NGI The Weekly Gas Market Report
The shakeout in the battle between online energy tradingexchanges has begun, with rumors circulating that at least two ofthe well marketed, visible performers have run out of money and noware scrambling for customers and liquidity. Though no companieshave publicly announced plans to close or merge, insiders say it’sjust a matter of time.
There are, of course, impressive success stories in the short,mostly happy life of Internet energy trading exchanges, whichnumbered as many as 30 about six months ago. IndependentEnronOnline, the acknowledged leader of the pack for all Internetcommodity trades, launched its site in November 1999, and currentlyboasts an average daily trading volume of $3.5 billion, the highestamong online energy exchanges.
IntercontinentalExchange (ICE), which secured the backing ofenergy giants BP, Royal Dutch/Shell and TotalFinaElf, as well asinvestment banks and power firms, by Nov. 17 had recorded more than$13 billion in total trades in its first month of trading. ICE’scash markets in natural gas were averaging 1-2 Bcf/d in trades bymid-November. It had traded 60 Bcf of physically delivered gas andfinancially settled gas volumes had reached almost 900 Bcf.
Of course, many others are laying odds on surviving andthriving. TradeSpark, which launched in early October 2000, issimilar to the ICE business model, with high profile partnersWilliams, Dominion, Coral Energy, Koch and TXU, and Dynegy Inc.expected to come on board by the second quarter. Houston-basedAltra, which operates an independent trading platform, saw itsphysical trading activity increase almost 40% in December, with asolid customer base of 700 and climbing.
But for any online platforms thinking they were in the cat birdseat just six months ago, today they are sitting on a precariousperch.
“It’s a very interesting game to be in right now,” said ScottColeman, director of natural gas trading for Altra. “Peopleattempting to roll out a new platform or trying to operate withoutliquidity are finding they can’t play. And a lot of those thatstarted out so well with great marketing plans have lost some oftheir momentum.”
Coleman, who like a lot of his fellow e-trade executives washesitant to name names of companies not doing well, said some ofthe higher profile companies have just “run out of money.” He saidsome had a “great marketing plan but no liquidity.”
While he said that Altra is doing well, Coleman admitted thecompany had a “bad” summer. With so many companies jumping into theonline trading arena at the time, Coleman said that business wasnot as strong as expected. However, having made it through thefirst shakeout, he said, Altra’s long- and short-term goals now areto “beat the competition.”
To do that, he said Altra would have to continue to generateliquidity, something it’s been able to do through its clearingfunction, a technique not used by other online traders.
“Credit is a huge issue right now because of the way natural gasprices shot up,” Coleman said. Even though some of the consortiumswere put together by huge corporations, parties have begun runningout of credit with each other, which in turn kills the trade. “Justbecause you have corporate level backing doesn’t mean the traderswill use you. You’ve got to have liquidity. If you know how toanticipate when the customer is running out of credit, youeliminate the problem. You’ve got to think like a trader.”
When questioning companies about cutbacks or rumored joblayoffs, few commented on the stability or lack thereof ofcompetitors. However, in the past few weeks, rumors have centeredon RedMeteor and HoustonStreet as two exchanges experiencingliquidity problems, but there was no confirmation. In fact, whileacknowledging that it’s an uphill battle to compete,HoustonStreet’s chief strategy officer said last week that thecompany is doing well.
“The first struggle is liquidity,” said HoustonStreet’s KevinSluder, executive vice president and chief strategy officer for theneutral platform energy trader. “That’s the entry ticket into themarket. You’ve got to be nimble, be quick to succeed, but theopportunities are still there.”
With trading floors in wholesale electricity, crude oil andrefined products, Sluder estimates the Portsmouth, NH-based companycurrently has between 200 and 225 customers, but admits that noteveryone who registers with the site comes back to trade. The onlyproprietary information HoustonStreet disclosed was that fourmonths after its launch, Oct. 2, 2000, it had completed $1 billionin crude oil trades. There were no figures about its natural gas orother platforms, or any information on its current businessactivity.
“The battle will be fought and won on which user services thecustomer chooses,” Sluder said. “As people who trade become moresophisticated and know more, they will choose a level platform likeHoustonStreet in the long run.”
But in the meantime? “It’s a real dogfight, that’s for sure,”said Sluder. “The competition can make your life miserable. Butyou’ve got to be creative, tenacious, efficient and mind your Psand Qs.”
Sluder dodged questions about lay-offs at the company, butsources reported about 17 people — one-third of the company’sstaff — were abruptly terminated two weeks ago. The sources saidthe lay-offs were prompted by a lack of new venture capital.
Last week another e-trader rumored to be short on liquidity,RedMeteor, based in Houston, said it had expanded its businessoperations to now license its technology to create open exchangemarketplaces and private branded marketplaces.
“Given the recent volatility in commodities, companies areseeking better, technology-enabled business processes that provideinstantaneous market access and enhanced counter-party controls,”said RedMeteor CEO Vincent Di Cosimo. “Even with the existing widerange of Internet-based trading alternatives, online trading isstill very much in its infancy. We know that several years from nowthere will be a myriad of exchange platforms all linked in one wayor another.” There was no mention of how well its online energytrading exchange was doing.
What’s happening now was bound to happen, and even though theshakeout in the online energy trading marketplace will take itstoll on large and small companies, in the long run, the Internetwill become the first choice for buying and selling energyproducts, according to an expert who follows the industry on adaily basis.
Peter Fusaro, principal of knowledge management for SkippingStone Inc., said the e-commerce marketplace is still so young, thatit may take as long as two years before the dust clears and thetrue players are determined.
“It is so early in the game for electronic energy trading, andwhat you have with electronic trading is a long process of actuallychanging human behavior,” Fusaro said, and what’s happening nowalways happens with a new way of doing things. “Brokerages reallydon’t want to change. They have the information and many customerslike to deal with their brokers on the phone, and it’s still verypopular. But in the long run, the value of the electronicmarketplace will take over, and I think that in the next couple ofyears, we’ll slowly see the brokerages gravitate toward electronictrading.”
It won’t be a straight line, though. Some electronic traderswill cease to exist or consolidate — not a negative consequence,just the normal migration of a burgeoning start-up industry, hesaid.
Fusaro, who has tracked the dotcom energy business on a dailybasis since 1999, has issued three in-depth reports on where theindustry is and where it’s going. He confirmed rumors thatHoustonStreet and RedMeteor are floundering because of a lack ofliquidity.
However, he predicted that those companies and others losingsteam might be “patched” together or swallowed by more liquidplatforms. “Somebody will buy them,” he said. “I don’t know if itwill be some of their backers or another platform, but I expect tohear about that soon.” Fusaro said he also suspects that someexchanges that appear to be solid may be “hyping up the numbers” ontheir transactions, which also will eventually come back and hitthem in the bottom line.
“It depends on how a transaction is measured. When I hearsomeone talk about having 100 trillion in over the counter sales,are they talking about 100 trillion kilowatts, or 100 trillionmolecules? It makes a big difference, and the numbers can bemanipulated in a lot of different ways.”
Even with expected consolidation, Fusaro said the marketplacewouldn’t be getting any smaller.
Next Wave of Exchanges Coming
“There will be more, not fewer in the very near future, both inEurope and the United States. The next wave of exchanges mostlikely will replicate those that are most successful at the presenttime,” he said. The reason, he said, is that consolidation of theenergy industry will “accelerate the movement further. There willbe more liquidity, which in turn will generate more growth in theelectronic trading field.”
On his short list of those companies likely to make it throughthe latest shakeout is ICE, TradeSpark and Altra. He doesn’tinclude EnronOnline on his list because “it’s not like any of theother exchanges. It creates its own liquidity” with its massivewholesale marketplace.
And unlike Enron, other electronic traders should considerparing down their offerings and concentrate on what they do best.”The energy industry is very information intensive and someexchanges are trying to do too much. It’s difficult to captureeverything. To be successful, the electronic platform has to createliquidity, and how to do that, no one seems to really know, exceptcertainly Enron. The trader has to find a niche to help him standout and cut out his slice of the market,” he said.
One idea to generate more liquidity for online energy tradingwas floated in late December by Houston-based Dynegy Inc., whichlaunched its propriety site Dynegydirect in November. MattSchatzman, president of Dynegy Trading, said then that ifEnronOnline would link its independent site to Dynegy’s futurepartner TradeSpark, the liquidity would be there. Schatzman saidDynegydirect would aggregate multiple transactions from its smallcustomers and then execute the trades on TradeSpark. Though itscustomers would pay a fee for the transaction, Schatzman said thecustomers would still pay less because there would be moreliquidity.
While discussions continue between Dynegy and EnronOnline, sofar, no agreement has made, and Dynegy’s John Jordan, the seniordirector of the company’s e-solutions, said he could not comment onthe discussions or on Dynegy’s current trading activity becausefourth quarter earnings will soon be released.
Carolyn Davis, Houston
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