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Enron Mail |
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
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