Price Matrix Heart of Successful Supply Acquisition Campaign

Kelly Untinen

n an industry rife with uncertainty, there’s I one thing you can count on in the natural gas business: Price will continue to be the number- one concern for consumers and suppliers, and both want price to be more predictable. Western Gas Marketing had this in mind when it launched an aggressive supply acquisition campaign in October 1994.

Last fall, with a new contract year looming, producers were faced with tough decisions about contracting their uncommitted gas sup- ply. With volatile gas prices, many producers admitted they were nervous about committing to long-term contracts. They thought it might be less risky to sell their gas on the Alberta spot market.

. . . offer a superior long-term price for gas compared to the

spot market alternative.

Wanted Better Deal Than Spot Market The challenge? Western Gas wanted to at-

tract producers’ gas to its long-term supply pool, so it had to prove it could offer a superior long- term price for gas compared to the spot market alternative. Although discussion of attractive pricing had always been part of its marketing repertoire, with increased competition for avail- able supply, the company recognized it was time for a new approach-something new, aggressive, and meaningful to producers. And timing was key. Western Gas had only two weeks to persuade producers to sign up for the 1994-1995 contract year.

The Calgary-based marketer deals with more than 700 Alberta natural gas producers, which have their own distinct theories about where prices will be next month or next year. Knowing

this, Western Gas came up with a way to help producers use their own price assumptions to estimate the price they could receive from the Western Gas long-term market pool.

Price-Matrix Solution Enter the Western Gas Long-Term Market

Price Matrix (Exhibit l b t h e heart of the supply acquisition campaign. The matrix for the 1994-1995 contract year is based on a computer model the company developed to project prices for its market pool.

“We ran the model for a variety of market conditions and extrapolated the matrix from the results,” explains John Voss, manager of long- term supply. “What the matrix tries to do is reduce all the factors affecting our price down to two key variables-prices at Empress and at Henry Hub. It allows producers to look at something fairly simple and get a pretty good idea of the prices they can expect under the conditions they expect in the next year.”

The matrix is a straightforward table show- ing Empress prices on the horizontal axis and Henry Hub prices on the vertical axis. To use, you simply read down from the 12-month average price you expect at Empress, and read across from the corresponding price you expect at Henry Hub. Where the two intersect, you’ll find the projected Western Gas long-term mar- ket price, accurate to within 2 percent.

The beauty of the matrix is that it allows producers to focus on real numbers. Consider this analogy: A furniture store advertises that it has the best price on coffee tables. If the store does not tell you exactly what that price is, they will not convince you to buy a coffee table. It is

Kelly Untinen is a communications specialist with Western Gas Marketing Limited, of Calgary, Alberta.

OCTOBER 1995 NATURAL GAS Q 1995 John Wiley & Sons, Inc.

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the same thing with natural gas. If a marketer says it can give producers a better price for their gas, why would producers take the claim seriously if they have not seen real numbers to use in comparison shopping? Western Gas Marketing’s philosophy: It’s not enough for marketers to say they can pay a better price. They have to demonstrate that price.

Western Gas wanted to provide meaningful numbers, but with volatile gas prices and differ- ent opinions about future prices it was impos- sible to focus on one price the way a furniture store could. Coffee table prices, after all, do not fluctuate daily. The matrix takes those variables into account.

Selling the Sizzle Although the price matrix was the meat of

the advertising campaign, it was introduced with a lot of sizzle.

Ads Western Gas first raised producers’ aware-

ness of its attractive price by placing large ads displaying the projected long-term market pool price at the time of publication. The price was well above the spot-market alternative: by about 20 cents a gigajoule.

As expected, the ads raised a few eyebrows in the producing community because the price was attractive and because this kind of advertis- ing had never been used in the Alberta gas community. Although many gas marketers ad- vertise competitive purchase prices, no one had actually advertised specific prices. One com- petitor actually phoned Western Gas and asked, half-joking, “How could you do this to us?”

. . - wanted to provide meaningful numbers, but

with volatile gas prices and different opinions about future

prices it was impossible - - .

Mailers At the same time the newspaper ads ran,

mailers were sent to targeted producers-those known to have uncommitted gas supply. The mailers were designed to capture producers’ attention and carried the same message as the published ads. They also included a symbolic

gift, a change purse containing two Canadian dollar coins, also known as loonies. Two dol- lars was Western Gas’s projected long-term market pool price at the time (last fall, when gas prices were more favorable). The message behind the purses, called “loonie lockers,” was that Western Gas was putting its money where its mouth was.

Personal Contact But the price matrix was the real substance

of the campaign. It was mailed to targeted producers and followed up with personal visits from Western Gas supply reps. The reps went out prepared to answer questions and provide more information about the company’s ser- vices; price may be producers’ number-one consideration, but they also expect superior service.

. - . mailers were sent to targeted producers-

those known to have uncommitted gas supply.

Campaign Far Exceeded Expectations John Voss says, “Producer feedback on the

campaign was extremely positive. Typical com- ments were, ‘What a bold move for Western Gas’, and ‘The loonie locker made my day.’ An instructor at a local college used our campaign as an example to his petroleum technology students of how the gas industry is changing and becoming more dynamic.”

Adds Voss, “Of course, there was skepti- cism, too. Some producers wondered if we could actually deliver the prices we claimed. The fact is we’re outperforming our claim. The original ads projected our long-term market pool price would beat the Empress spot price by about 20 cents per gigajoule this year. For the first quarter of 1995, our average long-term border price beat Empress by 48 cents per gigajoule.”

The results of the campaign speak for them- selves. In 1994, Western Gas targeted the addi- tion of 200 million cubic feet a day of gas. The company exceeded its target, with 125 million cubic feet a day added in the two weeks following the launch of the campaign.

Voss attributes the campaign’s success to

22 NATURAL GAS OCTOBER 1995 0 1995 John Wiley 8 Sons, Inc.

I Exhibit 1. Projection of Western 0 Price for the 19941995 Contract Funotion of Empress 6order

(‘Based on average market p

1 199495 Average Prices

1 I I I I I I I I I

($CdnlGJ) 2.15 2.10 2.05 2.00 1.95 1.90 1.85 1.80 1.75 I I I I I I I I I I 1 I 1 1

-

1.70

2.31

2.28

2.24 -

2.20

2.17

2.13 -

2.09

1.83

1.80

1.76

1.72

-

-

-

-

1.65

- 2.30

2.26

2.23 -

2.19

2.15

2.12 -

2.08

2.04 -

1.78

1.75

1.71

- -

1-60 155 1.50 I * I

2.29 2.27 2.26

2.25 2.24 2.23

2.21 2.20 2.19

2.18 2.16 2.15

2.14 2.13 2.11

2.10 2.09 2.08

2.07 2.05 2.04

2.03 2.02 2.00

1.99 1.98 1.97

1.70 I 1.69 I 1.67

-

1.45

2.25

2.21

2.18 -

2.14

2.10

2.07

2.03

1.99

1.95

-

-

1.92

1.88

Empress Basis Differential (61 to -70)

EmpregsBasiSDilferentisl(b1 tO-60)

Range of marketmitkns in m t h e Annual Average Empregs

November1994toOctober 1995

Range of average Empress Border prices for Fkm supply. forthe 12 months

-v Hub (-1 Range 0s average Henry Hub prices for Firm supply, forthe 12 months November 1994to October 1995

Nots: Assume~Wn0USS18.251bMandUssO.745/cdns @esedonaveragemwketprbes~23-30)

Emprr##l Basis DiffemW (41 to -50)

BorderPriceexceedsthe WestsmGasLong-Tm Mwket Pool Price

Pmjectd Long-Tm Market Pool Price asdSeptember30,1994

*Empnu-(SCQJOJ)

the fact that “Western Gas was front and center with a credible alternative at a time when producers had gas to sell and needed to make decisions. We learned that unorthodox promo- tional approaches can work, but sizzle must come from some real steak.”

As for the price matrix, it has lasting value. New versions are issued as necessary to keep projections tracking closely to Western Gas’s more complicated computer model. The com- pany is about to issue the third-generation matrix.

OCTOBER 1995 NATURAL GAS 0 1995 John Wiley 8 Sons, Inc.

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