Park and Loans (PALs) are agreements which allow shippers on natural gas pipelines in North America to either park extra gas or borrow gas from the pipeline when they are short. These agreements are tied to specific locations on pipelines, such as the STX (South Texas) or ETX (East Texas) points on the Texas Eastern Pipeline. A lot of players in the market find profit opportunities but getting the risk structure correct is important and can some times take a bit of time to get right.
A typical P&L play is based on the spread of the monthly forward prices for each month. For example, the July locational market price for STX may be $2.25, while the November price may be $2.45. Depending on the cost to park and store the gas, parking the gas in July to pull out in November could make a nice profit. In this scenario, if it costs $.012 to move the gas to the location, and $.01 per MMBtu to park the gas per month, and a cost of $.01 per MMBtu to move the gas out in November, a park of 50,000 MMBtus on July 1st (ignoring losses for now) could make a profit of $6,900.
Of course, actual profit is not realized until the deal prices are settled. Until buy and sell deals are executed to cover the movements in and out of the PAL agreement, the trader has some price exposure associated with any PAL agreement. For the front month (in this scenario the front month is July), in order to take advantage of the PAL, a buy trade must eventually be executed. If the current month is April and the PAL has been executed from July to November, there is a short exposure to July which means gas should be purchased. There is also a long exposure to November, which means gas must be sold in November if that is the plan.
Now, considering there is long and short exposure due to the PAL agreement, the components of natural gas price exposure must be considered. For physical gas, there are typically three components of a forward price:
- NYMEX (or FIXED),
- BASIS, and
- PHYSICAL PREMIUM (this is usually Gas Daily exposure, but could be Inside FERC, some call it INDEX).
Therefore, before any trades are executed there are exposures that should either be met with physical deals, or hedged with financial transactions. The initial exposure of the PAL Agreement outlined above would look like this:
|Month||Exposure Type||Exposure Quantity (MMBtu)|
At this point, traders could execute Futures and Basis Swaps or other instruments to hedge the positions. Traders could also execute fixed price physical transactions and lock in the P&L up front, ignoring credit risk for now.
It is important to understand and report these exposures, because until they are hedged, the potential profit around the PAL will fluctuate based on each of the price components; NYMEX, BASIS, and PHYSICAL PREMIUM.
Many ETRM systems do not report these exposures out of the box. If you cannot get an accurate P&L around a PAL agreement, reach out! We love to help and have extensive experience with this configuration at a variety of client sites.