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Newest Wholesale Gas Merchants 'Regenerating,' 'Immigrating' into Sector

The players that took charge of the energy merchant sector following the dismal 2001-2002 shakeout continued to lead North American wholesale natural gas sales in 1Q2005, with BP plc, Sempra, ConocoPhillps, Coral and Atmos holding the top five spots in NGI's latest natural gas marketing survey. However, new participants began "immigrating" into the business during the first quarter, and more are expected to follow, industry experts predict.

London-based BP, which has been the leader in NGI's quarterly survey for two straight years, remained the top gas marketer, with 24.84 Bcf/d, compared with 24.50 in 1Q2004, as calculated by NGI.

BP did not provide total North American sales in the quarter to NGI, however, according to its Securities and Exchange Commission (SEC) 1Q2005 filing, BP sold 14.2 Bcf/d of gas in the United States. NGI estimated BP's Canadian sales for 1Q2005 by using its reported SEC 4Q2004 U.S. sales (13.85 Bcf/d) and the total number provided by BP to NGI for 4Q2004 (24.50 Bcf/d).

Nearly all of the North American gas marketers' sales figures in NGI's survey are reported in SEC filings. Companies that do not include separate, wholesale gas sales for North America in their filings are contacted by NGI, and they provide their sales numbers via fax or email. Excluding BP, those companies that provided sales figures to NGI for the 1Q2005 survey included ConocoPhillips, Coral, Tenaska and Merrill Lynch.

Sempra, which remained a top marketer throughout the turbulent post-Enron period, reported gas sales of 12.2 Bcf/d, down from 13.8 Bcf/d in 1Q2004. ConocoPhillps was in third place, up 8% from a year ago with reported sales of 11.2 Bcf/d from 10.4 Bcf/d. Coral, the marketing arm of Shell Oil Co., reported 10.8 Bcf/d, up from 9.6 Bcf/d, and rounding out the top five was Atmos, with 6.6 Bcf/d in gas sales, down slightly from 6.7 Bcf/d.

The newest players to emerge in this quarter's survey were UBS and Merrill Lynch -- two top 20 sellers that got their operations going by drawing talent from some of the best. UBS's energy trading operation is headed by Louise Kitchen, who steered the development of EnronOnline (see NGI, Oct. 2, 2000). Merrill Lynch bought Entergy-Koch's successful trading operations last year (see NGI, Nov. 8, 2004).

Energy consultant Ben Schlesinger believes the merchant sector will continue to see new participants because he believes a lot of opportunities are available now -- or will be down the road.

"When the trading sector was decimated, the market suffered as a result," he said. "There was not enough of a strong middle sector. Now it looks like other people are seeing opportunities and that's healthy. There's always a kind of turnover, around the time that businesses are shaking out. Now, the new players are emerging...there are waves of immigration and regeneration into the business. This is what we're seeing now."

The Bethesda, MD-based consultant said the energy merchant sector will "continually regenerate its ranks. That doesn't mean the old players will definitely be in or out, but clearly, there is still an opportunity." There won't be an "onrush of participants like the late '80s, early '90s. This business had its difficulties; the world knows about them. But I see some stronger players coming in, and this time, it's the financial firms."

Some of the best opportunities, he said, are the ones taken, for example, by Merrill Lynch, which bought an existing trading operation. Constellation Energy recently did the same thing, swallowing up Epoch Energy, a small Houston-based trading operation. Epoch was started by former El Paso Merchant President Tim Bourn, and he will continue as managing director of Constellation Energy Commodities Group (CECG).

Larry McDonnell, director of corporate communications for Baltimore-based Constellation, said that CECG, the wholesale risk and management arm of the business, will base its expanded trading operation in Houston.

"We've been in the gas market for a couple of years...and we've been very clear with Wall Street and the media that this is an area where we intended to expand, both in natural gas and in coal to a certain extent," McDonnell said. "Houston is the most appropriate place to base our operations, and we anticipate hiring new people in the Houston market and also bringing down more Baltimore-based people by the end of the year. We'll have a combination of moves, with roughly 50 people based in this operation."

McDonnell noted that with Constellation's established power trading operations made the company able to move into upstream and downstream trading markets. "We're taking the same model that we've used to establish the power business, and it's well suited to natural gas and coal. This is certainly a step to grow the business, and to establish a presence to build out the business."

Most of the new players are emerging from the financial industries sector, with Goldman Sachs, Morgan Stanley, Bank of America, JPMorgan Chase Bank NA, Credit Suisse First Boston, Citigroup, Deutsche Bank and Barclays all expanding their power and gas trading operations in North America (see Power Market Today, April 21; March 21).

Many banking firms are hiring former energy traders to grow their businesses, including Lehman Brothers Holdings Inc., which is seeking candidates with "significant industry experience."

Lehman CEO Richard Fuld said in April that the firm is "considering" entering the energy merchant sector. Lehman's advertisement reads in part: "Growing energy trading business at a global investment bank is looking to add experienced professionals in sales, trading and research at the vice president, senior vice president and managing director level in oil, natural gas and/or power trading."

Schlesinger responded, "I think this makes such a lot of sense. Here you have a group of really skilled traders out there...there were so many skilled traders out of a job when the great companies went down. Others started doing something else. Some of these guys formed their own small companies, and then the highly capitalized players come into the business. I can't think of a better way to get a trading operation going. You don't have to reinvent the wheel."

Company 1Q05 1Q04 Change
BP* 24.84 24.50 1%
Sempra 12.20 13.80 -12%
ConocoPhillips 11.20 10.40 8%
Coral 10.80 9.60 13%
Atmos 6.60 6.70 -1%
Cinergy 5.86 4.71 24%
Nexen 5.10 4.70 9%
Chevron 4.92 4.59 7%
Tenaska 4.10 4.20 -2%
Oneok 3.61 3.15 15%
Louis Dreyfus 3.60 2.14 68%
EnCana 3.15 2.68 18%
UBS 3.10 2.50 24%
ExxonMobil 2.80 3.08 -9%
Devon 2.60 2.67 -3%
Williams 2.50 2.60 -4%
Merrill Lynch ** 2.42 7.30 -67%
Sequent 2.30 2.10 10%
Calpine 2.23 2.42 -8%
Amerada Hess 1.90 1.30 46%
Total 115.83 115.14 1%

Source: Quarterly financial reports with the Securities and Exchange Commission, or if necessary, statements signed by company officials and provided to NGI.

BP, ConocoPhillips, Coral, Tenaska and Merrill Lynch did not report North American gas sales volumes to the SEC. Data for those companies was obtained directly from company officials, or, in BP's case, was estimated based on previous information. * BP's 1Q2005 number is an estimate based on its 1Q2005 U.S. volumes, which were reported to the SEC, and an estimate of its 1Q2005 Canadian sales volumes based on what BP sold in 4Q2004. ** The 1Q2004 number for Merrill Lynch was reported by Entergy Koch last year. Merrill Lynch purchased the Entergy Koch Energy Trading business.

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