Before its sudden downfall, Enron remained at the top of the charts in energy trading and marketing, holding the lead for most of the history of NGI’s ranking of the largest gas marketing companies by volumes sold. It held that spot in the third quarter, but that soon will change, and the impact of Enron’s fall probably will reduce transaction volumes among the other top marketers in the near term, according to Ronald Barone of UBS Warburg.

“I think maybe it could initially detract from volume growth, but I don’t think it’s going to be a long-term detraction,” he said in an interview with NGI. “I think there will be a lot of market share to divide up among the remaining players so the pie may shrink a little bit initially.

“Let’s face it; the problem with Enron wasn’t marketing and trading, it was all the other crazy things they invested in, like Azurix, Dabhol power, broadband, Brazil and New Power, and the way they leveraged the hell out of everything. The trading operations were good,” and the trading business should remain strong in the long term, he said.

Enron showed 6.5% volume growth in the third quarter, off substantially from previous quarters but still enough to hold its lead. It sold 26.1 Bcf/d during the quarter, up 800 MMcf/d from the second quarter and 1.6 Bcf/d from 3Q2000.

The biggest gainer in the quarter, however, was American Electric Power (AEP), which saw its volumes soar 263% to 14.5 Bcf from 4 Bcf/d in 3Q2000. “The addition of gas pipeline and storage assets, through acquisitions like Houston Pipe Line, completed in June, has allowed us to rapidly grow in gas markets,” CEO E. Linn Draper Jr. said in AEP’s third quarter announcement. AEP catapulted from tenth in the rankings to second behind Enron. With Enron’s fall and the rapid rise of the IntercontinentalExchange, in which AEP is a founding partner, AEP may easily assume the lead role in the fourth quarter. However, it is still to be determined how Enron’s business will be divided up.

Duke, Reliant and Mirant are very close at the next three spots down the ranking. Reliant’s volumes rose 55% to 13.8 Bcf/d. Mirant showed 47% growth with 13.1 Bcf/d sold. Duke’s volumes were up 16.7% to 14 Bcf/d. The other factors to consider are the mergers that occurred during the quarter.

Among the major highlights was an announcement in September that Duke would expand its position in the North American natural gas marketplace by acquiring Canadian-based Westcoast Energy in a cash and stock transaction valued at US$8.5 billion, including debt. The acquisition is expected to close in first quarter 2002, not only combining Westcoast’s massive Canadian pipeline assets with Duke’s North American pipeline holdings but also putting Engage and Duke’s North American Wholesale Energy segment under one roof. Combined, Duke and Engage sold 20 Bcf/d of gas in the third quarter. Engage was one of the biggest volume gainers with 50% growth and 6 Bcf/d of sales. Duke’s wholesale segment, comprised of Duke Energy North America (DENA) and Duke Energy Merchants (DEM), reported record quarterly earnings, delivering $618 million in EBIT — a 163% increase over third quarter 2000.

The other major merger that will impact the rankings in the quarters to come was ChevronTexaco. Chevron’s gas production currently is marketed by Dynegy. Adding Texaco to the mix will boost Dynegy’s sales to 15.8 Bcf/d.

BP’s trading and marketing activities also are expected to improve in the future following an agreement in September to purchase most of the natural gas marketing and trading assets of TransCanada PipeLines Ltd. TransCanada sold 7.9 Bcf/d of gas in the first quarter of this year, putting it at No. 11 in the rankings. Assuming BP will capture all of those volumes, it would have sales of 20.2 Bcf/d.

The only large volume losses reported during the quarter were by PG&E’s National Energy Group (down 47.8% to 3.6 Bcf/d) and Coral Energy ( down 11.7% to 9.1 Bcf/d). Total volumes rose 35.5 Bcf/d to 186.9 Bcf/d, a 23.5% increase.

The gas marketing business was alive and well in the third quarter and still appears to be strong despite the fall of the Enron empire. UBS Warburg’s Barone believes the situation could have been significantly worse had Dynegy not stepped in and given the industry a little more time to escape from the massive web of transactions spun by Enron.

“I think Dynegy paid the world a service by allowing there to be an early and gradual demise of Enron as opposed to a total collapse,” he said. “If it were a total collapse and we picked up the papers one day and found out they were illiquid, the markets would have been chaos. But a lot of companies had time to unwind their positions fairly substantially. I don’t think it will have a long-term impact on the business.”

That’s good news for Enron’s peers who have been doing so well. Natural gas sales volumes jumped more than 23% but operating income from wholesale operations also grew significantly in the third quarter, according to John Gehman of Maryland-based Energy Performance Review.

Earnings, excluding special items, from the wholesale operations (energy trading, marketing and merchant power generation) of the 35 major energy companies Gehman tracks were up 50% in 3Q2001 from 3Q2000. “AEP earnings from wholesale were up 78% (up 29% from just trading and marketing) but there were some that dropped,” he said. “Reliant Energy earnings, for example, fell 15%. Enron’s [operating income from unregulated wholesale operations] was up 20%. Dynegy was up 85% with really strong growth. Mirant was well more than double, up 139%. PG&E’s unregulated energy trading operations more than tripled their earnings from $24 million to $77 million. Duke’s [operating income] from trading and merchant power was more than double from $235 million pre-tax to $618 million.”

It remains to be seen whether these companies can maintain such growth with the largest trading partner crippled and during a period of declining spot prices and a weak economy.

Volumes represent North American physical natural gas sales and exclude financial transactions. Sales volumes were provided by company officials. Number in ( ) indicates second quarter 2001 ranking.

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