re : lng may 19 decision john ,
this is the update on what i have done for the lng transactions .
1 . i was not involved in the lng ship project . i shall read the dash
and give you my comments . without looking at the details , i think that the
decision
to charter a tanker removes one significant risk we have at the elba island
project ( please , see point 2 ) .
2 . elba island . i am working with doug rotenberbg , brad hitch , scott earnest
( sally beck ' s organization ) and rac to set up the book for the elba island
transaction . the next step
will be to expand the book to capture all the enron ' s lng - related positions
in one place and
to look for natural risk offsets and possible hedges . a working group is
meeting to close a few
remaining gaps tomorrow ( tuesday ) at 8 : 30 .
a few comments on the book design and my view of the project :
a . the current thinking is that lng will be sourced for the elba island
facility
by buying marginal cargos on the fob basis . marginal cargos will represent
supply from excess capacity that has not been committed under long - term
contracts or became available due to some short - term frictions .
the fob cargos are typically selling at a significant discount to the
long - term
contract prices . the economics of the deal , as represented by the book we are
setting up , will reflect the assumption that not only we can locate marginal
cargos
but that we shall be able to do it on a regular basis , arranging shipping and
coordinating
the facility schedule and natural gas transactions in the us . in other words ,
we have a significant logistical and operational risk in this transaction .
b . the transaction will cover the period of 17 years ( with an extension
option of
5 years ) . even if we can lock - in the lng volumes over this time period , we
have no ability to lock - in the other side of the spread ( us gas prices ) for
such a long tenor . this is
essentially a tolling transaction with exposure to the lng - nat gas spread
and
i would not recommend locking - in only one leg of the spread .
one solution would be to cover , let ' s say , 50 % of he lng volumes for the
first
5 years and lock - in the nat gas side on the us market side .
c . the book we are setting up will be based on many managerial assumptions
regarding sources of lng , shipping rates , schedules , etc . i would set up a
big prudence reserve
in case we mark it to market .
d . my group will work on valuation of some options we have in the elba island
deal
( that are good for enron ) and on the hedging strategy for the lng positions .
long - term lng contracts are typically based on the japanese crude cocktail
that
correlates very well with brent .
vince
john sherriff
05 / 14 / 2000 01 : 40 am
to : vince j kaminski / hou / ect @ ect
cc : lauren urquhart / lon / ect @ ect
subject : lng may 19 decision
vince
i haven ' t spoken to you for awhile but hope the world is treating you well .
anyway with greg moving to his
new role i have ( i hope only temporarily ) staff trading oversight for the
eastern hemishere plus lng .
i understand that your group is taking a first cut at developing curves for
lng and lng ship values . i also understand
that another lng ship decision is on the dockets for may 19 ( not very far
away ) . anway i understand this
is a big decision but i still have gotten very little info yet . can you
please let me know where you stand now ?
i will ask my assistant lauren to set up a time that i can speak with you in
the next couple of days and if you
have anything for me to review before then she can get it faxed to me as well .
look forward to connecting with you vince .
john
re : lng may 19 decision
john ,
this is the update on what i have done for the lng transactions .
1 . i was not involved in the lng ship project . i shall read the dash
and give you my comments . without looking at the details , i think that the
decision
to charter a tanker removes one significant risk we have at the elba island
project ( please , see point 2 ) .
2 . elba island . i am working with doug rotenberbg , brad hitch , scott earnest
( sally beck ' s organization ) and rac to set up the book for the elba island
transaction . the next step
will be to expand the book to capture all the enron ' s lng - related positions
in one place and
to look for natural risk offsets and possible hedges . a working group is
meeting to close a few
remaining gaps tomorrow ( tuesday ) at 8 : 30 .
a few comments on the book design and my view of the project :
a . the current thinking is that lng will be sourced for the elba island
facility
by buying marginal cargos on the fob basis . marginal cargos will represent
supply from excess capacity that has not been committed under long - term
contracts or became available due to some short - term frictions .
the fob cargos are typically selling at a significant discount to the
long - term
contract prices . the economics of the deal , as represented by the book we are
setting up , will reflect the assumption that not only we can locate marginal
cargos
but that we shall be able to do it on a regular basis , arranging shipping and
coordinating
the facility schedule and natural gas transactions in the us . in other words ,
we have a significant logistical and operational risk in this transaction .
b . the transaction will cover the period of 17 years ( with an extension
option of
5 years ) . even if we can lock - in the lng volumes over this time period , we
have no ability to lock - in the other side of the spread ( us gas prices ) for
such a long tenor . this is
essentially a tolling transaction with exposure to the lng - nat gas spread
and
i would not recommend locking - in only one leg of the spread .
one solution would be to cover , let ' s say , 50 % of he lng volumes for the
first
5 years and lock - in the nat gas side on the us market side .
c . the book we are setting up will be based on many managerial assumptions
regarding sources of lng , shipping rates , schedules , etc . i would set up a
big prudence reserve
in case we mark it to market .
d . my group will work on valuation of some options we have in the elba island
deal
( that are good for enron ) and on the hedging strategy for the lng positions .
long - term lng contracts are typically based on the japanese crude cocktail
that
correlates very well with brent .
vince
john sherriff
05 / 14 / 2000 01 : 40 am
to : vince j kaminski / hou / ect @ ect
cc : lauren urquhart / lon / ect @ ect
subject : lng may 19 decision
vince
i haven ' t spoken to you for awhile but hope the world is treating you well .
anyway with greg moving to his
new role i have ( i hope only temporarily ) staff trading oversight for the
eastern hemishere plus lng .
i understand that your group is taking a first cut at developing curves for
lng and lng ship values . i also understand
that another lng ship decision is on the dockets for may 19 ( not very far
away ) . anway i understand this
is a big decision but i still have gotten very little info yet . can you
please let me know where you stand now ?
i will ask my assistant lauren to set up a time that i can speak with you in
the next couple of days and if you
have anything for me to review before then she can get it faxed to me as well .
look forward to connecting with you vince .
john