This article, http://www.reuters.com/article/us-oil-trading-lawsuit-insight-idUSKCN0W90EH, from Reuters is about a law suit between BP and NARL refining, but it highlights the optionality that exists naturally in energy markets:
“There is no dispute that BP was to supply crude to the refinery and take back roughly 82 percent of the refined fuels, such as gasoline, diesel and jet fuel, paying NARL a fixed “toll” of $9.45 per barrel on the first 90,000 barrels of oil put through each day.”
We obviously don’t know the details, but here BP essentially pays $9.45 to go long the call that is a refinery… A refinery has the option to run when profitable and shut down when not…
And, there may have been an option to supply the “cheapest to deliver” crude streams:
“NARL alleges that BP made only lesser grades available, resulting in “significant and long-term damage” to refinery equipment, including a vacuum tower that had to be shut down abruptly last the fall.”
Some oil companies, like BP, have been very good at recognizing optionality that occur in energy markets, others have not…
Leave a Reply