Goldman Sachs has quietly overtaken Chevron and ExxonMobil to become one of the biggest natural gas merchants in North America, expanding in physical commodities trading even as other banks pull back.
The Wall Street institution last year bought and sold 1.2tn cubic feet of physical gas in the US — equal to a quarter of the country’s residential consumption and more than twice its volumes in 2013, a recent regulatory filing revealed. Goldman is now the seventh-largest gas marketer in North America, according to Natural Gas Intelligence.
The gas utility serving households in Buffalo, New York last year purchased 11 per cent of its supply from Goldman, a securities filing showed. Power plants that produce electricity for copper mines in northern Mexico also buy gas from the bank, according to government reports and industry executives. Goldman’s commodities division, known as J Aron, is listed as a shipper on huge pipelines including the Texas Eastern, which last month ruptured into a fireball that critically injured a man.
Goldman has grown the business even as banks await fresh rules on handling physical commodities such as oil, gas and aluminium. The Federal Reserve has said lethal gas explosions illustrate the risks banks face.
Dealing in physical commodities is exempt from the Volcker rule ban on banks’ proprietary trading passed after the financial crisis. In a letter to the Fed in 2014, Goldman said the physical market, not financially settled derivatives, was the main way gas was traded at certain locations.
While the bank has sold off infrastructure such as power plants and metals warehouses, its rise as a gas middleman highlights a commitment to commodities. Prominent Goldman leaders including Lloyd Blankfein, chief executive, are J Aron alumni.
“The fact that J Aron’s business is growing in the face of low volatility in physical natural gas markets is noteworthy. Many players have downsized,” said Tom Russo, an energy consultant and former official at the Federal Energy Regulatory Commission. Goldman declined to comment.
Goldman moved into the gas merchant business when it acquired the North American natural gas marketing operations of Nexen, a Canadian oil company, in 2010. After dealing 3.42bn cu ft per day in 2011, its North American volumes rose 71 per cent to 5.86bn cu ft/d in 2015, according to NGI. The average US household that heats with natural gas uses 50,000 cu ft of gas in a year, according to the Energy Information Administration.
“Historically, J Aron in natural gas was more of a financial player. The Nexen acquisition really allowed them to enter the physical space” by taking over supply contracts with customers, said a former Goldman commodities employee.
The power and gas business is led by Owen West, a Goldman partner who has authored novels, served combat tours in Iraq as a US Marine and climbed 28,000 feet up the north face of Mount Everest.
“I hate to use this word, but Owen is very ‘Zen’,” a colleague once told the New York Times. “When some traders start losing money they get nervous. Owen stays very relaxed.”
While Goldman’s commodities business reported weaker results in the first quarter, the physical gas division has been lucrative. One deal involved supplying the plants powering mines owned by Grupo Mexico in the Mexican state of Sonora, two people familiar with the transaction said. Goldman exported 22bn cu ft of US gas to the operation in 2015, according to figures published Wednesday.
The contract gave Goldman the option to sell gas to the plants at either the monthly average price or the price at the close of each month, to be decided at the end of the month, said people with knowledge of its terms. Given the extent to which gas prices move up and down, Goldman’s option was worth $120m, they added.
When a polar vortex ushered frigid air into the northern US two years ago, utilities scrambled to obtain gas. Goldman, which has storage contracts in states including Michigan, profited as regional gas prices soared, according to people familiar with the matter.
In February the ANR Pipeline Company sought permission to allow Goldman to park more gas in its vast underground storage facilities. The proposed agreement deviated from the norm in that it required Goldman to keep gas stored for 12 months until March 2017, then withdraw it in April 2017.
The FERC raised questions, saying the agreement “could create a substantial risk of undue discrimination” against other customers, and ordered the pipeline to offer the same terms to all. A person close to Goldman said the deal was structured at the pipeline company’s request to allow it to satisfy obligations to customers.
Other US banks, including JPMorgan Chase and Bank of America, have sharply scaled back in physical gas. Only Australia-based Macquarie, which is not overseen by the Fed, maintains a bank-owned North American gas business bigger than Goldman’s.
Underscoring its commitment, Goldman recently completed a deal to deliver gas to a rural district of Alabama for the next 30 years.
Sheldon Day, mayor of Thomasville, Alabama, said the transaction allowed municipal utilities to cut customers’ gas prices.
“We’re very fortunate and glad that there are folks that want to do these deals because they’re extremely important to us and the viability of our businesses,” he said. “If an elderly lady sitting next to a gas heater in her house is in our district, her rate just went down by 8.5 per cent last month.”
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