The year 2000 was a banner year for the top players in gasmarketing, with huge increases in gas prices, enormous volatility,continuing growth in sales volumes and major potential for profits.Physical gas sales volumes for the top 20 marketers in NGI’sranking grew 17% to nearly 150 Bcf/d, and profits among the largerplayers came in very strong with companies such as Williamsreporting 2,000% profit increases from energy merchant operations.
However, for many of the smaller players it was a tough year.”The big news here is probably the price pressure the marketershave had to withstand,” said Ben Schlesinger, president ofMaryland-based consulting firm Schlesinger and Associates, whichtracks energy marketing. “These people have price exposure on bothsides of their business: the buy side and sell side. They’veactively sought to hedge these risks, but there’s no question thatthere have been some real stresses in their businesses as a resultof quadrupling gas prices in 2000.”
Significant shuffling has begun to take place and will continue,not just among the leadership but among the whole roster of 500marketing companies, predicted Schlesinger. “For the first time I’mnot sure all 500 will make it because of the price volatility, andthe stresses that it creates on their balance sheets and theirability to meet the different needs of their customers.” If you areon the wrong side of a transaction these days in California, youare going to suffer significantly. It’s not much different at theHenry Hub either, he noted. The harsh reality is that only thestrong will survive.
Ronald J. Barone of UBS Warburg believes the California energycrisis and fears of lack of gas supply and capacity are drivingcustomers to the strongest marketers. “I think that over the longterm it will be a positive for the bigger players, such as Enron.Customers want to go with somebody who is big, has facilities,somebody who is going to guarantee it, somebody who can do riskmanagement for them. Enron is the 800-pound gorilla here.”
Enron has been the 800-pound gorilla in gas marketing for yearsbut there were always plenty of 750-pound gorillas around. Lastyear, however, Enron found a way to trade natural gas over theInternet and at last glance was well over 1,600 pounds, more thandouble the size of its next closest rival gorilla, Duke Energy.Enron sold 23.8 Bcf/d of gas last year compared to only 13.3 Bcf/dthe year prior and compared to the 11.9 Bcf/d sold by Duke Energy,which came in second place in NGI’s ranking of gas marketers byphysical sales volume. It was the largest annual gas sales volumeincrease for Enron in its history.
Believe it or not, 23.8 Bcf/d is the real number, said Enronspokesman Eric Thode. “That includes only wholesale physical gassales volumes for North America.
“Gas and power use was up all across the U.S. for a variety ofreasons and EnronOnline certainly brought a great deal more trafficto Enron than we had ever seen in the past. Whereas someone mayhave done 10 transactions a month with us in the past last yearthey were doing 20.”
Enron completed its first full year in 2000 of deployingEnronOnline, a web-based proprietary energy and commodity tradingsystem, which quickly became the world’s largest web-basede-commerce site. During the year, Enron executed 548,000transactions online with 3,000 customers, totaling $336 billion ofgross value.
The tremendous success of EnronOnline catapulted Enron far abovethe rest of the marketing crowd and led many observers to wonderwhether market concentration was beginning to take place in theindustry. Enron’s 23.8 Bcf/d is pretty large (35%) when comparedwith the 69 Bcf/d that is actually consumed in North America. Butmany observers forget that natural gas is traded multiple times -one marketer trades a given molecule of gas to another marketer andso on.
According to Schlesinger, the so-called “churning factor” isclose to three. “In the past several years when we’ve been pollingmarketers, we got numbers (in 1999) that came to about 60 Tcf. Weadded up all the physical sales by all the marketing companies. Wedid not have 100% response in our survey — some of the mid-sizedand smaller companies didn’t respond. We reasonably extrapolatedthat about 65 Tcf, maybe even 70 Tcf of gas was traded each year inNorth America. Physical consumption in North America is about 25Tcf, so 70 divided by 25 is about 2.8.”
Using that calculation, Enron with 23.8 Bcf/d of physical gassales in 2000 ends up with a not unreasonable 12% market share.When the Federal Trade Commission looks at markets and marketshare, it uses several tools, one of which is theHerschman-Herfindahl Index, a measure of market concentration. It’sthe sum of the squares of the market share of each participant. Ifone company owns the entire 100% of the market, that’s an HHI of10,000.
The Department of Justice has been using 1,800 as a red flagwhen it considers approval of mergers and acquisitions. Accordingto Schlesinger, the total gas industry has an HHI of only about200, way below any suggestion of market concentration.
“It’s so low that it’s unbelievable,” he said. “It’s a highlycompetitive business. Even if one competitor has 12% of the market(HHI of 144) and the next competitor has 6% and on down, itcertainly doesn’t send up any red flags.
“It could be that market concentration in the gas industry hasrisen a bit in 2000, but this information alone would not diminishthe fact that the industry is one of the most competitivebusinesses in the United States. However, there may be someregional issues we have to think about,” he added. “We haven’tlooked at that, so I can’t comment on whether anyone has unduemarket power in a particular region or state, for example.”
There is a snowball effect going on among the top marketers. Theleaders keep getting larger. Volume growth averages at least 10%per year or more. Several factors should fuel future growth. Priceincreases, volatility and uncertainty of supplies are drivingbuyers to the larger marketers, according to both Schlesinger andBarone. Online trading has become a new springboard for additionalgrowth by allowing greater efficiency and many more trades to takeplace.
Schlesinger said he believes electronic trading was responsiblefor a good part of the 17% increase in total sales volumes lastyear. Enron attributed much of its growth to the online business.
According to many observers, online trading still has plenty ofroom to grow. “We certainly think it could continue to grow, nodoubt,” said Enron’s Thode. “I don’t know that we would necessarilysay at that rate.”
Altra Energy CEO Paul Bourke believes about 30% of all gastrading now takes place over the Internet. Bourke said Altra had8,000 natural gas trades on its system in December.
However, Barone predicts there eventually will be a slowdown ingas marketing growth in the United States as international energymarkets grab the attention of many marketers. “International shouldpick up the slack and contribute increasingly to the bottom line,”he said. Enron’s international natural gas sales volumes grew 131%in contrast to the 80% growth in North American gas sales.
Barone also said he expects the current market situation and thecontinued interest in service, supply and commodity versatility tocontinue driving marketing companies together. “I think size, scopeand scale are incredibly significant.”
Only one of the top 20 major marketers last year resulted fromthe combination of two separate predecessors: Axia, which grew outof the combination of Koch Energy and Entergy. The rest of thegroup achieved its growth without major acquisitions or mergers.
Thirteen out of the 20 top marketers showed double- ortriple-digit volume growth with only two companies in the minuscolumn. PG&E had the largest volume deterioration of any of thelarge marketers with a 40.1% decline in annual volumes and a 42%decline in quarterly volumes. PG&E went through a significantreorganization last year. The move of its National Energy Group(NEG) to Bethesda, MD, from Houston, had the greatest impact on itstrading activity. But the company also sold its energy servicesbusiness and its Texas gas transmission assets among other changes.”It really slowed down our trading [and] a large number of peoplestayed behind in Houston,” said company spokesman Patrick Hurston.At the time of the move, the company estimated about half, or 100,would make the move. Hurston wouldn’t say how many actually madethe trip, but the company is still actively hiring. TransCanada,which also underwent a massive reorganization last year, was theother company in the minus column with a 3% decline in salesvolume.
The remainder of the group experienced large increases involumes: Enron at 80%, Duke with 13% growth, Sempra with 53%, BPAmoco with 56% growth, AEP with a 42% volume increase, and Mirantand Reliant with 28% growth.
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