Shell subsidiaries” and “Shell companies” as used in this presentation refer to companies over which Royal Dutch Shell plc either directly or indirectly has control. Entities and unincorporated arrangements over which Shell has joint control are generally referred to as “joint ventures” and “joint operations” respectively. Entities over which Shell has significant influence but neither control nor joint control are referred to as “associates”. The term “Shell interest” is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in a venture, partnership or company, after exclusion of all third-party interest.
This presentation contains forward-looking statements concerning the financial condition, results of operations and businesses of Royal Dutch Shell. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Royal Dutch Shell to market risks and statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions. These forward-looking statements are identified by their use of terms and phrases such as ‘‘anticipate’’, ‘‘believe’’, ‘‘could’’, ‘‘estimate’’, ‘‘expect’’, ‘‘goals’’, ‘‘intend’’, ‘‘may’’, ‘‘objectives’’, ‘‘outlook’’, ‘‘plan’’, ‘‘probably’’, ‘‘project’’, ‘‘risks’’, “schedule”, ‘‘seek’’, ‘‘should’’, ‘‘target’’, ‘‘will’’ and similar terms and phrases. There are a number of factors that could affect the future operations of Royal Dutch Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this presentation, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) reserves estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including regulatory measures addressing climate change; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; and (m) changes in trading conditions. No assurance is provided that future dividend payments will match or exceed previous dividend payments. All forward-looking statements contained in this presentation are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Additional risk factors that may affect future results are contained in Royal Dutch Shell’s Form 20-F for the year ended December 31, 2016 (available at www.shell.com/investor and www.sec.gov). These risk factors also expressly qualify all forward-looking statements contained in this presentation and should be considered by the reader. Each forward-looking statement speaks only as of the date of this presentation, May 9, 2017. Neither Royal Dutch Shell plc nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this presentation.
We may have used certain terms, such as resources, in this presentation that United States Securities and Exchange Commission (SEC) strictly prohibits us from including in our filings with the SEC. U.S. investors are urged to consider closely the disclosure in our Form 20-F, File No 1-32575, available on the SEC website www.sec.gov. You can also obtain this form from the SEC by calling 1-800-SEC-0330.
Copyright of Shell Trading Risk Management, LLC
CONTENTS
▪ Company Overview
▪ What value hedging brings to the business?
▪ What’s your hedging strategy?
• Fixed Price Products
•Options
▪ In this uncertain environment, can you afford not to have a hedging program in place?
▪ What type of credit support and its impact on execution costs?
▪ How do you choose a hedge counterparty?
▪ Other Useful Information
▪ Contact Details
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COMPANY OVERVIEW
DOWNSTREAM OPERATIONS
N
ROYAL DUTCH SHELL DOWNSTREAM GAS AND ENERGY MARKETING & TRADING SHELL ENERGY
C
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THE SHELL TRADING NETWORKROYAL DUTCH SHELL DOWNSTREAM –
TRADING & SUPPLY GAS AND ENERGY MARKETING & TRADING SHELL TRADING
Power Trading
Crude Oil Trading
Products Trading
Natural Gas Trading
LPG Trading
LNG Trading
STIL/SEEL London
STR Rotterdam
STRU Moscow
SJT Tokyo
SITME/SMLNG DubaiSIETCO/SELNG SingaporeSWST Barbados
STUSCO/SENA/STRMSNALNG Houston
STC/SENAC
STM Mexico
SILS The Hague
Spot Chartering
Environmental Products Trading
Barge chartering
Shipping
CALGARY
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SHELL TRADING RISK MANAGEMENT LLC*
Core Business
Customer Base
Markets Shell’s Energy Risk Management Services in US
Registered Swap Dealer A subsidiary of Shell Energy North America (US), L.P., one of the strongest balance sheets in the industry
A/A3 Broad Commodity Capability
Natural Gas Natural Gas Liquids Crude Oil Refined Products Power
Expansive Financial Product Offering Swaps Options – Costless Collars, 3-ways, index Basis Swaps and options
▪ 27 basis locations for NG▪ All major Crude grades
Bespoke structured products and credit structures
Producers Refineries Electric utilities Municipalities Rural electric cooperatives Independent power producers Natural gas and power aggregators Large commercial and industrial end-
users MLP and Pipelines
Industry Position
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SHELL ENERGY NORTH AMERICA (US) L.P.
Core Business
Customer Base
Energy marketing and trading Gas and power asset supply and
management Markets Shell’s equity natural gas
production in the U.S.
Natural gas marketer in the U.S. with sales volumes of 7 billion cubic feet (Bcf) per day
Wholesale and retail power marketer with sales volumes topping 270million megawatt hours (MWh) annually
Shell Energy participates in nearly all organized power markets, with 10,000 megawatts of generating capacity across the U.S.
Shell Energy consistently ranks within top three gas and power marketers in North America according to Platts
Expansive physical commodity offerings Pricing – fixed, index, basis options as well as other
structured pricing (cross-commodity, collars, storage, etc.)
Balancing, transportation and storage management
Electric utilities Local natural gas distribution
companies Municipalities Rural electric cooperatives Independent power producers Natural gas and power energy
retailers Large commercial and industrial end-
users Producers
Industry Position
ROYAL DUTCH SHELL DOWNSTREAM SHELL TRADING
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SHELL TRADING (US) COMPANY
Core Business
Customer Base
Crude and Products Marketing and Trading
Markets the Majority of Shell's (US) Equity Crude Oil Production
The largest physical crude purchaser in North America
Markets more than 13 million bbl/d of crude oil
Markets 3.5 million bbl/d of oil products
One of the world’s largest spot charterers ~700 crude oil tankers
Operates/manages approximately 55 shipping vessels
One of world’s largest spot charters, transport ~25% of world’s LNG
Approximately 4,000 energy professionals and 2,500 seafarers
Producers Refineries Consumers
Industry Position
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STRENGTH IN CREDIT
Royal Dutch Shell plc (S&P: A, Moody’s: Aa2)
Shell Oil Company (S&P: A, Moody’s: Aa3)100% ownership through wholly-owned subsidiaries
Shell Energy North America (US),L.P.(S&P: A-, Moody’s: A3)100% ownership through wholly-owned subsidiaries
Shell Trading Risk Management, LLC(PG by SENA)
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What value hedging brings to the business?
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RATIONALES FOR HEDGING
Stabilize cash flows and promote sound corporate governance through effective risk management practices.
Maximize shareholder value by shielding revenue streams, profitability, and balance sheets from market price risks and potential losses.
Hedging acts an insurance against price risk.
A hedging program can aide in forecasting future budgets by locking in continuity of cash flows.
Potentially lower tax liabilities.
Copyright of Shell Trading Risk Management, LLC
DISADVANTAGES OF HEDGING
Potentially limit the upside of cash flows if you have a bullish view on the market if you are a producer or bearish view on the market if you are a consumer.
Dodd-Frank Financial Regulation has added multiple layers to onboarding between swap counterparties. Therefore, it can be time consuming to establish and maintain trading relationships between counterparties.
If you have never hedged, your shareholders may value the upside to commodity price risk.
If you are a Producer and the market is backwardated, you could be locking in lower prices than current spot prices.
If you are a Consumer and the market is in contango, you could be locking in lower prices than current spot prices.
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What’s your hedging strategy?
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STANDARD PRODUCTS
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FIXED PRICE SWAP EXAMPLE
Transaction OverviewThis product is designed for customers who want to buy or sell a fixed volume of an energy commodity without being exposed to the risk of volatile prices.
A fixed price can be offered for the entire term.
Variation: fixed price can be shaped (seasonally) to suit cash flow needs. Underlying volumes can be shaped (seasonally) to suit operational requirements. Several other variations are also available.
Buyer Customer
Seller Shell Trading Risk Mgmt
Product Natural gas
Volume 10,000 MMBtu/d
Price $3.00/MMBtu
Term 12 months
Customer Benefits Price and volume assurance
Simple, flat price for entire deal term
Protection from volatile price swings driven by extreme weather events, transport constraints and market imbalances, etc.
Fixed Price Spot Market Price Realized Savings
$3.00 /MMBtu $4.00/MMBtu +$1.00 /MMBtu
$3.00/MMBtu $3.00/MMBtu $0.00 /MMBtu
$3.00/MMBtu $2.50/MMBtu ($0.50) /MMBtu
Summary Terms Example: Transaction Economics
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SHAPED VOLUME EXAMPLE
Transaction OverviewThis product is designed to serve the needs of a producer or consumer that has changing delivery volumes; for example -new production that is ramping up over time.
A shaped commodity swap can provide fixed pricing that reflects the expected flow.
Buyer Shell Trading Risk Mgmt
Seller Customer
Product WTI
Volume Initial volume of 1,000 Bbls/d increasing by an additional 1,500 Bbls/d each year thereafter
Price $ 55.00/ Bbl
Term 36 months
Customer Benefits Level price assures economics: For a producer can
manage well economics through a price that covers fixed costs, helping reduce bank borrowing and/or increase bank borrowing base
Level price improves short-term production value: producer can gain the benefit of a contango forward curve (higher prices in later periods) even for prompt production
Fixed price: customer achieves price certainty and stability on the balance sheet to better predict financial performance
Summary Terms Example: Transaction Economics
Period Flowing Volume
Market Price
(Example)
Fixed Price
(Example)
Year 1 1,000 Bbl/d
$55.00/ Bbl/d
$55.00/ Bbl/d
Year 2 2,500Bbl/d
$56.00/ Bbl/d
$55.00/ Bbl/d
Year 3 4,000Bbl/d
$56.50/ Bbl/d
$55.00/ Bbl/d
Averages 2500 Bbl/d
$56.13/ Bbl/d
$55.00/ Bb/d
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ODD LOT COMMODITY EXAMPLE
Transaction OverviewThis product is designed to serve the needs of a customer whose loads that are smaller than standard wholesale commodity blocks of 1,000 Bbls or 10,000 nat gas or whose volumes to not match standard lot contracts.
Odd lot commodity can provide fixed for small to medium loads and will bear the hedging risk. This can be either a fixed volume product, or a shaped product.
Customer can add additional loads as needed.
Buyer Customer
Seller Shell Trading Risk Mgmt
Product HO
Volume 500,000 gals per year
Price $1.75/gal
Term 12 months
Customer Benefits Minimizes risk: customer can increase or change load
without being severely over-hedged or under-hedged
Summary Terms Example: Transaction Economics
Volume Price
Standard 42,000/gal $1.75/gal
Odd Lot 41,667/gal $1.75/gal + Odd Lot Premium
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OPTIONS
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CALL OPTION
Transaction OverviewConsumers can protect their exposure to a rise in prices by purchasing a call option. The call provides upside protection at a predetermined price level. However, unlike a regular swap, it gives the consumer the opportunity to participate on any beneficial downward move in prices.
Option premiums are payable (often upfront) regardless how the option settles.
Buyer Customer
Seller Shell Trading Risk Mgmt
Product Natural gas
Volume 5,000 MMBtu/d
Option Type Call Option
Index Inside FERC NGPL
Strike Price $3.00/MMBtu
Option Premium
$0.20/MMBtu (paid upfront)
Customer Benefits Price protection: provides customer with protection against
unexpected price increases
Easily adaptable: customer can select the level at which protection is provided (i.e., strike price)
Full participation for customer when market price declines below strike price
Summary Terms Example: Transaction Economics
Volume Provided Market Settle Ceiling Price
(Call Strike)Settlement
Price*
5,000 MMBtu/d
$3.50/ MMBtu
$3.00/ MMBtu
$3.00/ MMBtu
5,000 MMBtu/d
$3.00/ MMBtu
$3.00/ MMBtu
$3.00/ MMBtu
5,000 MMBtu/d
$2.75/ MMBtu
$3.00/ MMBtu
$2.75/ MMBtu
*Not inclusive of option premiums
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PUT OPTION
Transaction OverviewProducers can protect their exposure to a fall in prices by purchasing a put option. The put provides downside protection at a predetermined price level. However, unlike a regular swap, it gives the producer the opportunity to participate on any beneficial upward move in prices.
Option premiums are payable (often upfront) regardless how the option settles.
Buyer Customer
Seller Shell Trading Risk Mgmt
Product WTI Crude
Volume 1,000 Bbl/d
Option Type Put option
Index WTI CMA
Strike Price $45.00/Bbl
Option Premium
$2.68/Bbl/d (payable upfront)
Customer Benefits Price protection: provides customer with protection against
unexpected price decreases
Easily adaptable: customer can select the level at which protection is provided (i.e., strike price)
Full participation for producers when market price increase above strike price
Summary Terms Example: Transaction Economics
*Not inclusive of option premiums
Volume Provided Market Settle Price Floor
(Put Strike)Settlement
Price*
1,000 Bbl/d $50.00/ Bbl/d
$45.00/ Bbl/d
$50.00/ Bbl/d
1,000 Bbl/d $42.00/ Bbl/d
$45.00/ Bbl/d
$45.00/ Bbl/d
1,000 Bbl/d $40.00/ Bbl/d
$45.00/ Bbl/d $45.00/
Bbl/d
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HEAT RATE CALL OPTIONS FOR POWER
Transaction OverviewThis product is designed for customers who want an option to buy heat rate power at a fixed multiple of a gas index. If the market heat rate subsequently falls, the customer is able to procure cheaper power in the market since it is not obliged to take delivery from Seller. Seller can offer heat rate call options for power where:
option premiums are paid monthly regardless if power is delivered or not; and
customer pays a multiple of gas index if power is delivered.
Variation: choice of heat rate strikes (lower strikes would entail costlier option premiums).
Buyer Customer
Seller Shell Trading Risk Mgmt
Power Index ERCOT Houston
Gas Index GDD HSC
Volume 100 MW (delivered into pool)
Heat Rate Strike 8.00 MMBtu/MWh
Option Premium $3.00/kw-month (or $300k per month)
Term 12 months
Customer Benefits Locked in heat-rate cap
Protection against spikes in market heat rates due to weather events, transmission constraints or market imbalances
Procure cheaper power when market heat rates are lower
Summary Terms Example: Transaction Economics
*Not inclusive of option premiums
Market Power
Market Gas
Market Heat Rate
Take Delivery if Mkt HR >
8.0
RealizedPrice*(8.0 x Gas)
$50/MWh
$5.00/MMBtu 10.0 YES $40/
MWh
$45/MWh
$5.00/MMBtu 9.0 YES $40/
MWh
$35 /MWh
$5.00/MMBtu 7.0 NO N/A
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PRODUCER COSTLESS COLLAR
Transaction OverviewThis product is suited for producers who are not wanting to lock in current prices with a swap, but would like to have inexpensive protection against unexpected market price increases/decreases.
The ‘width’ of the price band between the floor price (put strike) and the ceiling price (call strike) can be structured to fit the customer’s view of the market.
No option premiums required.
Buyer Customer
Seller Shell Trading Risk Mgmt
Product Natural gas
Volume 5,000 MMBtu/d
Price Inside FERC NGPL MidContinent, subject to:
Ceiling Price: $4.50/MMBtuFloor Price: $3.00/MMBtu
Term 24 months
Customer Benefits Price protection: provides customer with protection against
unexpected price increases or decreases, but allows the commodity price to decrease until it reaches the floor price
Easily adaptable: customer can select the level at which protection is provided; ceiling price can be adjusted to make the transaction “costless”
Additional flexibility: if a customer doesn’t mind switching from a costless to slight cost structure, Seller can add considerable flexibility to the width of the bands (floor to ceiling band)
Summary Terms Example: Transaction Economics
Volume Provided
Current Market
Ceiling Price
(Call Strike)
Floor Price
(Put Strike)
Settlement Price
5,000 MMBtu/d
$5.50/ MMBtu
$4.50/ MMBtu
$3.00/ MMBtu
$4.50/ MMBtu
5,000 MMBtu/d
$4.00/ MMBtu
$4.50/ MMBtu
$3.00/ MMBtu
$4.00/MMBtu
5,000 MMBtu/d
$2.50/ MMBtu
$4.50/ MMBtu
$3.00/ MMBtu
$3.00/MMBtu
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PRODUCER LOW-COST COLLAR
Transaction OverviewThis product is designed for producers with existing costless collar hedges – allowing a choice to pay a small premium to raise the price ceiling. The low-cost collar is suited for producers who are not wanting to lock in current prices with a swap, but would like to have inexpensive protection against unexpected market price decreases.
Buyer Customer
Seller Shell Trading Risk Mgmt
Product Natural gas
Volume 5,000 MMBtu/d
Price Inside FERC NGPL MidContinent, subject to:
Ceiling Price: $5.00/MMBtuFloor Price: $3.00/MMBtu
Option Premium $0.05/MMBtu (payable upfront)
Customer Benefits Maintains price protection: provides customer with
protection against unexpected price decreases afforded by their existing costless collar
Greater upside participation as compared to a costless collar (up to the revised ceiling price)
Summary Terms Example: Transaction Economics
Volume Provided
Current Market
Ceiling Price(Call Strike)
Floor Price (Put Strike)
Settlement Price*
5,000 MMBtu/d
$5.50/ MMBtu
$5.00/ MMBtu
$3.00/ MMBtu
$5.00/ MMBtu
5,000 MMBtu/d
$4.00/ MMBtu
$5.00/ MMBtu
$3.00/ MMBtu
$4.00/MMBtu
5,000 MMBtu/d
$2.50/ MMBtu
$5.00/ MMBtu
$3.00/ MMBtu
$3.00/MMBtu
*Not inclusive of option premiums
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THREE WAY COLLAR
Transaction OverviewA 3-way collar can be constructed for end users or producers by enhancing a collar, but gives up protection in extreme high price environments. The consumer sells a cap above the strike of purchased cap. The value obtained by cap sale is applied to the collar band to make it more attractive. This would be executed in the implied view of the market were that prices might dip somewhat (and you want to be able to benefit from this), but not spike up above the strike of the cap that was sold. The opposite would apply for producers
Buyer Customer
Seller Shell Trading Risk Mgmt
Product Natural Gas
Volume 5,000 Mmbtu/day
Price Inside FERC NGPL MidContinent, subject to:Ceiling Price: lifted beyond $5.50/MMBtuInterim Ceiling Price: $4.50/MMBtuFloor Price: $3.00/MMBtu
Option Premium
No upfront payment
Customer Benefits Can enhance collar price, but give up protection in
extreme high price environment
Can buy back additional downside potential by adjusting collar levels.
Can be structures with no upfront fee.
Can guarantee worst-case scenario and increase upside potential.
Structured in a way to fit the consumer needs.
Summary Terms Example: Transaction Economics
*Not inclusive of option premiums
Volume Provided
Current Market
Ceiling Lifted
Beyond
Interim Ceiling Price (Call Strike)
Floor Price (Put Strike)
Settlement Price*
5,000 MMBtu/d
$6.00/ MMBtu
$5.50/ MMBtu
$4.50/ MMBtu
$3.00/ MMBtu
$4.50 + $0.50/ MMBtu
5,000 MMBtu/d
$5.00/ MMBtu
$5.50/ MMBtu
$4.50/ MMBtu
$3.00/ MMBtu
$4.50/ MMBtu
5,000 MMBtu/d
$4.00/ MMBtu
$5.50/ MMBtu
$4.50/ MMBtu
$3.00/ MMBtu
$4.00/MMBtu
5,000 MMBtu/d
$2.50/ MMBtu
$5.50/ MMBtu
$4.50/ MMBtu
$3.00/ MMBtu
$3.00/MMBtu
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In this uncertain environment, can you afford not to have a hedging program in place?
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CRUDE MARKET FUNDAMENTALS
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MACRO GEO
Q4 - Prelim
Macroeconomics
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WORLD ECONOMY EXPECTED TO GROW BY 3.3% IN 2017, UP FROM 3% IN 2016. CHINA, INDIA & US COMBINED REPRESENT 60% OF GLOBAL ECONOMIC GROWTH, WHICH DENOTES A KEY RISK TO THE WORLD ECONOMY.
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018 4Q2018
Ann
ual G
DP
Gro
wth
, %
World GDP Growth Forecasts at PPP
Rest of the World
Canada
France
United Kingdom
Brazil
Russia
Germany
Japan
India
United States
China
Global GDP
Copyright of Shell Trading Risk Management, LLCSource: IMF
AS US BOND YIELDS RISE FASTER THAN ELSEWHERE, SO WILL THE US$. BUT THAT NEED NOT IMPLY THE OIL PRICE WILL BE UNDER PRESSURE. IN FACT, OVER THE PAST 12 MONTHS, US$ AND WTI HAVE SELDOM MOVED IN SYNC.
Bonds, US$ & Oil Price
1
1.2
1.4
1.6
1.8
2
2.2
2.4
2.6
112
114
116
118
120
122
124
126
128
130
Bond
yie
lds,
%
US
Dol
lar
Inde
x
US Dollar Index vs. 10-Y US Government Bonds Yields
US Dollar Index (1997=100) 10-Y Gvt Bond Yields
20
25
30
35
40
45
50
55
112
114
116
118
120
122
124
126
128
130
$/bb
l
Dol
lar
Inde
x
US Dollar Index vs. WTI Price
US Dollar Index (1997=100) WTI, $/bbl
Source: Reuters
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GLOBALLY WE ARE SEEING A GROWING TREND TOWARDS LARGER SUVS WHILECAR PLANTS WHICH MAKE SMALL CARS ARE BEING IDLED DUE TO GROWING INVENTORIES.
Global SUVs
US
New Passengers Vehicles Sales Breakdown
Source: IEA
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WHILE 2017 AVERAGE PRODUCTION IS EXPECTED TO BE FLAT Y-O-Y BUT ENDING HIGHER IN 2H17 THAN 2016, CREATING A PLATFORM FOR STRONGER GROWTH IN 2018.
8,000
8,200
8,400
8,600
8,800
9,000
9,200
9,400
9,600
9,800
10,000
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-18
Nov-18
U.S. Total Crude/Condensate Production, Kbd
EIA STEO PIRA Wood Mac I.H.S. Genscape
US Supply
Source: EIA, PIRA, Woodmac, IHS, Genscape
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0
20
40
60
80
100
120
140
160
Jan-
06
May
-06
Sep-
06
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
Sep-
10
Jan-
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May
-11
Sep-
11
Jan-
12
May
-12
Sep-
12
Jan-
13
May
-13
Sep-
13
Jan-
14
May
-14
Sep-
14
Jan-
15
May
-15
Sep-
15
Jan-
16
May
-16
Sep-
16
Wellhead BEP Hz WTI
WELL BEP’S CLOSER TO WTI PRICE IS LIKELY TO DRIVE INCREASED DRILLING ACTIVITY IN 2017. THOUGH COST IMPROVEMENTS HAVE PLATEAUED AND ARE LIKELY TO START ESCALATING.
US SupplyW
ell h
ead
BEP
, WTI
$/b
bl
?
Source: Rystad Energy
Copyright of Shell Trading Risk Management, LLC
THE MORE VISIBLE OECD STOCKS HAVE BEEN RELATIVELY FLAT WHEREAS MORE DRAWS OF CRUDE HAVE BEEN REPORTED IN THE NON-OECD. SPR AND FLOATING STORAGE HAVE HELPED TO CLEAR BARRELS FROM THE MARKET.
1000
1200
1400
1600
1800
2000
2200 CommTotal (mb)
2015 2016
600
700
800
900
1000
1100
1200
1300
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
OECD (mb)
2015 2016
600
620
640
660
680
700
720
740
760
780
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Non-OECD (mb)
2015 2016
Global Crude inventories dip
back below 2015 levels
Global Crude Inventory
Source : JODI
Source: IEA
Copyright of Shell Trading Risk Management, LLC
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
EA OPEC EIA IEA
WITH AN ALREADY LOW BASELINE IN 2016, AGENCIES BROADLY SEE NON-OPEC SUPPLY DECLINES ARRESTING IN 2017, RELIEVING THE CALL ON OPEC.
Agencies
Non-OPEC Supply(incl. NGLs)Demand
Call on OPEC / Inventory
2017 Agency Forecast (MBD)
YTD Growth vs 2016 50 kbd
OPEC Growth
Stoc
k D
raw
s?
Source: IEA, EIA, OPEC, Energy Aspects
Copyright of Shell Trading Risk Management, LLC
NATURAL GAS MARKET FUNDAMENTALS
U.S. EIA STEO SUMMARY – OCTOBER 2017
COMMENTARYThe U.S. EIA stated Henry Hub prices declined in early September largely in reaction to Hurricane Irma’s impact to gas fired generation in Florida. Most generation in Florida is gas-fired and production was 41% lower on September 11 than the average first 7 days of September.
Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
HENRY HUB SPOT PRICE
2016 averaged $2.52/MMBtu
2017 to average $3.03/MMBtu
2018 to average $3.19/MMBtu**revised down from $3.29/MMBtu in September 2017 STEO
MARKETED PRODUCTION
2016 averaged 77.8 Bcf/d
2017 to average 79.0 Bcf/d
2018 to average 84.4 Bcf/d**revised up from 84.1 Bcf/d in September 2017 STEO
PIPELINE IMPORTS
2016 averaged 8.0 Bcf/d
2017 to average 8.0 Bcf/d*
2018 to average 8.1 Bcf/d
*revised up from 7.9 Bcf/d in September 2017 STEO
R&C DEMAND
2016 averaged 20.4 Bcf/d
2017 to average 20.7 Bcf/d
2018 to average 21.8 Bcf/d**revised up from 21.7 Bcf/d in September 2017 STEO
ELECTRIC POWER DEMAND
2016 averaged 27.3 Bcf/d
2017 to average 24.8 Bcf/d
2018 to average 26.3 Bcf/d**revised up from 25.5 Bcf/d in September 2017 STEO
HENRY HUB NATURAL GAS PRICE FORECAST
▪ The U.S. EIA stated that Henry Hub natural gas prices are expected to average $3.03/MMBtu in2017 and $3.19 in 2018.
▪ The U.S. EIA also stated that Henry Hub natural gas spot prices averaged $2.98/MMBtu inSeptember, up $0.08 from its July average.
Note: Confidence interval derived from options market information for the 5 trading days ending Oct. 5, 2017. Intervals not calculated for the months with sparse trading in near-the-money options contracts.
This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
Source: U.S. EIA Short-Term Energy Outlook, April 11, 2017
U.S. NATURAL GAS PRICE COMPARISONS
Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017Note from EIA regarding residential price peaks in the summer and troughs in the winter: Residential prices have two components: the variable cost (cost of gas) and the utility’s fixed costs (operating/infrastructure/etc). The fixed costs are very high and they’re spread out over consumption. Since there’s more consumption in the winter, the fixed costs are spread out much more. Winter heating bills will be higher because the increase in consumption outweighs the lower price.
Copyright of Shell Energy North America
This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
U.S. NATURAL GAS DRY PRODUCTION
▪ According to the U.S. EIA, dry natural gas production is expected to average 73.6 Bcf/d in2017, a 0.7 Bcf/d increase from 2016.
▪ The U.S. EIA also stated that dry gas production averaged 75 Bcf/d in September, 3.1 Bcf/dgreater than the same time last year.
Source: U.S. EIA Short-Term Energy Outlook, October11, 2017
This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
65.0
67.0
69.0
71.0
73.0
75.0
77.0
79.0
81.0
83.0
85.0
Jan-
16 Mar
May Ju
l
Sep
Nov
Jan-
17 Mar
May Ju
l
Sep
Nov
Jan-
18 Mar
May Ju
l
Sep
Nov
Actual Forecast
EIA Actual EIA Forecast
U.S. NATURAL GAS PIPELINE GROSS IMPORTS
▪ According to the U.S. EIA, pipeline gross imports will average 8.1 Bcf/d in 2018 and 8.0 Bcf/din 2017.
▪ The U.S. EIA expects that growth in natural gas exports and growth in consumption willcontribute to Henry Hub Natural Gas spot price increasing to an annual average of$3.19/MMBtu in 2018 from $3.03/MMBtu in 2017
Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017
This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
Copyright of Shell Energy North America
EIA Actual
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
Jan…
Mar
May Ju
l
Sep
Nov Jan…
Mar
May Ju
l
Sep
Nov Jan…
Mar
May Ju
l
Sep
Nov
Pipe
line
Impo
rts
in B
cf/d
ActualForecast
EIA Forecast
According to the U.S. EIA, February 2017 natural gas prices were higher than February 2016 prices because of higher exports and lower production, leading to lower inventory levels.
U.S. GAS DRY PRODUCTION + LNG & PIPELINE GROSS IMPORTS
Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017
This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
▪ According to the U.S EIA, LNG export capacity is expected to increase in 2018 with exports exceeding 3Bcf/d, 66% more than the 2017 projected average.
EIA Actual EIA Forecast
Copyright of Shell Energy North America
65
70
75
80
85
90Ja
n-16 Mar
May Ju
l
Sep
Nov
Jan-
17 Mar
May Ju
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Jan-
18 Mar
May Ju
l
Sep
Nov
Supp
ly in
Bcf
/d
Pipeline Gross Imports
LNG Gross Imports
Dry Production
U.S. NATURAL GAS DEMAND – RESIDENTAL & COMMERCIAL
▪ The U.S. EIA expects residential and commercial consumption to average 20.7 Bcf/d in 2017and 21.8 Bcf/d in 2018.
EIA Actual EIA Forecast
Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017
This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
Copyright of Shell Energy North America
0
5
10
15
20
25
30
35
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45
50
Jan-
16 Mar
May Ju
l
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Jan-
17 Mar
May Ju
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Nov
Nat
ural
Gas
Dem
and
in B
cf/d Actual
Forecast
C
U.S. NATURAL GAS DEMAND – INDUSTRIAL
EIA Actual EIA Forecast
Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017
This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
Copyright of Shell Energy North America
18
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21
22
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25
Jan-
16 Feb
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May Jun Jul
Aug Sep
Oct
Nov Dec
Jan-
17 Feb
Mar
Apr
May Jun Jul
Aug Sep
Oct
Nov Dec
Jan-
18 Feb
Mar
Apr
May Jun Jul
Aug Sep
Oct
Nov Dec
Nat
ural
Gas
Dem
and
in B
cf/d
Actual
Forecast
U.S. NATURAL GAS DEMAND – POWER GENERATION
▪ According to the U.S. EIA, consumption in the electric power sector should decrease 9.1% in2017 and increase 6.2% in 2018.
EIA Actual EIA Forecast
Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017
This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
10
15
20
25
30
35
40Ja
n-16 Mar
May Ju
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Jan-
17 Mar
May Ju
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Jan-
18 Mar
May Ju
l
Sep
Nov
Nat
ural
Gas
Dem
and
in B
cf/d
Actual
Forecast
U.S. NATURAL GAS DEMAND BY SECTOR
EIA Actual EIA Forecast
Source: U.S. EIA Short-Term Energy Outlook, October11, 2017
This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
Copyright of Shell Energy North America
0
10
20
30
40
50
60
70
80
90
100
Jan-
16 Mar
May Ju
l
Sep
Nov
Jan-
17 Mar
May Ju
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Nov
Jan-
18 Mar
May Ju
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Sep
Nov
Dem
and
in B
cf/d
Residential &CommercialPower Generation
U.S. NATURAL GAS DEMAND VS. SUPPLY*
EIA Actual EIA Forecast
Source: U.S. EIA Short-Term Energy Outlook, October 11, 2017
* Supply = Dry Production + LNG Imports + Pipeline Gross Imports
This information comes directly from the U.S. Energy Information Administration website and is to be used for discussion purposes only. Shell makes norepresentation and expresses no opinion as to the accuracy of such information and such information is not a reflection of Shell’s view of any market fundamentals.
30
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Nat
ural
Gas
in B
cf/d
Demand
Demand Forecast
Supply
Supply Forecast
What type of credit support is required and its impact on execution costs?
ISDA WITH CSA
Bi-lateral credit limits are established based upon the credit assessments of the Producer and Shell Trading ISDA with a CSA
Collateral (cash or LoC) required if daily mark-to-market exposures from financial trades exceed credit thresholds in contract
Producer with external credit rating issued by a rating agency, credit thresholds are tied to a credit grid (i.e. a credit line tied to rating)
Aggressive pricing but could fill up derivative lines.
Copyright of Shell Trading Risk Management, LLC
UNSECURED NO-MARGIN PROGRAM
Used to compete with bank syndicates, where bank’s hedging affiliates are secured and producer is not able to post collateral outside bank facility
ISDA with no CSA. No posting of cash, LCs, or security interest in reserves is required (thus STRM’s credit exposure is “unsecured”)
Covenants generally used for sub investment grade rated Producers to mitigate risk of credit deterioration. Dynamic or static covenants pulled from existing credit agreement
Credit charge based on internal adjusted credit rating and recovery rate
60 month + balance of current year hedge tenor allows STRM to compete for essentially all the hedges
Credit reports weekly exposure by CP and credit reserve applied to P&L
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UNSECURED NO-MARGIN DUE-DILIGENCE
Producer Review
Company assessment – typical credit underwriting review augmented by analysis of 3rd party engineering reserve reports
Credit determines an adjusted credit rating and recovery rate that is used to determine credit charge
Credit monitors and adjusts individual credit ratings on a periodic basis
Copyright of Shell Trading Risk Management, LLC
SECURED NO-MARGIN PROGRAM
Used in situations where a Producer’s lender allows STRM to share in collateral on a first lien basis to secure hedging obligation. If recovery rate is high, pricing can be aggressive.
Credit exposure under the ISDA is secured via a mortgage on the Producer’s reserves and other collateral and guarantees securing the Producer’s lenders.
Bank and STRM share in the collateral and guarantees on a pari passu(i.e. “ratable”) basis.
Producer credit review includes financial statements and review of 3rd party engineering (potentially evaluated by STRM contract reservoir engineer)
Contracts include 1) an ISDA with Producer and 2) An IntercreditorAgreement with STRM, Lender and Producer
STRM legal due diligence required including reviewing all closing documents from financing.
Copyright of Shell Trading Risk Management, LLC
SECURED NO-MARGIN DUE-DILIGENCE
Secured Deals are handled with a Deal Team approach; Credit, Structuring, Commercial, Legal & Contracts
Lender Review
E&P portfolio and experience lending to E&P companies
Is the Lender well capitalized?
Credit Agreement, ICA and security docs
Producer Review
Company assessment – management and track record
Analyze 3rd party engineering and production reports
Financial review – historical and pro-forma
Hedging strategy and PFE
Collateral coverage assessment – debt and MtM
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How do you chose a hedge counterparty?
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CHOOSING A HEDGE COUNTERPARTY
Questions to consider when choosing hedge providers:
What is the credit quality of the hedge provider? Are they financially stable enough to pay if I settle or unwind in the money?
What is the reputation of the hedge provider? Do they plan to price aggressively?
Can they offer the specific underlyings and financial structures I require for my risk management program?
What type of credit support is required? Am I interested in no margin or margining to improve pricing?
Copyright of Shell Trading Risk Management, LLC
CHOOSING A HEDGE COUNTERPARTY CONTINUED
Questions to consider when choosing hedge providers:
If I am hedging with my bank group only, do they have the capacity to fulfill all my hedging requirement?
How many hedge providers do I need? Weigh the time constraints of adding and maintaining those hedging relationship in the new Dodd-Frank financial regulatory world.
How do I want to handle the onboarding process with those hedge counterparties?
Should I consider adding Shell to increase competitiveness, spread counterparty risk, and help fulfill all my hedging needs?
Copyright of Shell Trading Risk Management, LLC
Copyright of Shell International B.V.
OTHER USEFUL INFO
SAMPLE LIST OF NATURAL GAS INDEX POINTS
Natural Gas IntelligenceCHICAGOMALINPGE CITYGATESOCALSOCAL CGSOCALBRDR PGE
Last DayEHRENBERGGOSHENHERMISTONLANC DA BIDNGPL GAGENWPL CGPSCO CITYGATERATTLESNAKE CRKREX WESTSWGAS AZSWGasSJ
Inside FERCANRLaANROKCanNigCIGRockyCNGApplColGasAppalColGfLaCOLGULF MLDAWNELPPermELPSanJuanETx KATYFGTZ3HHCHSCMICHCON LEUNGPLMCNGPLSTxNGPLTxOkNNGDeNNGVIowaNWPCB SUMASNWRocONGOkPANCENTERPOINT EASTSONATLa
Gas DailyANR ML7ANROKCARTHAGE HUBCHEYENNEChicago LDCsCIG ROCKYCNG NorthPointCNG SouthPointCNSPWRCOLGAS APPCOLGULF MAINLINEDAWNDRACUTELP BONDADELP NonBondadELPPermEmerson VikingHHCHSCIROQUOISKERN DELIVEREDKERN RIVER OPALMALIN MichCon LEUNGPL MDCTNGPLTxOk ENIAGARA
Gas DailyNNG DEMNNG VIANW S GRN RIVERNW STANFIELDNW WYOMING POOLNWPCB SumasPANPGE CITYGATEPGE LPQUESTARCENTERPOINT EASTSOCAL CGSOCAL LPSonatTENN Z6TET ELATETM3TGTSLTRNSWST PERMTRZ3TRZ6 NYWAHA
Inside FERCTENN 500TENN 800TENN Z6TENNTxZ0TETCOETxTETCOSTxTETELaTETM3TGTSLTGTZ1TRMissAlabTRUNKLaTRZ2TRZ3TRZ6 NON-NYTRZ6 NYWILLTxOkKsWTXWaha
IPEBrent
Canadian GasAECO
Canadian Gas DollarAECOEMP
ARGFormula WTIWTS WTD
NYMHHWTI
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DISCOVER MORE
www.shell.us
youtube.com/shell
flickr.com/photos/royaldutchshell
shell.com/inside_energy
facebook.com/shell
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CONTACT DETAILS
Shell Trading Risk Management offers a wide range of Risk Management solutions
Our experienced team welcomes the opportunity to speak to you about how our services can help you achieve your business goals
Contact us:
Name: Kevin Hulsey
Number: 713-230-7327
E-mail: [email protected]
Hotline Number: 844.788.7876
Copyright of Shell Trading Risk Management, LLC
Copyright of Shell Trading Risk Management, LLC
APPENDIX
Copyright of Shell Trading Risk Management, LLC
INDEXED PRICE – HEAT RATE POWER
Transaction OverviewThis product is designed to allow customers to convert power exposure into gas terms by purchasing a fixed volume of power priced on a gas index.
Heat rate power is offered at a fixed multiple to a gas index.
Variation: choice of preferred gas index, e.g. Henry Hub or Houston Ship Channel.
Buyer Customer
Seller Shell Trading Risk Mgmt
Power Index ERCOT Houston
Gas Index GDD HSC
Volume 100 MW
Heat Rate 8.0 MMBtu/MWh
Term 12 months
Customer Benefits Locked in fixed heat-rate
Protection against spikes in market heat rates due to weather events, transmission constraints or market imbalances
Simple, transparent pricing based on published gas index
Low credit costs, compared to transacting fixed price power
Summary Terms Example: Transaction Economics
Fixed Heat Rate Gas Index Settle Realized Price
8.0x $6.00/MMBtu $48/MWh
8.0x $5.00/MMBtu $40/MWh
8.0x $4.00/MMBtu $32/MWh
Copyright of Shell Trading Risk Management, LLC
COMMODITY PRICED AS A PERCENT OF NYMEX
Transaction OverviewThis product provides commodity pricing at a preferred point (including basis), with the price expressed as a percent of NYMEX Henry Hub. As an alternative to fixing the basis differential, the product allows for transparent, market-tracking with minimum complexity.
Buyer Customer
Seller Shell Trading Risk Mgmt
Product Natural gas (NGPL MidContinent Inside FERC)
Volume 5,000 MMBtu/d
Price 96% of NYMEX Henry Hub
Term 12 months
Customer Benefits Provides customer a market based price with a
transparent way to understand and explain price changes
Delivered price (including basis) moves with NYMEX
Summary Terms Example: Transaction Economics
Volume NYMEX Settled Price
NGPL-Midcon Basis
Contract Billed Price -% of Nymex
5,000MMBtu/d
$3.40/ MMBtu
($0.135)/MMBtu 96%
5,000MMBtu/d
$3.50/ MMBtu
($0.140)/MMBtu 96%
5,000MMBtu/d $3.60/
MMBtu($0.145)/
MMBtu 96%
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GAS PRICE BASED UPON CRUDE OR POWER PRICES
Transaction OverviewThis product is designed for producers with both crude and gas production, who would like to understand their production in terms of a single index price.Option to purchase or sell gas production based upon a percentage of a crude oil marker price (NYMEX WTI, Louisiana Light Sweet, etc).
Variation: gas purchase or sale price can be based upon a power price index, or a basket of oil marker prices.
Buyer Shell Trading Risk Mgmt
Seller Customer
Product Natural gas
Volume 10,000 MMBtu/d
Price 6.67% NYMEX WTI
Term 12 months
Customer Benefits Simplify economics: customer can understand and report
changes in production value based upon a single index
Price flexibility: gas price does not necessarily need to be based upon a single point, but could be a weighted average of multiple points
Summary Terms Example: Transaction Economics
Average Crude Price
Gas Price as %Crude
Realized Gas Price
$45.00/Bbl 6.67% NYMEXWTI $3.00/MMBtu
$48.50/Bbl 6.67% NYMEX WTI $3.25/MMBtu
$52.45/Bbl 6.67% NYMEX WTI $3.50/MMBtu
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STORAGE LOOKALIKE COMMODITY
Transaction OverviewThis product is designed for customers interested in the ability to produce natural gas in one period, and for it to be marketed in a different period or at a different location. Buyer pays a premium for a fixed price and opportunity to market fixed volumes at later dates or different locations.
Seller can purchase natural gas in one period, hold or trade it, and later provide an equivalent volume of product at a different time period to the customer.
Helpful for associated gas production that must be marketed.
Buyer Customer
Seller Shell Trading Risk Mgmt
Product Natural gas
Volume Received/ Redelivered
Summer: 20,000/10,000 MMBtu/dWinter: 20,000/30,000 MMBtu/d
Price Demand fee: $0.12/MMBtu per monthGas price: $3.22/MMBtu**(pre-agreed fixed price)
Term 12 months (April through March)
Customer Benefits Price advantages: enables buy-side customers to secure
better pricing when the current monthly price is expected to move downward as compared to later purchases
Market-time flexibility: customer can market commodity at later dates and/or at different delivery points
Geographic flexibility: can provide the storage equivalent for commodity in difficult markets
Summary Terms Example: Transaction Economics
Fixed Volume Supply
From Buyer
Summer Volume/ Winter Volume
from Seller
Premium for Storage Lookalike
20,000 MMBtu 10,000/30,000 MMBtu
$0.12/MMBtu per month of total
capacity
20,000 MMBtu 15,000/25,000 MMBtu
$0.08/MMBtu per month of total
capacity
20,000 MMBtu 30,000/10,000 MMBtu
$0.05/MMBtu per month of total
capacity
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