Top North American Gas Marketers :
Ranking by 2000 Sales Volume
Ranking by Fourth Quarter 2000 Sales Volume

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 in their energy merchantsegments.

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.

Enron catapulted itself to the next level with the help of itshandy new tool, EnronOnline, its web-based proprietary energy andcommodity trading system that now handles about 3,000 mainlynatural gas transactions each day. In 2000, Enron completed itsfirst full year of deploying EnronOnline, which quickly became theworld’s largest web-based e-commerce site. During the year, Enronexecuted 548,000 transactions online with 3,000 customers, totaling$336 billion of gross value.

The tremendous success of EnronOnline led many observers towonder whether market concentration was beginning to take place inthe industry. When you look at Enron’s massive increase inwholesale transactions you have to wonder about that concentration.Enron’s 23.8 Bcf/d is pretty large (35%) when compared with the 69Bcf/d that is actually consumed in North America. But you have tofactor in multiple trades — one marketer trades a given moleculeof gas to another marketer and so on. According to Schlesinger, theso-called “churning factor” is close to three.

“In the past several years when we’ve been polling marketers, wegot numbers (in 1999) that came to about 60 Tcf. We added up allthe physical sales by all the marketing companies. We did not have100% response in our survey — some of the mid-sized and smallercompanies didn’t respond. We reasonably extrapolated that about 65Tcf, maybe even 70 Tcf of gas was traded each year in NorthAmerica. Physical consumption in North America is about 25 Tcf so70 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. It’s a highly competitivebusiness. Even if one competitor has 12% of the market (HHI of 144)and the next competitor has 6% and on down, it certainly doesn’tsend up any red flags,” he said. “It could be that marketconcentration in the gas industry has risen a bit in 2000, but thisinformation alone would not diminish the fact that the industry isone of the most competitive businesses in the United States.However, there may be some regional issues we have to think about,”he added. “We haven’t looked at that, so I can’t comment on whetheranyone has undue market power in a particular region or state, forexample.”

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 the 17% increase in volumes. Enron attributed muchof its growth to the online business.

According to some observers, online trading still has plenty ofroom to grow. Altra Energy CEO Paul Bourke believes about 30% ofall gas trading now takes place over the Internet. Bourke saidAltra had 8,000 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. Barone also 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 94%, Duke with 15% growth, Sempra with 51% and BPAmoco with 100% growth.

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