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| 2001 Annual Report > Review of Operations > Marketing Arrangements |
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Natural Gas
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Enerplus’ production is currently 56% weighted
towards natural gas production. The price of natural
gas is dependent on North American supply and
demand fundamentals. The current economic
slowdown and warm winter have dramatically
reduced the demand for natural gas, causing
inventory storage levels to increase, resulting in
downward pressure on prices. Natural gas prices are
expected to remain weak for the first part of 2002, or
until such time as economic and weather-related
demand can demonstrate a sufficient draw on North
American storage levels. The industry has reacted to
lower prices with reduced drilling and capital
constraints, which,
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combined with natural reservoir
declines and the lack of exploration success, signals a
longer term reduction in supply and a potential price
recovery. Forecasters acknowledge the cyclical nature
of the gas markets, but are uncertain how long it will
take before prices recover.
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Both of the key North American natural gas price
indices saw significant year over year decreases in
2001. Despite opening 2001 with a January AECO
settlement price of $13.62/Mcf, natural gas prices fell
consistently throughout the year reaching a low of
$2.64/Mcf in October. With a fourth quarter average
price of $3.30/Mcf, the 2001 annual AECO Monthly
Index Price still managed to average $6.30/Mcf, up
25% from the $5.02/Mcf average for 2000. The NYMEX
Henry Hub monthly reference price also declined
throughout the year but nevertheless also achieved
an 11% increase over 2000 levels to average
US$4.38/Mcf for 2001. Enerplus’ overall natural gas
netback price on a combined basis at the plantgate
was $5.22/Mcf, a 13% increase over the $4.60/Mcf
received for 2000. As the Fund’s natural gas portfolio
is sold through a combination of physical and
financial sales arrangements, the realized price did
not increase at the same rate as the reference indices.
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Forty three percent of the Fund’s natural gas
production is directly marketed in western Canada
on the spot markets. An additional 14% of the
portfolio, referenced as "downstream contracts", is
delivered directly into the U.S. export market and is
priced against the NYMEX index, net of transportation
charges. A large portion of Enerplus’ production is
dedicated to netback price pools managed by the
major aggregators; PanAlberta Gas Ltd., Progas
Limited, and the Mirant Netback Pool (formerly
TransCanada Pipelines Limited). As aggregator prices
continue to be lower than the prevailing indices,
Enerplus is supporting industry efforts to wind-up
these aggregator arrangements.
Crude Oil
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The price of crude oil fluctuates with worldwide
supply and demand fundamentals. For much of 2001,
the OPEC countries were successful in managing oil
prices within their publicly stated price band of
US$24-$30 per barrel West Texas Intermediate (WTI)
equivalent. However, supply management has
become more difficult in recent months due to weak
economic demand and the prospect that non-OPEC
nations, such as Russia, are poised to attract a larger
share of the world markets. The main threat to crude
oil markets is a battle for market share between OPEC
and non-OPEC nations. On the other hand, there are
a number of factors that can put upward pressure
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on oil prices, including continued political instability in
the Middle East, natural reservoir declines, the lack of
exploration success, and an increase in demand
associated with worldwide economic recovery.
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The 2001 average WTI was US$25.97/bbl, down 14%
from 2000. WTI crude oil prices declined from almost
US$30/bbl in January to below US$20/bbl by the end
of 2001, nearly 33% in one year. The Fund’s netback
price on a combined basis for crude oil production
averaged $31.09/bbl, down a corresponding 16% from
the $37.08/bbl received for 2000. Enerplus sells all of
its crude oil at the lease site to marketers and refiners
on 30 day evergreen contracts that fluctuate with
monthly spot prices. With the majority of Canada’s
crude oil being exported and priced in the U.S. against
the WTI US$/bbl benchmark index, Enerplus benefited
from the increased weakness in the Canadian dollar.
However, 12% of Enerplus’ production is comprised
of heavy oil (Hardisty) which is priced at a variable
discount or differential to WTI.
During the high price environment, the heavy oil
differential increased from US$8.00/bbl in 2000 to
US$10.66/bbl in 2001. Oil refiners with heavy oil
refining capability were operating at near capacities
as the heavy oil differentials were wide and provided
opportunities for attractive refining margins. With
the current decline in the underlying WTI price , heavy
oil differentials today have decreased from the
US$10 - US$12 range to the US$8 - US$9 range.
NGLs
Condensate and natural gas liquids production
represents approximately 16% of the Fund’s total
production and is priced by individual product
components which are primarily sensitive to weatherrelated
demand.
COMMODITY PRICE RISK MANAGEMENT
Enerplus has an ongoing commodity price risk
management program that is designed to provide
downside price protection at a reasonable cost on a
portion of its future production in the event of adverse
commodity price movements, while retaining
significant exposure to upside price movements. Early
in 2001 while both oil and gas prices were significantly
higher than historic levels, Enerplus put in place a
Revenue Protection Plan by establishing floor price
(put) protection on a combined volume of natural
gas and crude oil which realized net gains of
$50 million. The cost of the plan was approximately
$0.22 per Unit and it protected approximately
36,000 BOE/day of Enerplus’ combined
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production for the second, third and fourth quarters of 2001.
While the combined prices of the second quarter were
high enough that the protection was not needed,
natural gas prices for the third quarter fell below the
established threshold and by the fourth quarter both
natural gas and crude oil prices had decreased to a
level that caused the plan to realize value for the
Fund and its Unitholders. The changing price
environment over the past year limited the ability to
enter into a similar instrument for subsequent years.
However, beginning in the fourth quarter of 2001,
Enerplus entered into various price protection
instruments for both crude oil and natural gas which
also retain significant upside price exposure.
Enerplus intends to actively manage its exposure to
future commodity price fluctuations in a similar
manner with the objective of providing low cost price
protection against downward price movements while
maintaining participation in improving price
movements.
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