Some natural gas insiders are cautiously optimistic that the market ultimately will deal effectively with the current challenges it faces and new players eventually will fill the gap left by the former merchant energy “titans,” according to a recent study conducted by R. J. Rudden Associates Inc.
“The competitive natural gas markets that have evolved over two decades of deregulation have proven remarkably adaptive and resilient to market stresses,” the consulting firm said. “The past two years are no exception. With the exit of the once ubiquitous mega-marketers (e.g., Enron, et al.), the basic composition and structure of the wholesale natural gas market has changed dramatically, and cracks in the industry foundation have become evident.”
Rudden said it undertook the survey to aid the industry in better understanding the scope of the natural gas supply challenges facing it in this new market. In addition to the surveys, Rudden also conducted telephone interviews.
When Enron was still king, local distribution companies (LDC) relied on the expertise of third-party marketers to help offset risk and manage gas supply portfolios. The marketers were tasked with providing a wide range of gas supply planning, transportation, risk management and acquisition services for the LDCs. Rudden said it was interested to determine if, and to what extent, there has been decline in the use or availability of third-party services and products, as a result of the demise of the mega-marketers, or if there has been a decline in perceived reliability.
Almost two-thirds of the respondents said that adverse effects on gas supply reliability were not a concern. However, it was a concern of 27% of the respondents. “While 27% is not high, per se, this statistic suggests that a significant degree of pessimism remains in an industry that has always had an excellent record of reliable transportation, distribution and delivery service,” Rudden said.
The survey indicated that one of the greatest concerns among respondents is the reduction in the number of third-party entities and the confusion in the market that has resulted, and will continue to result, in adverse effects on market liquidity and price volatility, as well as increases in corporate financial risk (although to a somewhat lesser degree).
In addition, respondents indicated that significantly fewer LDCs are using third-party services today than previously. In 2000 and 2001, approximately 55% of the respondents used third parties either “substantially” or “somewhat.” By the end of 2002, however, only 40% used outside services. Almost 73% of the gas supply personnel surveyed felt that the current state of the marketing and trading sector of the gas industry will require them to spend considerably more time in the management of gas supply acquisition.
“New players are stepping in to markets abandoned by the mega-marketers,” Rudden said. “However, slightly more than half of the respondents believed that these new players would not be effective until after 2003, and 9% believed that the new players wouldn’t be effective until after 2004.”
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