Metallgesellschaft, the name is quite a mouthful to say, was a German corporation. They were a conglomerate with interests ranging from metals, shipping to mining. They also had a financial trading arm,Metallgesellschaft Corporation , a subsidiary based in the US. Another piece of the empire was MG Refining and Mining and this company was involved in oil trading activities. Metallgesellschaft Refining obtained a 49% stake in a company called Castle Energy in the US. This was the start of changing Metallgesellschaft into a proper refiner. Through this deal Metallgesellschaft was able to to secure long term output of refined products at long-term contracts.
The next step for Metallgesellschaft was to agree long-term contracts with retailers for the delivery of gasoline, heating oil and jet fuel. There were 3 types of contracts that Metallgesellschaft devised :
Firm-Fixed – Customer agrees to fixed monthly delivery at a set price. Metallgesellschaft had agreements to supply 102 million barrels over 10 years.
Firm–Flexible – Similar to the firm-fixed but the client had greater flexibility over the delivery schedule. Metallgesellschaft had agreements to supply 52 million barrels over 10 years.
Guaranteed Margin – Metallgesellschaft would deliver at a fixed margin relative to the local area retail price. Metallgesellschaft has agreements to supply 54 million barrels over 10 years subject to Metallgesellschaft’s renewal.
Overall this meant that Metallgesellschaft would get a premium of $3 to $5 over the spot price. There were long term supply contracts in place out to 10 years for 160 million barrels.
There was also an option embedded in these contracts. The option allowed the counterparty to sell any remaining forwards back to Metallgesellschaft in the event of energy prices rising above contract price. The sell-back would be at 50% of the difference between the near term futures price and the contracted forward price.