“Morgan Stanley has quietly filed plans to build and run one of the first U.S. c
ID: 2716676 • Letter: #
Question
“Morgan Stanley has quietly filed plans to build and run one of the first U.S. compressed natural gas export facilities, the first sign the bank is plunging back into physical commodity markets even as it sells its physical oil business….. In a 23-page application to the U.S. Department of Energy's Office of Fossil Energy submitted in May, the Wall Street bank outlined a proposal to build, own and operate a compression and container loading facility near Freeport, Texas, which will have capacity to ship 60 billion cubic feet a year of compressed natural gas (CNG)…. The bank plans to ship CNG to countries with which the U.S. has free trade agreements, including the Dominican Republic, Panama, Guatemala, El Salvador, Honduras and Costa Rica, according to the filing, which has not been previously reported. Those countries now mainly use oil for their power plants…."You can collect U.S. gas at $4, it costs you $1 to ship it and gasify it, you bring it in at $5 and the equivalent that they are paying for fuel is $20 plus," said a person familiar with the project. "There is a lot of money to be made."
What risks do you think Morgan Stanley will face with this venture and assuming they wish to mitigate those risks how might they approach hedging or controlling those risks?
Explanation / Answer
Risks in Natural Gas
Decline in oil or natural gas prices
Competition from other oil and gas companies
Development and production uncertainties
Challenges in achieving strategic objectives
Transportation infrastructure risks
Political, social and economic instability
Political and legal factors
International sanctions
European economic challenges
Renewable energy challenges
Attracting and retaining management and personnel
Adverse changes in tax regimes
Adequate insurance coverage
Foreign exchange risks
Trading and supply risks
Failure to meet ethical and social standards
Buyers and sellers of natural gas hedge using derivatives to reduce price risk. Speculators, on the other hand, assume greater risk in order to profit off of changes in the price of natural gas.
Physical contracts are usually negotiated between buyers and sellers over the phone.
In addition to trading physical natural gas, there is a significant market for natural gas derivatives and financial instruments in the United States. In fact, it has been estimated that the value of trading that occurs on the financial market is 10 to 12 times greater than the value of physical natural gas trading.
Trading financial derivatives can help to mitigate, or ‘hedge’ this risk. A hedging strategy is created to reduce the risk of losing money.
It is commonplace for natural gas marketers to be active in a number of energy markets, taking advantage of their knowledge of these markets to diversify their business.
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