TITLE
Recommendation to authorize City Manager to execute International Swap and Derivatives Association (ISDA) Agreements with several energy market risk management product providers to allow various physical and financial natural gas transactions to protect against natural gas price spikes for customers of Long Beach Gas and Oil. (Citywide)
DISCUSSION
Natural gas, like other petroleum products, is subject to volatile commodity market pricing. Since the California energy crisis of 2000-2001, when natural gas prices increased nearly seven fold with residential monthly gas bills reaching $300-$400, Long Beach Gas and Oil (LBGO) has entered into price hedge structures to protect customers from large price spikes and provide price stability. The current price hedge agreement, with Shell Energy North America, terminates in March 2012.
Prior to seeking approval to continue the practice of hedging gas commodity prices, LBGO solicited interest from energy market risk management product providers. Respondents included British Petroleum, ConocoPhillips, Freepoint Commodities, Goldman Sachs, J.P. Morgan, MacQuarie Energy, Merrill Lynch, and Shell Energy. LBGO has met with each of these respondents for discussions on market outlooks, hedging strategies, and potential pricing structures. Discussions indicate that the recent low price stability provides attractive hedging opportunities resulting from abundant new shale gas production and reduced demand from the economic downturn.
All respondents have indicated the advantages of having industry standard ISDA agreements in place for the flexibility that will allow for prompt execution of competitive bids at the times of best possible pricing. Hedge bids would otherwise have to include a substantial premium over market prices to cover the risk bidders would assume in offering a firm price hedge for an extended length of time while approval was being sought. ISDA agreements by themselves would not obligate LBGO to ent...
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