The energy merchant sector has been rebuilt, stronger than ever — and those leading the parade are more than likely the large oil and natural gas producers that once used middlemen to market their natural gas. Also coming out of the closet as energy merchants under their own names are the bankers that used to finance the marketers.

There are fewer independent merchant players in NGI‘s Top 20 marketer list, and there also are shifts in the way the trading is being done. More financial heavyweights have muscled into the arena, and while Houston remains the epicenter of the physical trades, a lot of the money and the major players are moving to New York City, said energy consultant Peter Fusaro, chairman of Global Change Associates.

“The good news is that the market has finally been rebuilt,” said Fusaro. “There’s about $375 billion in the swaps market, and that’s where we were when Enron went down. In terms of liquidity, we’re back where we were. There’s lots of interest in natural gas trading, second to oil, and frankly, we didn’t see it coming. There’s a lot more this year than last year. A lot of investors are looking for opportunities for returns, and oil and gas offer a lot more.”

The next five years “could be huge” in the energy merchant sector, as it not only grows but attracts the interest of new players. “It’s accelerating because now there is market maturation,” said Fusaro. “The markets are becoming more financial. More folks are piling into this. They can smell the money. I’ve never seen a market like this for trading.”

The late 1990s, when the energy merchant sector appeared to be at the top of its game, is “Rip Van Winkle time” compared to now, said Fusaro. “It’s turning over to the financials. It’s moving so quickly, and a lot of the energy market doesn’t want to get involved in all of the deals. It’s too volatile. So, they are outsourcing a lot of their business to the big financial players.” He said that eventually he thinks most of the merchant trading, “will be outsourced. Producers don’t like to deal with volatile markets, and financial markets are the logical move.”

Fusaro said, “All I hear are Citibank, Barclays, all are opening energy trading offices. They are already out there, funding E&P, and the next step is, why not offer risk management? There is just so much money, and there really is a speculative influence, which is important because the banks bring liquidity and risk capital and they can handle the volatility. And there’s plenty in this market.”

There is a growing interest in energy trading from the hedge funds — New York is becoming the center of “hedge fund land.” Most of the physical trading remains in Houston, but the financial remains in New York.

“These are not the Enron days any more. It’s much more sophisticated. In the 1990s, the traders moved to Houston from New York. Now I see a lot of the traders have shifted back. The financial end is taking over the physical as new entities come into the market.”

Figuring out how much actual energy trading is being done by the large financial players is difficult. For most of its rankings, NGI relies on Securities and Exchange Commission (SEC) filings to determine North American wholesale gas sales. Because the information is not required by the SEC, some of the merchant traders — especially the large investment banks — may be omitted from the ranking.

Goldman Sachs and Morgan Stanley are said to be the two largest financial participants in commodities derivatives markets, but neither break out the amount they earn from oil, gas and power trading. Merrill Lynch, which bought Entergy-Koch’s energy trading operations last year, also has not released its gas trading numbers — and Entergy-Koch was marketing about 5.6 Bcf/d in North America when Merrill bought it.

So, the numbers can be a bit misleading. For those that do release information through SEC filings or voluntarily to NGI, the market appears to be solid and growing.

London-based BP plc, which markets its oil and gas commodities worldwide, again led the pack for North American gas sales in 4Q2004, and appears to be unparalleled in its ability to trade.

BP, said energy consultant Peter Gignoux, is the “world’s largest energy hedge fund business. They are able to make more than hedge funds because they are exposed to the whole supply chain from well-to-wheel and can take positions hedge funds can’t.”

Sempra Energy, whose gas trading was down about 1 Bcf/d from 4Q2003, still remained solidly in second place, followed by ConocoPhillips, which reported about 2 Bcf/d more in sales than a year ago. Coral Energy Holding LP, which markets Shell Oil’s gas, was steady in fourth place.

Dallas-based Atmos Energy, new to NGI‘s ranking, moved into fifth place. Atmos, which took over TXU Corp. and is now the nation’s largest utility, sold 6.55 Bcf/d of gas in 4Q2004, up slightly from 4Q2003’s 6.41 Bcf/d. For the year, Atmos marketed 6.08 Bcf/d, on par with 2003’s 6.19. (Click to see previous NGI marketer rankings)

Source: Physical sales volumes for the full year2004 as reported in quarterly financial reports to the Securities andExchange Commission or if necessary provided to NGI in a statementsigned by a company official.

Source: Quarterly financial reports with theSecurities and Exchange Commission, or if necessary, statements signedby company officials and provided to NGI.

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