 Before we start to get into the world of the financial energy commodity trading, we want to talk about what goes on in the actual physical marketplace and how prices they are determined. Historically, contracts between buyers and sellers of crude oil, natural gas, and other fuels would enter into long-term contracts, some 10 and even 20 years long. They would do these at a greed-upon fixed price. In 1978, the federal government enacted what was known as the Natural Gas Policy Act. There was a concern about future reserves of natural gas, and so they set various categories of natural gas up, and they gave them starting prices, and those prices escalated every month. We also had contracts that were set on life of reserves or take-of-pay or minimum contracts. These are basically agreements by the seller with the producer that they would purchase all the gas made available by the producer at the contract price or pay for the gas that is not taken. Those two things combined together, prices which escalated every single month based on federal price controls, and the idea that contracts allowed for the taking of all the gas or paying for it. These were certainly not market responsive at the time. The spot market, as we call it, started in natural gas in 1985 before the New York Mercantile Exchange contract for natural gas was initiated. This was as a result of the bubble of natural gas that had occurred because of all the gas being priced the way that it had been and not being market responsive whatsoever. Now both buyers and sellers are going to enter into shorter term contracts. More of a longer duration would be five or ten years at this time. Negotiations generally fix the new price at something less than the old contract price. They may have even negotiated on a percentage of the expiring contract. So let's say the contract for natural gas had been a 20-year contract at two dollars and fifty cents. Perhaps the new contract would lower to 225 or be 85% of the expiring price. We also now entered into shorter pricing periods. Contracts were done on a monthly basis. Gas was being bought and sold even on a daily basis. And so as a result it became much more market responsive. The price of natural gas was tied much more to demand based on things like weather and the economy and other factors. The way that prices are established today in the marketplace are based on a polling or survey methodology. Publications, those who within the industry responsible for reporting on prices for the various commodities in the various parts of the country will basically go out and they will call the buyers and sellers. They will find out the amount of gas and crude oil, heating oil, unleaded that was bought and sold. More supply and demand oriented type pricing. Any completed transaction that's reported is considered to be a market price. There is a heavy reliance on historicals when we negotiate prices. A lot of times both buyers and sellers will look at what the prices have been in the past and try to achieve a similar price. As a result there's wide fluctuations based on a lot of perceptions. The monthly business cycles, every energy commodity has deadlines under which transactions must be completed in order to set up the schedule of deliveries for the ensuing month. So that in and of itself represents somewhat of a trading deadline each month. So the more modern methods we have for establishing price, we have what are called indexes or postings. These will be the reported prices by publications. Whatever the index or posted price is, is considered to be the market price for that commodity, for that given date or time period at that particular location. Some of the natural gas industry publication indexes, they generally survey monthly for activity that's done during what we call bid week. The final week of every month in natural gas trading is when traders, marketers, producers, suppliers set up their business for the following month and it takes place over about a three to five day period and it's referred to as bid week. These publications now can report on weekly and daily prices as well. They will survey markets and users, producers and marketers to find out again how much gas they bought or sold and at what price levels. From this there's established what's known as a Wacog and Wasp. Wacog stands for a weighted average cost of gas and Wasp is a weighted average sales price. So for the end users, they're purchasing the gas at some weighted average cost and the suppliers or producers are selling at some weighted average sales price. This is much more accurate because you're not using a simple average of pricing. In other words, a producer could say that they sold a total of 100,000 MB to use for the month of September and they did it at an average price of $2.35. Well, if they took an average of just the prices themselves, it's not the same as if they went through and calculated based on a weighted average. Perhaps they sold 10,000 at 240,000 at 250,000 and so on. One of the major publications in the natural gas industry that reports market prices is called Inside FERC. It has nothing to do with the Federal Energy Regulatory Commission. It's just the catchy name that they chose about 20 years ago. It is the most widely used monthly price guide for natural gas. They also have a bi-monthly newsletter and price report, but mainly they are used to establish the prices that are good for an entire month. In other words, when they pull suppliers and marketers, they ask them, for instance, how much gas did you sell for the month of September and at what price? Those prices then apply to transactions that are what we refer to as a base load. If I sold 10,000 MB to use a day for the month of September and I did so at $2.35, that means that the 10,000 MB to use a day I deliver for the entire month of September. It will be at that price. There is no variation. It's a set price for the entire 30 days. Another publication which reports the prices or postings is Gas Daily. They've got a monthly bid week survey, but they are mostly used for their daily pricing. People want to know what the price is in the marketplace, the physical cash marketplace, as it's traded day to day. So it better reflects the changes in demand and supply that occur on a daily basis. So we can negotiate price based off of that publication. For instance, I could sell some natural gas to a utility and we'll both agree that we will go ahead and rather than try and guess on a fixed price, at the moment we'll go ahead and agree to transact our business at the posted price that comes out the next day in the Gas Daily publication. For crude oil and natural gas liquids, the primary publication there is OPUS or the Oil Producers Information Service. They produce monthly and daily pricing at the various markets. It is the most widely used crude and liquids guide. They have market overviews and they report pricing at all the major crude oil and natural gas liquid hubs throughout the United States. One final publication which is in electronic form is the Natural Gas Intelligence. It has a monthly bid week survey. It also reports daily and weekly price postings. And it is used primarily for the financial settlements of some basis swaps for the Chicago and California pricing. We will talk about basis swaps when we get past lessons 7 and 8 and we get into swaps and spreads.