MARKETING BRANCH

Presented by
Mohammed Tahar SELLAL
SONATRACH- HYDROCARBON LIQUIDS
MARKETING BRANCH
WORLD GAS CONFERENCE
NICE
6 - 9 JUNE 2000
LPG PRICING
A PRODUCER POINT OF VUE
LPG PRICING
LPG PRICING
SLIDE 1
LPG WORLD TRADE
WORLD LPG PRODUCTION WAS AROUND 187 MILLION TONNES IN 1998 UP BY 2.4 % (YR TO YR).
SOME LARGE LPG PRODUCERS LIKE USA, BEING THE LARGEST CONSUMER (ABOUT 54 MILLION TONNES),
INTERNATIONAL WATERBORNE LPG TRADE REPRESENTS ONLY ABOUT 48.9 MILLION TONNES.
THE WATERBORNE TRADE FLOWS, ESTIMATED IN 1999 ARE :
EXPORTS IMPORTS SURPLUS
MIDDLE EAST 27.2 - 27.2
MEDITERRANEAN SEA 7.7 6.6 1.1
NORTH SEA 5.2 4.9 0.3
AMERICA 3.3 7.2 (3.9)
ASIA & PACIFIC 2.8 28.8 (26.0)
WEST AFRICA 1.3 0.1 1.2
USA 1.4 1.3 0.1
TOTAL (10
6
T) 48.9 48.9
LPG PRICING
LPG PRICING
SLIDE 2
TWO WAYS OF PRICING LPG COEXIST TODAY
MONTHLY POSTED PRICES SET BY LPG PRODUCERS
OR
PRICE PUBLICATIONS LIKE :
* OPIS USED MAINLY IN UNITED STATES DOMESTIC MARKET
* ARGUS AND PLATT S USED MAINLY IN NORTHWEST EUROPE
PRICING OF LPG BY PRODUCERS
THE MAIN LPG PRODUCERS AND BY FAR THE LARGEST, USE THEIR MONTHLY POSTED PRICE FOR THE BULK
OF THEIR EXPORTS ESPECIALY THE MIDDLE EAST AND ALGERIA AND PARTLY FOR NORTH SEA PRODUCERS
(UK, NORWAY).
LPG PRICING
LPG PRICING
SLIDE 3
U.S. PRICE REPORTING
OPIS REPORTS DAILY PRICE QUOTATIONS BASED ON DAILY TRANSACTIONS AND SWAPS IN THE US MARKET
BUT THE MOST REPRESENTATIVES ARE THE QUOTATIONS OF MONT BELVIEU (TEXAS) DUE TO THE VERY
LARGE NETWORK OF LPG PROCESSING PLANTS, PIPELINES, STORAGES AND MARINE TERMINALS.
THE VOLUME TRADED DAILY IN MONT BELVIEU IS LARGE ENOUGH TO INSURE IN PRINCIPLE, LIQUIDITY AND
TRANSPARENCY.
THESE PRICES ARE SET ON THE BACKGROUND OF THE FONDAMENTALS OF THE US MARKET AND THERE IS
GENERALY GOOD CORRELATION WITH CRUDE OIL PRICES AND VOLATILITY IS GENERALY LIMITED THE VERY
LARGE MONT BELVIEU NETWORK BEING ABLE TO ADJUST QUICKLY TO OFFER-DEMAND IMBALANCES .
LPG PRICING
LPG PRICING
SLIDE 4
NORTH WEST EUROPE PRICE REPORTING
ARGUS AND PLATT S REPORT DAILY PRICE QUOTATIONS BASED ON DAILY TRANSACTIONS OR SWAPS IN
NORTH WEST EUROPE.
ALTHOUGH THE PRODUCTION IN THIS AREA IS QUITE LARGE, THE VOLUME TRADED DAILY IS LIMITED
BECAUSE MOST OF THE PRODUCERS ARE INTEGRATED DOWNSTREAM AND SOME BUYERS REFER EITHER
TO THESE PUBLICATIONS OR TO POSTINGS FOR PRICING PURPOSE.
AS A RESULT THE VOLUME TRADED DAILY AT FIXED PRICE IS NOT SUFFICIENT TO INSURE LIQUIDITY AND
TRANSPARENCY.
SLIDE 5
FLOATING PRICES (PROPANE)
l UNITED STATES :
DAILY QUOTES BASED ON TRANSACTIONS OF 25 000 BBLS (abt 2 000 T) LOTS DELIVERED EX-TERMINALS.
l NORTH WEST EUROPE:
DAILY QUOTES BASED ON TRANSACTIONS OF 7 000 T LOTS DELIVERED CIF ARA (ANTWERP, ROTTERDAM,
AMSTERDAM).
PRICE FIXATION
PRICE FIXATION
SLIDE6
PRODUCER VIEW
TO SALE LPG, PRODUCER HAS TWO OPTIONS FOR DETERMINING THE PRICE OF SUCH COMMODITY.
EITHER RELY ON FLOTING PRICES ASSESSED BY PRICE REPORTING PUBLICATIONS SUCH
AS PLATT S, ARGUS, OPIS ETC
ASSESS BY HIMSELF THE MARKET AND SET MONTHLY POSTED PRICES, OR USE A COMBINATION OF BOTH
POSTINGS AND REPORTED PRICES.
PRICE FIXATION...
PRICE FIXATION...
SLIDE7
REPORTED PRICES
PRICE REPORTED BY JOURNALISTS ARE DEEMED TO BE THE MARKET BECAUSE THEY ARE BASED ON DAILY
REAL TRANSACTIONS COMPLYING WITH STRICT RULES SET BY THESE PUBLICATIONS.
IN ADDITION, THESE REPORTED PRICES OFFER THE ADVANTAGE OF BEING HEDGEABLE BY USING THE
PARALLEL SWAP MARKET BASED ON THEM.
ACTUALLY, THE SITUATION IS NOT SO PERFECT, IN FACT THERE ARE SOME MAJEUR INCONVENIENCES WHICH
LIMIT THEIR RELIABILITY:
THESE REPORTED PRICES ARE NOT ALWAYS TRANSPARENTS AS THEY ARE SUPOSED TO BE.
TWO RAISONS :
l THE SIZE OF THE LOTS, TAKEN INTO CONSIDERATION, FOR PRICE REPORTING ARE OFTEN
SMALL COMPARED TO PRODUCERS USUAL LOTS AND THE LIQUIDITY IS NOT ALWAYS
SUFFICENT, IN ORDER TO AVOID THE RISK OF PRICE MANIPULATION.
l THE BALANCE BETWEEN PRODUCERS AND TRADERS REPORTING/CONSULTED FOR PRICE
REPORTING IS IN PRACTICE BIASED IN FAVOUR OF THE LATER.
A TRANSACTION BASED ON THESE REPORTED FLOTING PRICES EXPOSE BOTH PARTIES TO THE RISK OF
PRICE MANIPULATION THIS IS EQUIVALENT TO SIGNING A BLANK CHEQUE.
PRICE FIXATION...
PRICE FIXATION...
SLIDE 8
BY SETTING THE PRICE HIMSELF, THE PRODUCER INSURE FULL CONTROL OF HIS SALES,
BUT TO CONTROL THE PRICE DOES NOT IMPLY THAT THE PRICE CAN BE ARBITRARY.
FOR TWO REASONS :
l THIS PRICE SHOULD BE IN LINE WITH THE MARKET IN ORDER TO BE ACCEPTED AND IF IT IS
THE CASE BECOME A MARKER.
l THE PRODUCER MUST FIX A PRICE WHICH ALLOW HIM TO DISPOSE SMOOTHLY OF HIS LARGE
PRODUCTION, IN ORDER TO DO SO THE PRICE LEVEL SHOULD BE DICTATED BY THE
EXPRESSED/ANTICIPATED DEMAND.
PRICE FIXATION
PRICE FIXATION
PRICE FIXATION
PRICE FIXATION
SLIDE 9
FIXED MONTHLY PRICES HAVE TWO DISADVANTAGES:
l THEY DO NOT FOLLOW MARKET VOLATILITY AFTER BEING FIXED FOR ONE MONTH
l PRICE RISK IS DIFFICULT TO MANAGE DUE TO THE PRICE VOLATILITY
THE FIRST INCONVENIENT IS MANAGED BY THE MARKET THROUGH PREMIUM / DISCOUNT TO THE FIXED
MONTHLY PRICE. THIS MANAGEMENT IS POSSIBLE AS LONG AS THESE PREMIUM/ DISCOUNT REMAIN WITHIN
A REASONABLE LIMIT.
THE OTHER INCONVENIENCE, THE LACK OF A SWAP MARKET WHICH CAN ALLOW THE BUYER ON POSTED
PRICES TO HEDGE THE PRICE RISK CAN BE UNDERSTOOD BY THE RELUCTANCE OF TRADERS TO USE
TOOLS OUT OF THEIR CONTROL. IN THEORY SOME POSTED PRICES CONFORMS WITH THE PREREQUISITE OF
A SWAP MARKET IN TERMS OF VOLUME TRADED AND PREDICTIBILITY.
PROPANE PROPANE
POSTED PRICES
POSTED PRICES
60
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US $/T
SLIDE 10
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BUTANE BUTANE
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BP
ARAMCO
MT BELVIEU
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BP
ARAMCO
MT BELVIEU
US $/T
POSTED PRICES vs MT BELVIEU QUOTES
LPG PRICING
LPG PRICING
SLIDE 11
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BRENT
US $/T
SONATRACH PROPANE POSTINGS vs BRENT
LPG PRICING : CONCLUSION
LPG PRICING : CONCLUSION
SLIDE 12
OUR CONVICTION IS :
l OUR SAFEST OPTION IS TO USE OUR MONTHLY PRICES FOR THE BULK OF OUR SALE IN OUR MAIN MARKET
THE MEDITERRANEAN SEA. THESE PRICES MUST REFLECT THE MARKET FORCES IN ORDER TO BE ACCEPTED
AND COMONLY USED AS A MARKER SO FAR WE THINK THAT IS THE CASE FOR SONATRACH MONTHLY
PRICES.
l OUR PRODUCTION, EXCEEDING THE MEDITERRANEAN MARKET CALL FOR OUR PRODUCTS, MAINLY OUTSIDE
WINTER MONTHS, WE HAVE TO TARGET ALTENATE MARKETS LIKE
- AMERICAS
- PETROCHEMICAL FEEDSTOCKS.
THESE SWING MARKETS SHOULD BE SEGMENTED AND PRICING POLICY SHOULD BE
COMPETITIVE WITH THEIR ALTERNATIVES.