AGA decision to shut in storage survey rattles energy markets.
The race is on to fill the data void created by the American Gas Association's (AGA's) decision to stop gathering and publishing its weekly underground storage information. Aside from the Energy Department's Energy Information Administration (EIA), which announced in late October it would enter the weekly gas data business, several private companies are expected to vie to be the first to set up shop as the industry's new major weekly storage data provider.
AGA, the Washington lobbyist for 185 natural gas utilities across the nation, surprised many in the energy industry in October when it announced that it was exiting the weekly storage data business. In the discontinuance notice, AGA said it would issue its final working gas-in-storage report on Jan. 2, 2002, covering storage activity for the week ending Dec. 28.
Since the announcement, some industry officials have expressed a desire for AGA to continue issuing the storage inventory report through the end of this coming winter. Gauging gas inventories is most crucial in the January to March timeframe, when gas usage hits its traditional peak, and the market must decide whether to meet demand by pulling gas from storage or taking it straight from the wellhead.
But AGA says it will stick to its original plan and close up its storage data collection operations at the end of the year. The association says it has approached EIA about providing storage estimates on a weekly basis instead of the agency's current monthly schedule.
"AGA's weekly storage estimates have closely tracked EIA's numbers over the past seven years," said Roger Cooper, AGA executive vice president of policy and planning, in an Oct. 12 letter announcing its decision. "AGA estimates are currently issued three working days after the weekly reporting period ends, while EIA storage data is often published a month or more after the end of the reporting period."
Pat Wood, the new FERC chairman, said EIA was the logical group to take over the weekly storage survey duties. Based on his discussions with EIA, though, Wood believes it would take the statistical arm of the U.S. Energy Department a couple of years to get a weekly storage survey up and running. "EIA is not capable of doing that until 2004," Wood said following FERC's Oct. 24 public meeting.
In announcing on Oct. 30 that EIA would conduct a weekly storage survey, DOE officials said they expect the transfer of storage data duties to be "seamless" and that EIA should be capable of picking up where AGA left off as of Jan. 9, 2002. Cooper said AGA hopes the "EIA survey is simple, efficient and effective-as is ours. We don't want to see any unnecessary burdens placed on reporting companies."
Private Survey to the Rescue?
Despite EIA getting into the game, Wood feels the best option is for a news organization or private company to take over the storage survey efforts. Cooper agrees. In his letter, he suggested the industry turn to "commercial providers that either currently provide these services or that might offer storage-related services in the future."
AGA emphasizes it is conferring with organizations that might be interested in launching their own weekly storage survey. "We're talking with several people," says Paul Wilkinson, AGA vice president of policy analysis, and adds that some of those discussions have been with private companies. Following Wood's recommendation, consultants and major energy news companies reportedly have expressed interest in launching fee-based weekly storage data services.
To start its weekly survey, EIA would need Congress to grant the necessary funding, and any additional surveys of the 140 storage operators in the United States would have to be approved by the Office of Management and Budget. In case of a supply emergency, though, EIA says it does possess standby emergency status to gather storage data from operators.
Another option is for FERC to return to the storage data gathering business. In 1995, FERC eliminated its Form 8 storage report in an effort to reduce the reporting burden on pipelines and storage operators that fall under federal jurisdiction. Storage operators were required to send the Form 8s on a monthly basis to the commission, which would then make the information available to the public. Storage operators still are required to file monthly Form 191s with EIA, but the agency keeps the company-specific data confidential, and uses the data only for purposes of developing aggregate storage estimates on a state and national basis.
As for a possible role for FERC, Wood is not optimistic the commission could put together a weekly storage survey similar to AGA's. "I have inquired about our capability to replicate that effort here, and I am not real encouraged we could step right into the shoes of AGA and do that," he said.
Fallback Survey Exists
When 2002 rolls around, EIA will have company in its new role as weekly storage reporters. Houston-based Energy Reporting Network has been providing weekly storage estimates since August 1990 through its Gasfax service. The company has maintained a low profile over the years, providing aggregated storage data primarily to those companies in the physical gas market who own storage assets and participate in its survey ().
Gil Higgins, president of Energy Reporting Network, remembers receiving a phone call from one of his clients following AGA's announcement. The client remarked that Energy Reporting Network must have been excited upon learning of AGA's decision to discontinue its storage estimate service. That couldn't have been further from the truth, Higgins says. "Holy mackerel. We're not glad," he explains. "This is something the industry really depended on. Somebody has got to do something."
Alternative Storage Data Provider Resists New Market Temptations
Lost in the hand wringing by traders and analysts over the American Gas Association's (AGA) decision to discontinue its underground gas storage survey is the existence of another weekly storage data series.
Industry members, though, shouldn't be scolded for not being entirely up to speed on this other service. The company, Houston-based Energy Reporting Network, intentionally keeps a shroud around its Gasfax supply data service because the company's goal, up to this point, has been to provide reliable aggregated weekly storage estimates solely to the storage operators who provide Gasfax with inventory data on a weekly basis.
Energy Reporting Network declines to build a presence on the Web. (Go ahead and try searching on Google for either Energy Reporting Network or Gasfax and I guarantee you'll come up empty.) The company's Houston telephone number is unlisted. (The first words out of Energy Reporting Network President Gil Higgins' mouth when I rang to interview him were, "How did you get my phone number." Sorry, reporter ethics prevent me from burning my source of Gasfax's number.)
And, despite AGA choosing to exit the storage data market, Higgins isn't chomping at the bit at the perfect opportunity to grab a larger share of the weekly storage data market.
Going back to 1989, Higgins had conversations with enough people in the gas industry to convince him there wasn't timely gas supply data available during certain periods when circumstances demanded a quick look at supply indicators, especially in times of freeze-offs or tropical storms in major Gulf Coast producing areas. That year, he decided to develop a service that would measure storage levels as well as other supply indicators, including production rates, liquefied natural gas stores, and import levels.
Higgins says it took his company at least a year to get the storage survey in shape to launch. Among others, he consulted with the American Petroleum Institute to learn about the methodology the oil industry had used for years to conduct its weekly crude oil and petroleum products surveys.
Next, Higgins signed an agreement with accounting firm KPMG Peat Marwick to serve as the middleman between Gasfax and the storage operators. All of the weekly data gets sent first to KPMG starting on Thursday mornings, which then tabulates the data and delivers it to Gasfax by Monday.
For AGA's survey, storage operators fax their storage level data directly to AGA's offices in Washington starting Friday and continuing through Wednesday morning. AGA has an outside accountant who comes into its offices to tabulate the results each Wednesday afternoon.
Using KPMG as the auditor means Gasfax does not have the ability, and will not be tempted, to associate a storage level with a particular company. This focus on anonymity has been an important practice for Gasfax in gaining the trust of the reporting companies who have grown increasingly protective of their storage data as the industry has restructured and grown more competitive.
"We use KPMG because we don't want to know the individual company data," Higgins says. "We're careful about what we do. Everyone knows we are careful."
Instead of dividing its results into three regions, as AGA formats its survey, Gasfax's weekly data show storage levels for seven regions across the United States and Canada, as well as a total aggregate level. Canadian storage located in British Columbia, Alberta, and Saskatchewan is included in Gasfax's Western region, while all Canadian storage from Manitoba eastward is included in Gasfax's Region 2, which includes such states as Michigan and Illinois, where there is an abundance of aquifer storage facilities.
Gasfax's storage numbers can claim a high degree of respectability among the players who have access to them. Often, many in the industry who do not subscribe to the service will learn of Gasfax's storage estimate on Tuesday from colleagues in the industry who are Gasfax clients and who, in theory, are breaking a confidentiality agreement when they pass the information to others.
Given Higgins' reticence to raise his company's profile, it appears any other company hungry to tap a possible profit center could launch a new storage survey with a wider distribution than Gasfax. This new entrant's survey eventually may grow into a market mover similar to AGA's. But it's debatable whether it will possess the accuracy and depth of Gasfax.
Whether Energy Reporting Network makes its weekly Gasfax storage estimates more accessible to the industry depends on whether the company's clients decide to give Higgins the go-ahead. Higgins fears Gasfax's reputation for accuracy and its ability to gather data from a wide swath of North America's storage operators would be jeopardized if he begins to make decisions without receiving the green light from his clients who he relies on to provide Gasfax with its weekly data.
In the early 1990s, when Gasfax was only four years old, the industry decided to develop a storage data series that would be widely available and would complement EIA's monthly estimates. AGA convinced the industry it could perform the task and, after months of preparation and consultation with its gas utility members and other gas industry segments, AGA launched its own storage survey in January 1994.
Since then, both physical and forward markets have grown reliant on AGA's weekly storage numbers, which provide indicators on such things as how much stored gas is available to feed base load demand-retail as well as industrial and electric generation-and whether keeping gas in storage was a good arbitrage play.
Critics Bombard AGA
But AGA's survey has been under attack since August when bad data supplied by one or more of the association's survey participants forced it to make a substantial revision to one of its weekly surveys. In response to complaints from traders, the Commodity Futures Trading Commission (CFTC)-the federal agency that regulates commodity futures and options markets-sent its head of surveillance to AGA's offices on Capitol Hill the same week the revision was issued to review the methods used by the association to gather and disseminate its storage data that resulted in the large revision.
"It was unfortunate because it lost people a lot of money," Higgins says, referring to AGA's August revision. "Some careers were probably ruined."
The CFTC has yet to announce whether it found any evidence of market manipulation related to the management of the weekly storage survey, and the agency may set aside the inquiry permanently now that AGA has opted out of the storage data business.
AGA made public its decision to scrap the storage survey a couple days after Wood, speaking at FERC's Oct. 11 public meeting, expressed concern about gas markets "relying on one data point." Instead of relying solely on AGA's storage numbers, "the solution is to broaden the number of data points available to the market," Wood said.
The episode that created the uproar began on Aug. 15, when AGA's weekly survey revealed that only 3 billion cf of gas had been injected into working gas in storage inventories for the week ending Aug. 10. That miniscule injection figure sent gas futures prices on the New York Mercantile Exchange soaring. But on the following Wednesday, AGA announced that the storage figure for the week ending Aug. 10 should have been 50 billion cf, not 3 billion cf. AGA's revision sent the September futures price at Henry Hub down almost as much as it had gained the previous week when the erroneous data had been released.
"One little hiccup and everyone went crazy," Wood said, referring to AGA's August revision.
While a few industry insiders speculated AGA would call it quits because of the criticism, most thought the association would weather the storm by working behind the scenes to solidify its data gathering and verification techniques. But in his letter, AGA's Cooper wrote that the association was discontinuing the storage survey "primarily because it was taking increasingly more staff time and effort to calculate and post the survey estimates; this drained resources committed to other programs more beneficial to its members."
Some traders and analysts had argued the AGA storage survey had gained too much influence and unnecessarily brought trading to a halt each Wednesday prior to the release of the storage estimates at 2 p.m. Eastern time. UBS Warburg's Ron Barone, a prominent natural gas analyst, said in August that the market's obsession with the report has now reached "unhealthy cult levels."
January is the Coldest Month
But others now worry that an industry already deficient of timely fundamental supply data will be hurting even more without AGA's authoritative weekly reports once January rolls around. "Storage is a snapshot of the total supply and demand picture," a trader with a large Houston-based marketer said. "It's the best leading indicator we have."
The Houston marketer says the scientist in him says, "More information is better."But the competitive marketer instincts in him say that his larger company will be able to use its own internal storage models and gain a leg up on the competition once the AGA storage data disappears.
The industry's obsession with the AGA storage survey can be directly attributed to the lack of other timely surveys of gas supply fundamentals. "Any surveys of supply and demand are generally going to be good for the market," says Ben Ledene, manager of market development for AEC Storage and Hub Services in Calgary. "We expect they are going to make an occasional error. What we cannot accept is a big storage player intentionally giving a false number."
Industry players generally agree that a market with a fungible commodity will tend toward greater efficiency and success when it has access to large amounts of information on fundamentals and greater price transparency. Traders worry that with AGA dropping its storage survey, the gas market will become less liquid and more volatile.
Certain types of gas traders may be less inclined to enter the market because of the lack of information, leading to a smaller group of players dominating trading. Without AGA's weekly storage survey, large integrated companies with major ownership stakes in storage assets will have knowledge of the level of storage supplies at their own facilities and will be able to use this proprietary information to make trades that could lead to higher returns than those deals conducted by traders without access to storage inventory data.
Furthermore, the limited number of players in the industry who own storage and thereby can subscribe to Energy Reporting Network's Gasfax service also may have an advantage over the rest of the industry that does not have access to these numbers, industry officials say.
Prior to AGA unveiling its storage survey in 1994, never had the gas industry had such timely and authoritative inventory data, similar to the petroleum inventory data American Petroleum Institute (API) had been providing the oil industry on a weekly basis for several decades.
API releases weekly inventory reports that cover several segments of the petroleum industry, which are followed the next morning by the release of weekly EIA estimates of domestic oil production, imports, and crude product inventories, thereby giving traders of crude and petroleum products a gauge against which to measure the API data.
Did it Have to End This Way?
Prior to 1994, EIA had been the only game in town with widely disseminated gas storage inventory data. But EIA's storage reports had two key drawbacks. The estimates would arrive in industry mailboxes and on fax machines only once a month, and, given the deadlines for storage operators to submit their data plus the time needed by the government to process the information, EIA's data was typically at least 45 days old by the time industry officials got their hands on it.
Enter AGA, which successfully convinced the industry it was up to the task of conducting a weekly survey. In the early days, the industry generally applauded AGA's efforts. The association, however, received an occasional brickbat, primarily from producers who charged AGA's gas utility members, many of whom owned storage and contributed their data to the survey, could manipulate the weekly storage numbers.
AGA answered its critics with assurances that all the necessary procedures were in place to compute accurate aggregate storage levels and that the integrity of the survey could not be compromised. Curiously, this past summer's round of criticism coincided with a downturn in gas commodity prices, which produced many unhappy traders.
The association maintained in August that it would continue to produce the survey as long as its utility members found it valuable.
At the time, some industry players cautioned against calls for regulation of the survey because they worried AGA would decide to do exactly what it did: cease providing storage data.
Some traders speculate AGA decided to discontinue the survey based on fears that it would be the target of lawsuits from unhappy futures traders. AGA's Wilkinson dismisses these theories but concedes the staff time involved with handling the CFTC's information requests played a part in the association's conclusion that its time could be better spent on activities that would more directly benefit its members.
AGA maintains it never imagined the weekly storage report would evolve into such a prime mover of commodity markets. The association's rationale for launching the data series simply was to offer the energy industry a timely gauge of only one of many important components of the North American gas supply picture.
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