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In The News
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June 2005
Pipeline & Storage Companies Gear Up
The new reality of the energy market brought about by increasing demands on participants in the market — traders, asset owners or both — are bringing dramatic changes in gas trading and scheduling activities.
By MATTHEW FRYE
The post-enron downturn in the energy trading and marketing sector caused most gas pipeline companies and their corresponding shippers to put a hold on the purchase and upgrade of new software. However, as the industry begins to rebuild through the addition of new players and expanded volumes, intrastate pipeline companies that hold pipeline, gathering or storage assets are looking again to upgrade their software infrastructure and, specifically, their scheduling requirements.
The hiatus in software procurement has put many physical pipeline and storage owners in a critical position. In general, software applications become technically obsolete after three to four years unless they are continually upgraded and maintained by the vendor. This alone would indicate many first-generation scheduling systems are in need of renewal, particularly those developed in the mid to late 1990s. In addition, there is now a preference for straight-through-processing (STP) systems that take the place of a meld of different systems, platforms and databases, as well as the numerous interfaces previously required for system communication.
Typically, first-generation scheduling products were silo systems, supplied by specialist vendors. Other vendors provided different parts of the software infrastructure according to their specialty (deal capture, risk, credit). The separate applications then had to undergo complex and time-consuming integration. This created a wide range of problems. Managing multiple interfaces is an expensive and sometimes prolonged process. Also, vendors have different strategies and different upgrade philosophies; as a result, the client is trapped in the middle of trying to shuffle the different vendor agendas in order to keep the systems functioning. Furthermore, the long-term status of many first generation systems is now questionable. Often vendors do not have a solid roadmap of what they want to do with the product, or more often than not, the first generation application is being decommissioned.
As a result of these drivers, pipeline and storage companies are now reconsidering their old scheduling and operating applications and are looking for a comprehensive STP system. With a single source vendor who can supply an STP system, scheduling becomes easier and less expensive. The introduction of Sarbanes-Oxley legislation has also been a significant factor. Companies want an STP system that is fully Sarbanes-Oxley compliant. With traded volumes rising and new players seeking to secure transportation agreements, it is imperative that asset owners update their scheduling systems.
Unfortunately, gas pipeline and storage asset owners have been largely ignored by software producers, as the population of this marketplace has been somewhat limited. Most gas scheduling systems are written around the business processes of independent marketing companies - shippers who want to move gas on third-party pipelines. These applications allow them to manage their nomination and actualisation processes, transportation agreements, and settlements on all the different pipelines — essentially the accounting for and nomination of gas into and out of third-party pipelines.
However, companies that operate pipeline and storage assets have additional and different requirements. One such company is Bridgeline Holdings, which provides diversified merchant services and natural gas supply and storage infrastructure to the Southern Louisiana marketplace and the Gulf of Mexico pipeline grid via 1,000 miles of transmission and distribution pipeline, 13 Bcf of salt dome storage capacity, and 33,050 horsepower of compression.
As a trading company, Bridgeline does exactly the same thing that a merchant would do: it originates, bundles and trades to make a profit on the commodity. Unlike pure trading companies, it also provides physical services to the natural gas shipping population in that it allows third-party companies to lease space on its pipeline. Bridgeline, therefore, has a unique requirement that the other market participants do not have. It not only has to keep track of its own proprietary transactions that occur on its physical assets, but it also needs to manage the transportation obligations of its third-party shippers. This means that it needs an STP application to manage the front, mid and back offices for its proprietary trading book, as well as a unique requirement to manage third-party scheduling for its shippers and storage owners. Currently, many companies still carry out the scheduling function using spreadsheets. Except this is neither efficient nor cost-effective, and certainly not real-time.
To satisfy Bridgeline's unique requirements, OpenLink has developed a unique on-system pipeline module as an additional component to its gMotion natural gas scheduling application. This allows Bridgeline to manage its own trading activity through gMotion's off-system functionality while also managing the rates, nominations and administration of third-party volumes through its on-system module.
Because the scheduling model forms part of an STP system, it offers clear advantages. The use of one centralized database means the asset owner is privy to real-time position updates on where everything is on its pipeline and how much it owns, how much it has hedged, and how it has segregated third parties' volumes. Having that information in a real-time format allows for rapid, economical decision making.
Such real-time processing and STP are more important than ever in the current energy environment — particularly when a company is engaged in trading as well as having to manage its physical assets. Huge natural gas price spikes such as those seen during 2003 into 2004, and typically extreme pricing volatility, even within ten minutes of a single day, have all wrought significant changes on the energy marketing and trading world as we know it. Therefore, pipeline companies have to be able to react immediately to market changes and they also need to see every stage of each transaction in real time.
Pipeline and storage companies need to invest in the right technology for their business, and ensure that their transaction management/processing technology is up-to-date to address today's more complex and challenging demands as well as tomorrow's growth. A good STP system will keep the company on track to meet the new regulatory requirements and help it reach its business goals. The new reality of the energy market brought about by increasing demands on all participants — traders, asset owners or both — are bringing dramatic changes in gas trading and scheduling activities, and STP systems are best positioned to manage these changes. In the current atmosphere, pipeline and storage companies cannot afford to continue to struggle with a patchwork of programs and platforms when it is possible to unify everything within a single seamless operating structure.
MATTHEW FRYE is Managing Director of OpenLink's Houston, Texas division and leads a team of business analysts and software engineers focused on dynamic, integrated solutions for energy trading firms. OpenLink is a leading provider of energy and financial trading, risk management, and operations software solutions. The company's Next Generation eXtensible (NGX) platform supports the most rigorous business requirements of firms trading in energy, interest rate derivatives, fixed income securities, foreign exchange, money markets, metals, and soft commodities.
As seen in Commodities Now magazine - June 2005
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