Second quarter physical gas sales volumes showed large cracks beginning to form in the foundation of the energy merchant business. The credit and liquidity crisis was growing rapidly during the quarter and the effects of the regulatory investigation into round-trip trading had taken hold. While there still were large volume increases compared to the previous year’s second quarter (a 38 Bcf/d increase for the top 20), an estimated 10.7 Bcf/d decline in volumes appeared compared to the first quarter of this year. All signs currently point to much greater declines as the year progresses.

Nearly two-thirds of the companies reported volume declines in the second quarter compared to 1Q2002. Conoco reported the largest drop, 3.9 Bcf/d, followed by Williams (-2.10 Bcf/d), Dynegy (-1.8), Coral (-1.64), EnCana (-1.42) BP (-1.10) and others. The biggest volume gainers were PG&E (1.80) and Duke (1.50), followed by Mirant (0.90) and TXU (0.58). TXU showed the largest movement on the chart, jumping to the 14th spot from the 21st, while Williams fell four places to 17th from 13th. Cook Inlet, a private minority-owned energy marketing company based in Los Angeles that had 4.6 Bcf/d of gas sales in the first quarter, asked to be excluded from this quarter’s ranking.

Mirant once again topped the chart with 22.30 Bcf/d, up 10.5 Bcf from the same quarter last year before it purchased the bulk of TransCanada’s marketing operation. Mirant’s volumes also were up 0.9 Bcf/d from the first quarter, but the company’s hold on the top spot and the position of many others in the ranking are shaky given the junk level credit ratings, large collateral requirements and cash starvation that is affecting many of the top energy merchants.

Standard & Poor’s (S&P) warned last week in a report titled “Is Time Running Out for U.S. Energy Merchant Companies?” that bankruptcy is a possibility for more companies in this business. “Few doubt that one or more energy merchant companies may soon file for bankruptcy. Signals are appearing and getting stronger,” said S&P’s Peter Rigby, noting declining credit ratings, poor financial results, profit warnings, working capital problems, violation of banking agreements, worsening bank relationships, negative press coverage, delays in publishing financial reports, abrupt changes in senior management and sagging per-share prices (see related story).

The second largest gas marketer by volume, Aquila Energy, was downgraded to junk status just last week by Moody’s Investors Service, but the company called it quits in energy marketing two months ago (see NGI, June 24). Its 16.2 Bcf/d of sales volumes will vanish next quarter along with its 1,200 merchant energy unit employees. While some of those volumes and people may be absorbed by other companies, some experts believe the transformation of the merchant sector has left little room.

Porter Bennett of Bentek Energy Research in Colorado believes the energy marketing and trading business has changed forever, and the second quarter volume declines and merchant company shakeout were just the beginning of what’s to come. When Enron departed, the volumes of many other energy merchants grew. That probably will not be the result this time around when Aquila exits, Dynegy and Reliant trim staff and restrict trading, and Williams sells off a 40% chunk of its operation and further downsizes its merchant business going forward.

“I’ve got to believe there have been huge reductions in [sales volumes since the end of the second quarter],” said Bennett. “A huge part of the gas market was made up of gas marketers trading to other gas marketers. We did a study in 1994 and at that time every gas molecule was traded about twice. A couple years ago it was up to eight times. At the height last year it was probably more than eight times [that every gas molecule was traded]. I wouldn’t be surprised if it’s now back to the early 1990s levels. There just aren’t that many traders anymore.

“It’s not going to recover. I think it is permanently done,” he said. “There aren’t that many people in the business anymore. So many people have been let go, and so many marketing companies have been just decimated. There’s no money to be made in marketing anymore.”

A good illustration of the dramatic shift in energy trading during the second quarter was Williams’ report of a $616.5 million (182%) decrease in risk management and trading revenues. Natural gas and power trading revenues dropped $550.2 million, including a $339.5 million decrease in new transaction origination compared to second-quarter 2001, Williams said.

Citing the industry’s “mass exodus” from trading in recent months, S&P noted in its report that it “had always been skeptical of the long-term sustainability of trading, particularly at the levels that companies forecast, and, therefore, rarely included significant trading revenues in its credit analyses.”

Ben Schlesinger, president of Maryland-based Schlesinger and Associates, is confident the marketing and trading business will not go away. “I think much of the growth in recent years has been mainly speculative trading where companies were engaged in heavy volumes around arbitraging rather minor differences in hubs and locations, among other things.” However, he said he expects trading volumes to decline by at least 30% this year as about 20% of the people in the industry lose their jobs and energy marketing companies reconfigure their operations mainly around physical assets.

Top 20 North American Gas Marketers
Ranking by Second Quarter 2002 Sales Volume*
(Bcf/d)

*Volumes represent North American physical natural gas sales and exclude financial transactions. **1Q2002 numbers are estimates. Cook Inlet, which was 16th in the first quarter ranking with 4.6 Bcf/d, asked to be excluded from this quarter’s ranking. Sales volumes were provided by company officials. Numbers in ( ) indicates first quarter 2002 ranking.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.