With its expertise in selling and trading all types of commodities all over the world for more than 150 years, Louis Dreyfus’ success in marketing natural gas in North America should come as no surprise. What may have surprised industry watchers is the speed at which its physical gas sales have grown.

In just four years, the privately held entity’s U.S.-based Louis Dreyfus Energy Services has steadily increased its presence in gas marketing. The company first entered NGI‘s marketer ranking in 2Q2004 in 15th place, reporting 2.31 Bcf/d in gas sales (see NGI, Sept. 20, 2004). By the second quarter of 2006, it was selling more than 5 Bcf/d, which puts the company in eighth place in NGI‘s 2Q2006 marketer survey.

Dreyfus’ success is tied to a tried-and-true mantra: Build a platform of assets around the commodities, and offer full service for the customer. Louis Dreyfus Energy Services is a part of the Louis Dreyfus Group, an organization of companies owned by Paris-based Louis Dreyfus S.A.S. The company was founded in 1851, and it now consists of worldwide processing, trading and merchandising of a broad range of agricultural and energy commodities, telecommunications, real estate development and shipping.

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 included Chevron, Cinergy, ConocoPhillips, Constellation, Coral, Louis Dreyfus, Merrill Lynch, Tenaska and UBS. BP’s figure is for U.S. natural gas production, not natural gas sales. BP does not issue quarterly data for its North American gas sales.

“Dreyfus is all about managing commodity risk. It’s what we’re all about. It’s in our blood, it’s our culture,” Timothy Stuart, president of Louis Dreyfus Energy Services, told NGI. “We’re not new to the business… We have spent a lot of time investing in the foundation of our businesses… We focused on systems infrastructure to build in the right way.”

Throw in a little good luck as well.

In the 1990s, Dreyfus and Duke Energy partnered in a joint venture to market wholesale gas and power outside Duke’s utility market. The agreement ended in 1997, when Duke purchased PanEnergy. As part of its termination, Dreyfus signed a noncompete agreement to not market gas or power for five years in North America. The noncompete agreement kept Dreyfus out of the merchant sector when it hit its highs until the time it crashed and burned.

While it was not able to market gas and power, Dreyfus continued to process third-party gas, primarily along the Louisiana coast, for a variety of small to mid-size Gulf of Mexico (GOM) producers. When the noncompete agreement ended in 2002, Dreyfus had a clean balanced sheet, untarnished reputation and a list of customers, and it was quickly able to begin taking care of customers’ gas streams from the wellhead to the local distribution center.

“Knock on wood,” said Stuart. “The timing was quite fortunate for us. The energy merchant market was collapsing, and we had well-established relationships at the wellhead.”

Dreyfus is among the largest midstream operators in the United States, and it has a considerable presence in Canada. The company holds a 20% stake (132 MMcf/d) in the Sea Robin Processing plant in Louisiana, which processes up to 660 MMcf/d of wet gas mostly from offshore production fields. Dreyfus’ Canadian affiliate also controls 4.2 Bcf of high-deliverability gas storage.

Dreyfus Energy Services, which now employs about 280 people in North America, also is expanding its gas gathering abilities and is now working on a new gas system in North Texas to service the southern part of the Barnett Shale play (see NGI, July 31). In the last nine months, the energy services business also has begun to market coal products in North America and internationally — another business that’s expected to grow.

The company is unique in that it can offer producers bundled gas processing and hedging services and market the NGL streams. Producers may choose fixed-price or index-plus deals for multiple months or years, as well as spot and keep-whole transactions.

It has taken more than luck to steadily expand Dreyfus’ North American operations.

“We are very much focused on the customer and his needs…From day one, we have invested heavily in systems,” said Stuart. “We are all about leveraging our physical, financial and asset capabilities to better service producers and consumers.” Dreyfus, he added, has built its business “around the Btu spectrum and has additional marketing platforms in petrochemicals, NGLs, petroleum and coal.”

Dreyfus “might” consider some ventures with some of the investment bankers that have begun moving into the physical gas markets. “Many large financial players are attempting to get into the market. It may be a cyclical thing. It may be successful for some, and may not be for others,” Stuart said. “There’s a huge amount of risk capital that they’ve brought into the marketplace. That’s created volatility and risks for themselves too.” But Dreyfus sees opportunity with volatility and intends to continue to grow its business in North America.

“We’re here to stay. Step by step, buying and building assets, growing into new businesses.” The company is focused on consistency, and Stuart said any growth will be stable growth. Still, “there may be a relationship we might contemplate going forward. Energy is a very important sector for the LD Group. The owners of the firm have a large appetite for asset investments, and the continued expansion of our merchant platform.” For the near term, however, “we are focused on our knitting, properly servicing our customers.”

Marketer Sales Grow 6%

In the NGI 2Q2006 survey, the top North American gas marketers sold about 6% more gas than they did a year ago, 118 Bcf/d, compared with 111.51 Bcf/d in 2Q2005. London-based BP plc, the leading gas marketer since 1Q2003, appeared to once again dominate the rankings, followed by ConocoPhillips, Sempra Energy and Coral Energy, Shell’s trading arm. Constellation, which entered the NGI rankings last year, showed strong gains over a year ago and barely edged out Chevron Corp. for fifth place.

The compilation remains open to interpretation. Physical gas sales are not required to be reported to the Securities and Exchange Commission, but many energy companies provide gas sales data in their quarterly filings. Certain companies that don’t voluntary report their gas sales to the SEC provide verified numbers to NGI. Of those listed in this survey, only BP’s figure is based only on U.S. gas production data — the producer discloses its physical gas sales figures for the United States and Canada only once a year.

Still, the survey offers a useful indicator of what’s happening in the marketplace. All indications show a stable market, with dominance by the producers and their trading arms, but obvious growing clout by others.

In the second three months of 2006, the biggest news in the sector was Duke Energy’s agreement to sell its commercial marketing and trading business unit to international banking giant Fortis NV for an estimated $415 million (see NGI, July 3). Fortis, with dual headquarters in Brussels, Belgium, and the Netherlands, is among the 20 largest financial institutions in Europe. Fortis will join two other global bankers now included in NGI‘s surveys, UBS and Merrill Lynch.

Duke exited proprietary trading in 2003, but when it merged with Cinergy, it obtained a formidable trading arm in Cinergy Marketing and Trading LP and Calgary-based Cinergy Canada Inc., known collectively as CMT. The unit, though, was considered nonessential and too risky for Duke’s growth.

“The move by Fortis into North America was driven in large measure by the European community” and its lack of access to gas markets, said Maryland-based energy consultant Ben Schlesinger. Fortis “looked at the North American industry and invested. They’ve looked at it for some time, but they hesitated, particularly after the California debacle, the legal problems. Now there is a vigorous influx toward fair trade.”

Schlesinger, who counsels European energy companies, said the North American gas market “will probably see more interest from the Europeans, not less” going forward. “There’s tons of equity pouring in.”

Fortis Merchant Banking CEO Filip Dierckx said purchasing CMT has moved the business into the “second tier” of energy merchants in North America.

“We can say and we can debate a long time about who is where,” he said in May. Dierckx put Goldman Sachs and Merrill Lynch among the “first tier” of global energy players; they gross more than $500 million from their global energy trades. “In the second layer, you have players like Barclays, Deutsche, UBS, even Citigroup, where you are between $200 million and $500 million in sales. With this acquisition, what we have and what CMT has, we are in the second tier group, which has the full capabilities and is only somewhat behind the biggest investment banks.”

By NGI‘s calculation, don’t count out the large producers, especially the growth of ConocoPhillips. The Houston-based producer, which has merged with gas powerhouse (and former NGI survey participant) Burlington Resources, reported selling 14.1 Bcf/d in the quarter, well ahead of the 11.2 Bcf/d it reported for the same period of 2005, and above the 13 Bcf/d it reported in 1Q2006.

Sempra, another perennial leader, maintained the third-place spot — but for how long or in what way is unclear. Sempra marketed 11.6 Bcf/d, barely edging out Coral’s 11.2 Bcf/d in the quarter. But Sempra CEO Don Felsinger affirmed earlier this month that the trading arm is on the table undergoing strategic review (see NGI, Sept. 11). In May, the CEO said Sempra Commodities was undervalued, and it could be sold or spun off “before 2008” (see NGI, May 22).

There are no plans to sell, and no one has made any offers for the business, which has been going “incredibly well,” said Sempra spokesperson Jennifer Andrews. She said that Felsinger’s comments were not unusual. “We’ve said that at any time, any one of our businesses could be up for sale. But there’s nothing going on to indicate that it would be sold any time soon.”

About 32% of Sempra Commodities is devoted to natural gas, Andrews said. The unit employees about 800 globally, with about half of the work force headquartered in the United States. The main office is in Connecticut, “but we have a lot of smaller offices across the country.”

In any case, Sempra’s gas business will keep doing what it has been doing, she said. “It’s a very disciplined business,” she said. “It’s what makes us successful, It’s really strong, but it’s discipline and the people..really good people. That’s really what’s kept us so successful. Good people.”

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