What a difference a year makes. Over the last 12 months, the pure energy merchants have been dethroned as gas market leaders by the producers — big time. Third quarter gas sales volumes show that producers are responsible for 72% of gas sales from the top 10 gas sellers in North America. Not one pure energy merchant remains in the top 10, compared to last year’s third quarter when marketers represented nearly 40% of the gas sales of the top 10 and producers represented only 18%.

Of the leading companies reporting quarterly gas sales information, 10 were producers or their affiliates: BP, Coral (Shell Oil & Gas’s marketing arm), ConocoPhillips, ChevronTexaco Corp., Exxon Mobil Corp., EnCana, Marathon Oil Co., Anadarko Petroleum Corp., Burlington Resources and Unocal Corp. A few longtime gas sales leaders also remained among the top North American gas sellers, including pipeline operators El Paso Corp. and Williams and utility affiliates Sempra, Cinergy.

Gone are last year’s top three marketers and former stalwarts of the merchant sector: Mirant, AEP and Duke. Bankrupt Mirant, which reported 22.12 Bcf/d in sales for the third quarter of 2002, declined to offer statistics for this year’s third quarter. AEP, which reported 18.10 Bcf/d in sales a year ago, also declined to share its data. And Duke, which reported 17.90 Bcf/d in 3Q2002 sales also declined to take part.

Ben Schlesinger, whose Virginia-based company is a leading management consultant to the natural gas industry, said the numbers show there are not many large “straight marketing companies” operating now. But he’s not surprised that producers have taken over the gas sales business.

“The producers are leading not only because of their liquidity, but they need to do it as well,” Schlesinger said. “They have a pressing need to move their gas to market. It’s going back to what it was in ’83 and ’84, when marketing companies came into being. Marketing was created because there were too many producers wanting to move their gas. It just shows what liquidity means.”

Whether the producers remain dominant or are replaced by new middlemen in the next few years remains to be seen, he said. “The producers are principally interested in producing,” Schlesinger said. “But they want to be sure their gas is sold. They have to do that now. They want to complete their deals and move their gas on time.”

Obtaining data in the quarter proved to be a difficult task, with many companies changing the information they previously reported to the Securities and Exchange Commission or requesting that they be dropped from the survey. Energy analyst John Olson of Sanders Morris Harris agreed that it is “getting a little harder to ascertain what’s going on with any degree of confidence on an in-depth basis,” regarding the North American energy merchant sector. “They are running for cover. Actually, who’s the biggest with the mostest is hard to say.”

Whenever possible, NGI used Securities and Exchange Commission 10Q third quarter information, and when there were questions, attempted to verify the numbers or have them broken down by individual companies. However, some companies were hesitant — even with the published data — to further break down physical gas volumes. That trend, said Olson, is likely to continue.

The environment continues to be challenging, he said. “It’s not much better than it was a year ago and there are a lot of merchants who are fading away, they are winding down their books, building liquidity. Now the players have to certify their marketing numbers. And a lot of the sales are moving into the banks as the banks take over those that have lost liquidity.” He said J.P. Morgan Chase, Bank One and Goldman Sachs had become gas sales administrators “not because they want to but because they have that unit of the company.”

“Clearly, the big guys are getting bigger,” Olson said. “BP, …the big producers, they are showing more volume. They have more money, more liquidity. For the pure merchants, that number is a lot lower, but he said he was not surprised to see Oneok and Sempra on the list.

The dramatic fall off in physical volumes were not a surprise to the analyst. Until this year, Olson noted that the “physical volumes for any particular quarter…were turning over physical production 10 to 12 times or so.” The volumes just didn’t match the actual production, he said.

However, Olson added, there are legitimate aspects to the changes in the sales figures…because of accounting changes. The numbers may have changed as the companies moved from mark-to-market or accrual accounting. The books are coming back, and accrual provides cover for these people.”

According to Olson, Entergy-Koch’s volumes were expected to be one of the leaders. However, beginning with the third quarter, the company combined its U.S. and European physical gas volumes and did not separate the figures. For the third quarter, Entergy-Koch’s U.S. and European physical volumes totaled 5.8 Bcf/d, compared with 6.7 Bcf/d in combined volumes for the third quarter of 2002.

Looking ahead, Olson believes the energy merchant sector will be “measurably better off in the next two years. There will be more liquidity and maybe a return to the market” by some of the once mighty players. “You have to remember that gas trading is profitable. It has seasonality and storage, something that power marketing doesn’t have.”

Although he doesn’t believe power marketing will ever come back, Olson said that gas marketing will be “bigger and sounder” in the years to come. Within two years, Olson said, gas marketers’ “credit treatment will be better enjoyed, but power will continue to be a loss leader.”

Schlesinger thinks it is clear that even with the upheaval of the past two years, the merchant sector remains extremely competitive — even without the heavy concentration of pure merchants. Using the Herfindahl-Hirschman Index (HHI) as an economic test to measure market concentration, Schlesinger said the numbers indicate the market currently is operating at about 750 — about twice as concentrated as it used to be during the 1990s, and before Enron Corp.’s EnronOnline began to dominate the market.

The score of 750, he said, was a good sign. For most of the ’90s, the HHI showed a score of about 300-400 for the merchant sector, which indicated a lot of parity. Market concentration shows up with scores above 1,800. The number is “well below” any signs that one company is “dominating the market. It’s clearly a very competitive business right now.”

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