Sempra Energy's joint energy trading venture with the Royal Bank of Scotland (RBS), which is expected to close early next year, appears to have come at a most opportune time for the California-based corporation, and the sky may be the limit for NGI's top North American natural gas marketer.

Sempra Commodities, the energy trading unit of the San Diego, CA-based company, took top honors in NGI's third quarter survey of physical gas marketers. Sempra reported gas sales of 14.2 Bcf/d -- a 20% leap from the 11.8 Bcf/d sold in the same period a year ago. Sempra barely edged out second place ConocoPhillips, which reported physical gas sales of 14 Bcf/d in 3Q2007, a 3% gain over the 13.57 Bcf/d reported in 3Q2006.

"Those who have been following Sempra Energy over the past several years are well aware of our commitment to expand the company's role in the natural gas markets, particularly in the area of natural gas infrastructure," said Sempra CFO Mark Snell. On the marketing side, where Sempra employs about 100 traders, "we continue to identify opportunities that serve to expand our customer business."

Snell said Sempra Commodities' success over the past quarter "reflects the company's strategic emphasis in moving significant physical volumes of natural gas and decreasing our customers' exposure to price volatility. Obviously, natural gas is a priority for the company and we're looking to extend our advantages in this area both here in the U.S. and Europe via our proposed joint venture with RBS."

Based in Stamford, CT, the commodities trading unit of Sempra has rarely slowed down since it first entered NGI's quarterly survey of gas marketers in 1997. Sempra's trading arm holds claim to about a third of the corporation's total net income, which was nearly $500 million in 2006. The $30 billion the unit holds in market positions is backed by about $7.5 billion in credit lines, or about half of the company's total market cap.

Drexel Burnham Lambert launched the predecessor of the trading unit, and AIG Trading Corp. bought the business before Sempra eventually took it on. Sempra managed to avoid most of the turmoil within the energy marketing sector brought on by Enron Corp.'s demise, and now the trading unit revels in providing industrial customers price hedges to reduce their costs for gas, electricity and metals. And according to the company, most of its contracts are in liquid markets for less than two years.

Sempra has indeed made some good bets in an ever volatile industry. The corporation two years ago partnered with Kinder Morgan Energy Partners (KMP) and ConocoPhillips to build the massive Rockies Express Pipeline, which will carry gas to Midwest and eastern markets, and binding firm commitments already are in place from creditworthy shippers for "virtually all of the capacity on the pipeline," according to KMP (see NGI, Dec. 3).

Sempra also appears to have hit it big in its gamble on liquefied natural gas (LNG). Next year Sempra's Energia Costa Azul LNG project in Baja California, Mexico, will launch as the first ever receiving terminal to go into service on the West Coast of North America (see NGI, Nov. 12). Sempra beat out five competitors to secure the Mexican LNG project, and it also has another LNG terminal under construction in Cameron Parish, LA, and permits in place to build an LNG receiving facility in Texas.

The corporation has grown by leaps and bounds since it was formed through the merger of two utilities in 1998 (see NGI, June 29, 1998). However, in recent months Sempra's management has said the company was limited in how many new projects it could take on because of the collateral needs of its trading unit (see NGI, June 25).

Enter RBS -- a global financial giant that agreed in July to pay $1.3 billion and cosign on Sempra's obligations in return for 30% of the first $500 million in annual profits and 70% of the balance (see NGI, July 16). In the past five years RBS has raised $37 billion for LNG projects alone.

It's "the perfect marriage," said Sempra Commodities senior vice president Christine Cantor. She said that with the joint venture Sempra is "expecting massive growth."

Sempra could have continued to grow its commodities business in the short-term, but it wasn't in a position to take on big infrastructure projects or compete against the global energy trading behemoths, said Snell. He said it was "better to do a transaction like this before you need to, rather than waiting until you have to."

Of its Scottish banking deal, to be called RBS Sempra Commodities LLP, "a lot of people" questioned whether it was the right deal at the right time, Snell noted. With the credit markets now tighter, "this transaction looks quite brilliant right now..." As the joint venture trading business grows, RBS will gain a larger percentage of the profits, but it won't obtain half of Sempra's trading earnings "until the business almost doubles," Snell noted. For that to happen, he said, Sempra would have to double its net income from 2006's $500 million.

The beefed-up financing certainly would appear to give Sempra a lot bigger sandbox in which to play. Besides adding bulk to its already successful gas trading unit in Europe, RBS Sempra is expected to stretch its emerging Asian business. Earlier this year Sempra also strengthened its Canadian trading unit by purchasing an interest in Toronto-based Universal Energy Group Ltd., which sells power and gas to customers in Ontario. The deal, among other things, gives Sempra the right to appoint a director to Universal Energy's board.

NGI's quarterly survey of physical gas marketers for 3Q2007 is not considered a completely comprehensive list. There are many private and public trading entities that choose not to participate in providing data on their physical gas sales, and because the data is considered "voluntary" under Securities and Exchange Commission (SEC) rules, NGI relies on energy marketers and oil and gas producers to provide the information if it is not included in federal filings.

For instance, past leader BP plc was dropped from the survey beginning with this quarter -- even though it produced 21.86 Bcf/d of gas in 3Q2007 in the United States. NGI has chosen instead to highlight the North American physical gas players that wanted to participate in the survey, and on those participants that used the term "gas available for sale" in their SEC filings.

Also not in the survey, but undoubtedly with substantial physical gas sales in North America, are many of the big financial players, which include Goldman Sachs and JP Morgan, as well as privately held Cargill, Total Gas & Power, Occidental Energy Marketing, Fortis (which took over Cinergy/Duke's operations) and Suez Energy North America.

However, NGI secured a new participant beginning with this survey, and all signs indicate that it will be a company to watch. Houston-based Eagle Energy Partners I, LP sold 2.5 Bcf/d in 3Q2007 -- a substantial amount for a relatively new player -- and 47% higher than its sales of 1.70 Bcf/d in 3Q2006.

Eagle Energy holds quite a pedigree. The company was formed in 2003 by a group headed by, among others, Dynegy Inc. founder Chuck Watson, whose predecessor company Natural Gas Clearinghouse in 1985 set the stage for domestic gas marketing (see NGI, July 7, 2003). Earlier this year, Eagle was bought out by partner Lehman Brothers Commodities Services (LBCS) (see NGI, May 14).

Eagle Energy President Cliff Hare told NGI that for now, physical gas sales will be done under the Eagle Energy name as a wholly owned subsidiary of LBCS. "Within a few months it will all be LBCS," he said. With Eagle Energy, LBCS plans to build a 40-mile-long gas trading hub between Perryville and Delhi, LA, which would be the company's first fully owned energy facility (see NGI, Sept. 17). The Eagle Hub, as it would be called, would connect up to 12 major pipeline systems and have capacity to transport more than 2 Bcf/d.

In NGI's latest survey, Houston-based Shell Energy North America (US) LP, which had been operating as Coral Energy until earlier this year, took third place honors, with 13.10 Bcf/d in sales, which was up 12% from the 11.7 Bcf/d reported a year ago. With a 22% gain in gas sales from a year ago, Constellation Energy Commodities Group moved into fourth place with 9.94 Bcf/d from 8.15 Bcf/d. And rounding out the top five was Chevron Corp., which reported a 1% increase in its physical gas sales in North America, to 7.94 Bcf/d from 7.85 Bcf/d.

Company 3Q2007 3Q2006 Change
Sempra 14.20 11.80 20%
ConocoPhillips 14.00 13.57 3%
Shell Energy NA 13.10 11.70 12%
Constellation 9.94 8.15 22%
Chevron 7.94 7.85 1%
Louis Dreyfus 6.91 5.49 26%
Nexen 6.10 5.30 15%
Tenaska 5.00 4.30 16%
UBS 4.89 4.93 -1%
EnCana 3.63 3.36 8%
Oneok 3.16 3.02 5%
Eagle Energy/Lehman 2.50 1.70 47%
Devon 2.41 2.29 5%
Sequent 2.30 2.30 0%
ExxonMobil 2.17 2.43 -11%
Merrill Lynch 2.08 2.10 -1%
Enserco 1.96 1.81 8%
Chesapeake 1.85 1.46 27%
Anadarko 1.66 1.69 -2%
Canadian Natural 1.62 1.42 14%
XTO 1.56 1.21 29%
CenterPoint Energy 1.29 1.50 -14%
El Paso 1.17 1.18 -1%
Apache 1.15 1.14 1%
Total* 112.59 101.70 11%

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

*Companies providing data directly to NGI include Chevron, ConocoPhillips, Constellation Energy Commodities Group, Eagle Energy Partners I LP/Lehman Brothers Commodities Services, Louis Dreyfus Energy Services, Merrill Lynch Commodities, Shell Energy North America, Tenaska Marketing Ventures and UBS Energy. BP plc, which produced 21.86 Bcf/d in the United States during 3Q2007, did not report quarterly data for its physical gas sales.

©Copyright 2007 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.