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DERIVATIVES
ALBERTA NATURAL GAS
Basis Swap
Description:
An Alberta natural gas basis swap fixes the difference between NYMEX and the Alberta index price (i.e., Alberta basis). The seller of an Alberta basis swap receives NYMEX plus a negotiated fixed amount, and in return agrees to pay the future published Alberta index to the buyer. The swap generally settles 5 days after the Alberta index is published, but the settlement day can be negotiated to match the cash flow from the physical sale of the natural gas.
Example
A natural gas producer has a contract to sell 100,000 GJ’s each month at the Alberta monthly index price. The producer wishes to guarantee their natural gas revenue from this volume for the next 12 months will not be less than the NYMEX price less $0.75/GJ. As a result, they enter into an Alberta basis swap with ATB whereby each month they receive the future NYMEX price less a negotiated fixed amount of $0.75/GJ multiplied by 100,000 GJ’s. In return, they agree to pay ATB the future Alberta monthly index price multiplied by 100,000 GJ’s.
Risk Management Strategy
Entering into an Alberta natural gas basis swap is an effective risk management strategy when you want to guarantee the future Alberta basis. In exchange for this certainty and eliminating the potential downside from a wider Alberta basis, you forfeit the potential upside from a tighter Alberta basis. Using the same example as above, the following table and graph illustrate the impact of an Alberta basis swap hedging strategy on potential revenue for the next 12 months. In this example, we assume that the average forward price of the Alberta index for next year is currently $8.00/GJ, which is comprised of $8.75/GJ for NYMEX and ($0.75)/GJ for Alberta basis. In addition, you have determined based on historical volatility and the current forward curve that the 5% worst case is that actual prices average $5.00/GJ, which is comprised of $6.25/GJ for NYMEX and ($1.25)/GJ for Alberta basis; and the 5% best case is that actual prices average $11.50/GJ, which is comprised of $12.00/GJ for NYMEX and ($0.50)/GJ for Alberta basis. In other words, there is a 90% probability that the average forward price for the next year for NYMEX will be between $6.25/GJ and $12.00/GJ and between ($1.25) and ($0.50) for Alberta basis.
Impact of Hedging Strategies on Potential Revenue for the Next 12 months
| Hedging Strategy |
5% Worst Case Revenue |
Expected Revenue |
5% Best Case Revenue |
| No Hedges |
$6M
(100,000 GJ x $5.00 x 12mo.) |
$9.6M
(100,000 GJ x $8.00 x 12mo.) |
$13.8M
(100,000 GJ x $11.50 x 12mo.) |
Hedge 100%
of Volume |
$6.6M
(100,000 GJ x $6.25 x 12mo.)
-100,000 GJ x $0.75 x 12mo.) |
$9.6M
(100,000 GJ x $8.75 x 12mo.)
-100,000 GJ x $0.75 x 12mo.) |
$13.5M
(100,000 GJ x $12.00 x 12mo.)
-100,000 GJ x $0.75 x 12mo.) |
Commonly used terms  (PDF - 472K)
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