This year could be the first year since the gas marketing business began more than a decade and a half ago that annual marketing volumes will decline, said Benjamin Schlesinger, president of Maryland-based consulting firm Schlesinger and Associates, which has been closely tracking the industry since the early 1980s. Schleslinger said in addition to the likely volume declines this year, the number of gas merchants in the business also will fall sharply.

Recent disclosures of volume-inflating trading practices, such as round-trip or wash trades, will pressure companies to weed out any questionable transactions, and that is likely to cause a significant drop in reported volumes, based on Schlesinger’s calculations. He said an analysis of the top 15 gas marketers revealed that at least half of them showed suspicious sudden increases in volumes in the fourth quarter of 2001.

The top 20 gas marketers by volume reported about 192 Bcf/d in gas sales in the first quarter of 2002 (see Daily GPI, May 20). It was a 27% increase from 1Q2001 volumes, and NGI’s gas marketer rankings have consistently showed more than 20% volume increases each quarter compared to prior-year quarters. However, Schlesinger believes at least seven out of the top 15 companies could be scaling back reported volumes by as much as 15% by the fourth quarter of this year if they engaged in wash trades.

“We used the Natural Gas Intelligence [gas marketer ranking] from the fourth quarter of 2001 — and the first quarter 2002 ranking bears this out as well — and compared it with our previous half dozen years or so of [rankings] to determine who we thought probably had exaggerated volumes for one reason or another,” Schlesinger said. “We took the top 15 companies and excluded Enron and found that they split about evenly into companies who had some real sudden [volume] increases versus those that didn’t. This is a circumstantial analysis, so it’s probably not appropriate to name names, but I don’t think it would be too many surprises. There are several companies that already have reported round-trip transactions.”

Reliant, Williams, CMS and Dynegy have admitted doing round-trip power trades. Reliant said it did 45 Bcf of round-trip gas trades last year. Aquila, Questar, Constellation, Duke and Mirant have denied doing any trading to inflate volumes. Duke said it had done some round-trip trades but only to confirm prices on electronic trading systems.

Schlesinger broke the top 15 gas marketers into two groups. The first group showed steady sales volume increases since 1996 and a jump of 30% (compared to a five-year average) in the fourth quarter of last year. The second group of seven companies also grew steadily from 1996 through 2000 but reported a 116% increase (compared to a five-year average) in 4Q2001 gas sales. There have been instances in the past when companies showed sudden volume bursts only to disappear back into the pack the following year, Schlesinger said.

“If Group II members’ spectacular 4Q01 sales jumps resulted from round-trip transactions, we estimate they’ll each report 10-15% sales decreases by 4Q02,” he said. “We account in this estimate for the net effect of (a) discontinued ’round-trip’ transactions, (b) decreased growth in transactional activity in 2002 generally, and (c) an approximately 5-10% sales bump the leading marketers inherited from Enron’s bankruptcy.”

The significant increase in counterparty risk due to credit rating downgrades, the FERC inquiry into California energy trading and scheduling activities, and other factors will further put downward pressure on volumes and significantly restrict trading, said Schlesinger.

There also already has been a drop in the number of gas marketing companies in the industry for a variety of reasons, but most likely because of the Enron bankruptcy and the bad name Enron has left on the marketing and trading business. Schlesinger and Associates has been publishing an energy marketer directory since 1986, but this year companies have been unwilling to participate in the directory and the accompanying survey because of the increasing scrutiny of their operations. Based on his calculations, however, Schlesinger estimates that as many as 100 companies have been eliminated from gas marketing.

“There’s definitely been a reduction in the number of marketing companies this year already. There were 300, and it kind of bounced in the high 200s and low 300s for just about all of the 1990s,” he said. “I would be surprised if there were over 200 now.

“Even through normally there are a lot of companies that disappear each year either through mergers or going out of business or doing something else, it’s usually offset by new entries in the market.”

There always has been a lot of turnover in the industry. In the early 1990s, oil dealers and oil traders got into natural gas marketing, and new companies were formed to focus on particular states that were deregulating or growing.

“This year in our efforts we have hardly turned up any new entrants. It’s finally gone through a transition,” said Schlesinger. “It’s a visible field; it’s no longer sort of an open-ended prospect for people who want to get into the business. Of course, publicity is very negative of late, negative including some of the kinds of things they have done correctly — the idea of trading and seeking optionality has gotten a bad name even through its something that is helping markets reconcile and [helping the economy].”

For more details on Schlesinger’s analysis visit his web site at http://www.BSAenergy.com.

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