What is Natural Gas Procurement?

Natural gas procurement includes the activities tied to the purchase of natural gas. In the United States, there are several states that have deregulated the natural gas utility business. Pre-deregulation, businesses received both natural gas supply (the physical commodity) and distribution (the use of utility pipelines to transport the natural gas) services from the utility company.

With deregulation, utilities provide distribution service, but not necessarily supply service. Manufacturers and hospitals can opt to source natural gas supply from licensed third-party suppliers, foregoing utility-provided supply services. For those that do, they will enter into supply agreements with licensed suppliers.

Businesses have a number of licensed suppliers from which to choose – each with unique pros and cons. The process of evaluating the the pros and cons of the suppliers and ultimately choosing a supplier is the essense of natural gas procurement.

Natural Gas Procurement Strategies and Services

Foster LLC provides services to help businesses navigate the challenges tied to natural procurement. The financial consequences related to the “wrong” procurement choices can be huge. Based on experience, getting the right answers to the following three questions is critical for businesses that want to minimize natural gas supply costs.

  1. How to buy natural gas?
  2. From which supplier to buy?
  3. When to buy?

How to Buy?

A key to effective natural gas procurement is deciding how to buy. Generally, there are three natural gas procurement strategies:

Fixed pricing means that the price is set, and will not change, for a period of time. Consumers are protected from price increases during the contract term but forego price reductions if prices fall during the contract term.

Variable pricing means that the price varies, typically by month. In this scenario, consumers benefit from lower natural gas prices when they fall, but will realize higher prices when they rise.

When consumers use a combination of fixed and variable pricing, they opt to fix the price for a percentage of their usage and allow the price for the remaining percentage to vary as prices increase or decrease.

How We Help Businesses Buy

When businesses aren’t doing natural gas procurement the right way, we find:

  • They are under a false impression that one-way always results in lower costs than another.
  • Their supplier has steered them towards a pricing structure that gives the supplier the best chance to win the business. For example, a supplier may influence a consumer to buy variably priced natural gas because they won’t win a fixed price competition against other suppliers. This post about the hidden agendas of suppliers explains more.
  • There are internal disconnects about the goals of the organization regarding budgets and natural gas price risk.

We help businesses figure out how to buy natural gas by identifying the existence of these issues, by bringing clarity to the problems, and by establishing pricing plans that make sense.

From Which Natural Gas Supplier to Buy?

Depending on how a business wants to buy natural gas, some suppliers are better suited to serve their business than others. There are several differences between suppliers that impact the value of their offers. Identifying and valuing supplier offer disparities is an important part of the procurement process. These differences include:

  • Pricing.
  • Charges connected to differences between actual usage and usage forecasts (normally included in a natural gas supply agreement).
  • Costs associated with “Operational Flow Orders” or “Critical Days” that are related to periods of colder-than-normal wintertime temperatures and escalated space heating-related natural gas consumption.

How We Help Businesses Decide From Which Supplier to Buy

Based on experience, offers from suppliers vary significantly, and the ultimate value of their offers is a relationship between pricing, contract terms, and the needs of consumers. Thus, the necessity to shop suppliers – a big piece of winning natural gas procurement.

What we do:

  • Create a competition between suppliers to get multiple offers using a best-in-class Request for Proposal (RFP) process.
  • Summarize the offers concerning price and other relevant issues that impact the value of these offers.
  • Monetize the total value of the offers.
  • Walk the customer through the pros and cons of the offers.
  • Review the natural gas supply agreement, and assist with changes if necessary.
  • Assist with final implementation of the agreement.

When to Buy Natural Gas?

The benchmark price for natural gas is established on the New York Mercantile Exchange (NYMEX) and trades every business day. Every month (for the next six years) has a distinct price. Natural gas is a futures price because prices for the current calendar year (and the next 12 calendar years) beyond the current month trade.

Because this commodity has been trading on the NYMEX since 1990, there is historical data to benchmark futures price values.

How We Help Businesses Decide When to Buy

Because buying opportunities may happen at any time, we:

  • Proactively monitor short-term and long-term NYMEX natural gas futures prices.
  • Put the value of current NYMEX natural gas futures prices in context with historical highs and lows.
  • Garner an understanding of the consumer’s business conditions that could impact a commitment to buying shorter or longer-term.
  • If it makes sense to buy, if necessary, implement the shopping process.
  • Assist the client with implementing the commodity buy and securing the purchase.

Natural Gas Procurement: The Bottom Line

When natural gas procurement is done right, businesses will purchase the way the best aligns to their business, will reduce costs by buying from the lowest priced, best valued, and optimally fitted supplier, and with the right intel, will decide better when to buy. It was also lead to lower prices (up to 25%), reduced business risk, and the elimination of cost leakage.

Additional energy buying insights are available in the Foster LLC blog.

If you considering using a broker to assist with procurement, consider the following: