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North American Gas Market Stabilizing, Sales Climb 4%

Devastating storms in the third quarter jolted the energy markets and sent natural gas prices soaring, but despite the upheaval in prices and the continuing entry of new investment bankers into the marketplace, natural gas trading in North America continues to stabilize and grow, up an estimated 4%, to 96.45 Bcf/d from 92.81 Bcf/d a year ago, according to NGI's latest gas marketer survey.

The spike in gas prices over the past few months appeared to have little effect on the gas sales by producers or the large investment banks, which have taken over NGI's leader board in the past few years. BP plc is no longer disclosing its Canadian physical gas sales by quarter, but comparing quarter-over-quarter U.S.-sales only, it still led the pack, up 15% in 3Q2005 to 15.55 Bcf/d, compared with 13.53 Bcf/d for the same period a year ago.

ConocoPhillips moved into second place, with a 16% hike in gas sales, to 12.2 Bcf/d from 10.5 Bcf/d a year earlier. Sempra, which also reported a sequential loss in gas sales, fell into third place, with sales down 14% from a year ago, to 11.7 Bcf/d from 13.6 Bcf/d. Rounding out the top five were Coral Energy, with a gain of 5% to 9.8 Bcf/d from 9.3 Bcf/d and Chevron Corp., up 26% to 5.45 Bcf/d from 4 Bcf/d. Chevron only reported U.S. sales in its SEC filing.

Company 3Q05 3Q04 Change
BP* 15.55 13.53 15%
ConocoPhillips 12.20 10.50 16%
Sempra 11.70 13.60 -14%
Coral 9.80 9.30 5%
Chevron* 5.45 4.00 36%
Cinergy 5.38 4.23 27%
Constellation 5.12 NA NA
UBS 4.57 3.97 15%
Tenaska 4.40 3.60 22%
Louis Dreyfus 4.25 3.00 42%
Oneok 3.38 3.30 2%
EnCana 3.22 3.19 1%
ExxonMobil 2.54 2.87 -11%
Nexen 2.33 2.91 -20%
Sequent 2.33 2.08 12%
Devon 2.21 2.39 -8%
Merrill Lynch** 2.08 5.40 -61%
Burlington 1.75 1.73 1%
Williams 1.70 1.50 13%
El Paso 1.60 1.70 -6%
Total*** 96.45 92.81 4%

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

* The physical gas sales for BP and Chevron are U.S. totals only, provided in SEC reports. Companies providing data directly to NGI were ConocoPhillips, Coral, Cinergy, Tenaska, Louis Dreyfus, UBS, Merrill Lynch and Constellation. ** The 3Q2004 number for Merrill Lynch was reported by Entergy Koch last year. Merrill Lynch purchased the Entergy Koch energy trading business. *** The total excludes Constellation data for 3Q2005 and 3Q2004. Constellation did not provide a 3Q2004 figure.

The plethora of hurricanes and the spike in gas prices "had a very dramatic impact on energy infrastructure," said Derek Davies, executive director of UBS Commodities Canada. "There are still some supplies shut in off the Gulf Coast, and part of our business entities in the Northeastern U.S. are keenly interested in who their suppliers are going to be this winter. They are interested in securing supply," which is having a positive effect on UBS. "We have the name and the reputation that make them comfortable...people know when they deal with us, we mean what we say."

According to Sanford C. Bernstein & Co., energy trading is generating about $8 billion a year in revenue and expanding at a rate of about 15% a year.

Morgan Stanley and Goldman Sachs Group Inc., which took quick advantage of the marketplace following Enron Corp.'s collapse in late 2001, each generated $1 billion of revenue from energy trading last year, according to Sanford. UBS Energy, which is profitable and growing, first entered the marketplace after purchasing Enron's substantial online expertise in 2002. Last year, Merrill Lynch paid Entergy Corp. and Koch Industries Inc. $800 million in 2004 to purchase their joint energy trading company. And Citigroup Inc. and JPMorgan Chase & Co. also are continuing to recruit trading talent to boost their energy presence.

And the players are continuing to change. Perennial gas trading leader in gas trading Oneok Inc. in September sold its oil and gas production operations for $645 million to privately held, Dallas-based TXOK Acquisition Inc. (see NGI, Sept. 26). And beleaguered Calpine Corp. and Bear Stearns Companies Inc. announced their own venture in September -- forming CalBear Energy LP to draw on Calpine's U.S. network of gas-fired power plants and Bear Stearns' financial wherewithal (see NGI, Sept. 12).

The CalBear venture, which was expected to officially begin operations in the fourth quarter, allows Bear Stearns to "go from almost no business to having a potentially big business in fairly short order," CFO Sam Molinaro said. Even if Calpine were to declare bankruptcy, Bear Stearns is expected to escape any fallout.

Hedge funds, buyout firms and municipalities, which are already Bear Stearns customers, increasingly are interested in trading gas and power, both for speculation and to hedge energy costs, said Molinaro. CalBear's 50-50 profit-sharing plan only applies to trades that are not related to Calpine's own power sales, including speculative trades or risk management deals on behalf of clients. The agreement allows Calpine to retain all profits from sales of its own power. Also, the 200 Calpine employees who moved to CalBear now fall under new subsidiary Calpine Merchant Services Co., which has an independent board and is insulated from bankruptcy.

"To the extent that something were to happen with Calpine, we feel that the joint venture would likely continue in some form, even if there was a reorganization of some type," Molinaro told analysts in October. "So we think that's pretty well not a major issue." He added the risk "is well collateralized and manageable."

On Friday, Fitch Ratings said if Calpine declares bankruptcy, it anticipates "no alteration in wholesale market prices of electricity or in regional supply, as was demonstrated in the earlier bankruptcies of Enron Corp. and Mirant Corp." Fitch analyst Leslie Bright said, "They should not have an impact on Bear. Their exposure is really limited, almost negligible in many respects."

Craig Pirrong, director of energy markets at the University of Houston's Global Energy Management Institute, said from the beginning, the CalBear endeavor posed "some risk" for Bear Stearns, but Calpine "has a lot of physical assets, so they see a lot of what's going on in the marketplace."

What Bear Stearns is gaining in the deal is key, said Molinaro. Banks, he said, "know how to make markets and find price discovery and provide liquidity to the professional investor community. The hard part is cracking into the physical end of the energy business."

UBS' Davies said financial support and reputation are "integral " to operating in energy trading today. UBS now has about 150 professionals dedicated to the North American business. Of that number about 70 are "client facing," or traders and marketers, with a staff of about 50 in Stamford, CT and the others in Calgary.

Davies said UBS' "very solid reputation and track record" have been an entry for securing clients. "It's been in business over 100 years and their business approach is consistent to be in business another 100 years...The bank recognized energy is going to be a focus point...and they would tell you the emphasis is a long-term focus of the bank. We're committed to the commodities business, particularly energy.

Similar to other banks' marketing strategies, UBS does not focus on one region of North America, but instead focuses on the clients. "We provide solutions that other banks aren't able to provide," said Davies. "Unlike very few banks, UBS is able to touch the physical commodity. We are one of them, and it helps to differentiate the business we have. We're not doing just swaps for the customer, but we take physical delivery of the commodity."

Not content to remain in the middle of the pack, UBS "in general views energy as an area where there can be some significant growth opportunities in the next one to three years," said Davies. "I think when you look at our physical business and how we've been able to grow the physical business, it's shown through the volumes." He pointed to UBS's growth in just one year -- in 3Q2004, it sold 3.9 Bcf/d, and in 3Q2005, gas sales totaled 4.5 Bcf/d. "We're seeing some consistent growth on the physical side of the business," which UBS expects to continue.

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