Mid-American Energy just announced that they will acquire Constellation Energy for $26.50/share. Constellation, which had traded at almost $108/share in January of this year, had been seeking a life-line for several days as its credit was being downgraded. This is a company that had revenues of around $8 billion in wholesale power trading in just the first half of this year, yet because of the banking crisis, was perceived by the market to be at risk because they were so large and appeared to be dependent on multiple lines of credit from various banks that are either wobbly or are going under.

Again, keep in mind that Constellation was a strong company. Its trading business was fundamentally solid and they were making money. Yet, because they were so large and relied on various lines of credit to support their operations, just like most every large business in this country, the perception developed that they were at risk. And, when it comes to credit exposure in this market of hypersensitive nerves and sweaty palms, perception is everything. If your counter parties think you’re at risk (even if you’re not), you’re going to have a hard time maintaining your business. These trading partners will pull back and want to limit their exposure to you. You become a trading leper and you can’t stay in business. Perception of risk will always create risk - it is truely a self-fulfilling prophecy.

With the failure of Lehman Bros., their energy trading group, Eagle Energy, is facing its own meltdown. Eagle, which was bought by Lehman in 2007, is being pounded by the fallout of having their credit tied to that of Lehman. Those that are selling gas to Eagle are canceling deals and those that are buying are left looking for other sources.

For a while, Tenaska Energy was facing a similar fate, as their trading arm, Tenaska Marketing Ventures (TMV) is backed by failing insurance giant American International Group (AIG), who picked up 50% of the gas trader/marketer last year. Fortunately for Tenaska, and those that do business with the company, the Feds stepped-in to save AIG, advancing about $85 billion in loans to keep the global company from going belly-up.

Also this week, Bank of America agreed to bail out Merrill Lynch, taking over their business in a $50 billion stock transaction. In the process, BofA gets Merrill’s energy trading group, formally known as Entergy-Koch. Interestingly enough, BofA has already taken a bath in energy trading, having lost a bunch of money on wrong sided hedges in crude and jet fuel, and most recently, with the collapse of Tulsa based SemGroup LP, a company that lost $3.2 billion due to poor decision making in the energy futures markets and was heavy into BofA for commercial credit.

Don’t think for a second this is the end of the turmoil in the energy markets brought about by the movement of financial services companies into energy commodity trading. It’s not that these companies don’t know what they are doing when it comes to energy trading (in fact, some of the most profitable divisions for a few of them have been their energy trading operations). The problem is that these companies have brought an entirely new counter party credit risk profile with them. These financial companies have staked huge positions in both the physical and financial energy commodity space, the “traditional” traders that do business with them now have to contend with events that have nothing to do with energy market fundamentals when calculating risk exposures. They now have to deal with issues related to junk mortgages, bond trading, and exposures of insurance companies to storm losses. Financial services and hedge funds carry with them an entirely new load of baggage that, prior to the last couple of years, most credit managers never really had to consider.

OPEC declared yesterday that crude prices were too low and that they were going to cut production to ensure that their various despotic leaders could continue to exercise their favorite hobbies of driving Bentley’s and oppressing their citizens. Their flawed logic maintains that cutting production would drive up prices and produce more revenue - this despite the fact that prices have fallen in large part due to increasing inventories driven up by a decline in consumption as folks drive less and global economies start to slow down. Pushing crude prices up will only exacerbate their demand side problem.

Setting that aside, most analysts don’t believe it the cuts will ever materialize given the fact that the largest players we’re talking about here include countries like Venezuela and Iran. OPEC has become less a cartel and more a group of clowns sitting around playing liars poker, each trying to convince the others that they are cutting all the production they can and that everyone else needs to take a larger share of the cuts.

The Saudis are the only ones showing real business acumen. They have declared that they are not going along with what would have been an otherwise unanimous decision. In announcing that "Saudi Arabia will meet the market's demand. We will see what the market requires and we will not leave a customer without oil", the Saudi’s not only look like the good guys, they are also helping to limit damage to global economies and ensuring that our heroin-like addiction continues - they’re the street corner pusher with the heart of gold. They’re showing that they are clearly the brains behind the operation.

The markets are clearly unimpressed with the Saudi-less OPEC bluster, as crude is trading lower this morning and nearing the $100/bbl mark.

For the socially backward and politically aggressive third world countries that make up the bulk of OPEC membership, declining revenues equal social unrest and a threat to their leaders’ continued existence. These guys can’t afford a decline in cash flow. While siphoning off huge amounts of cash to fill bank accounts in Geneva, these leaders are spending beyond their meaning on military equipment that their undereducated armed forces can’t even maintain, while doling out just enough money to keep their citizens complacent despite the economic disasters brought on by failed socialist economic policies. It’s clearly quite possible that Hugo Chavez may ultimately find that for him, crude oil really is the devil’s excrement.

Triple Point announced this week that they have signed Sheetz, Inc., “one of the largest gas and convenience store operators in the US with $3.8 billion dollars in annual revenue”. Sheetz bought Triple Point’s Commodity XL for Oil to manage their wholesale gasoline procurement, hedging programs and supply chain logistics. In addition to Commodity XL for Oil, they also picked up the PhysOps ‘Visual Cockpit’ to manage logistical operations, including ships, barges, trucks, railcars and pipelines.

Ospraie Management this morning announced that it was shutting down its commodity fund and liquidating after taking a beating in the energy and commodities markets the last couple of months. Their holding lost almost 27% in August and more than 38% since the first of the year. Right now, the fund plans on liquidating and distributing 40% of their assets by the end of the month and another 40% by the end of the year. That leaves about 20% of the investors’ value up in the air.

Don’t think this is going to be the end of dying funds…with the current tightness in the energy and commodities markets, events have a way of getting magnified. Reduced consumption forecasts have the commodities markets down hard in the last several weeks, but supply interruptions or revised forecasts can send it sharply the other way without much notice.

It is probably best to just sit on the sidelines and watch this game be played by others.

A UtiliPoint IssueAlert

Gary M. Vasey, Ph.D., General Manager, Europe and
Patrick Reames, Vice President, Trading & Risk Management

UtiliPoint International, Inc. has amassed a variety of research, data and knowledge regarding Trading & Risk Management (TRM) through proprietary research, extensive industry contacts, on-going analysis and our own analyst’s expertise and experience. But what does this all add up to? How can a company participating in the energy and commodity markets leverage this expertise?

The UtiliPoint TRM Executive Service
UtiliPoint is launching its TRM Executive Service precisely to answer those questions. The TRM Executive Service is designed to provide on call research, analysis and advice to executives of companies engaged in trading & risk management as well as to provide a forum in which industry peer groups can gain knowledge and experience form one another on a variety of issues.

The UtiliPoint TRM Executive Service is a Program designed to maximize the delivery of UtiliPoint’s analysis expertise, proprietary research and consulting services to industry clients in the area of Trading & Risk Management best practices both from a business and a technology perspective. The Program is explicitly designed to provide industry executives with access to proprietary research, analysis and consulting as well as opportunities to discuss and tackle industry issues with peers and UtiliPoint analysts and consultants.

The new UtiliPoint TRM Executive Service is focused on the following areas:

o Trading & Risk Management business process and I.T. best practice and benchmarking.
o Trading & Risk Management software solutions - best practice selection and implementation, vendor and solution comparisons, technology developments, integration, support and landscapes.
o The continued evolution of commodity markets, trading practices and growth and its impacts on Energy Trading & Risk Management practices and processes.
o Ancillary products and services that support the Trading & Risk Management function including weather services, peripheral software applications, electronic trading, deal discovery and more;
o Access to, and the opportunity to participate in semi-annual TRM focused workshops and meetings organized exclusively by UtiliPoint for TRM Executive Service subscribers. The events are held in both North America and Europe and provide participants the opportunity to remain abreast of the latest market and technology trends from a combination of presentations by UtiliPoint and industry experts, and peer level networking.

In short, this program is designed to provide on-going help and assistance around all things trading & risk management.

Benefits
Most often, UtiliPoint are utilized by end user companies on an ad hoc consulting basis. The types of roles that we have delivered have included:

o Half-day pre-selection seminars focused on the vendor and product landscape, the selection process and implementation issues. Often this service is providing an education in the TRM software arena for companies who will soon be investing deeply in a selection program. UtiliPoint helps the end user client by helping them hone in on likely solution and service providers as well ensure an understanding of what is really available in the market. It helps sets expectations correctly and it ensures that the selection team is prepared for many of the common issues associated with TRM selection and implementation projects.
o TRM selection audits that involve UtiliPoint playing an on-going role during the selection process acting as a vendor and service provider independent auditor and adviser. Here the benefit is in having an experienced and knowledgeable extra set of eyes and ears tuned in to the project looking for omissions, errors, best practice and so on. Quite often this role is extended through the actual implementation project itself.
- Current system reviews in which UtiliPoint examines the existing TRM solution against the business requirements today and into the future and makes recommendations regarding likelihood of replacement. Generally, the choice to be made is to find ways to extend the life of the current investment or to undertake a costly replacement effort.
- Business process reviews in which UtiliPoint reviews current business practice against industry best practice and offers alternative ways to conducting the trading and risk management business.
- Point solution reviews and market analysis in which UtiliPoint looks at specific business functions in the trading & risk management area providing advice on possible solution alternatives and issues.

These are just a few examples of where UtiliPoint analysts and consultants get involved with TRM end users. However, the problem is that quite often UtiliPoint is brought in late, after something has gone wrong and our assistance is required in “righting the ship.” While this is undoubtedly good business for UtiliPoint, but it doesn’t exactly leverage our expertise, data and research in the most effective manner for the client.

The TRM Executive Service is designed to provide a more comprehensive, proactive, and on-going link with the firms that rely on having a good insight into the latest trends, developments and issues around TRM in order to ensure that they maximizing their investment in, and use of, their TRM infrastructure . It provides UtiliPoint an ability to stay focused on the needs of each client over a longer period of time, allowing our analysts to anticipate issues and to provide timely briefings, updates and intervention on the client’s behalf. Perhaps more importantly, it allows UtiliPoint to facilitate discussion and peer-to-peer communication around TRM issues.

The process in fact works both ways since the continuous and consistent interaction means UtiliPoint can also stay abreast of emergent industry concerns in the TRM area, catalyzing additional research, and helping establish leading-edge best practices. These results can then be communicated back to the TRM Executive Service client group.

The ETRM Community website and blog will also provide an interactive forum for knowledge management and discussion between UtiliPoint and TRM Executive Service clients. The ETRM website is already a widely popular tool and resource in the industry. Through this website, TRM Executive Service subscriber will have access to the entirety of UtiliPoint’s TRM related reports which as of writing include the following;

o North American Market for ETRM Software - Market Analysis and Sizing, 2008
o Energy and Natural Resource Blog Snapshot Survey Results, 2008
o Results of a Snapshot Survey on Energy & Natural Resources ETF’s, 2008
o European ETRM Integration Survey Results, 2007
o The Use of Weather Data by Energy Companies - Snapshot Survey Results, 2007
o European Markets for Energy Trading, Transaction and Risk Management - Market Sizig and Assessment, 2007
o ETRM Software Implementation Projects - Snapshot Survey Results, 2007
o Cross Border Gas Trading in Europe, 2007
o Benchmarking of European ETRM Software Markets, 2007
o ETRM Vendor Perception Study - North America, 2006
o North American Market for ETRM Software - Market Sizing and Assessment, 2006
o Evaluation and Benchmarking of Natural Gas Software Application Usage in North American Energy Companies, 2005
o Green Trading Markets: How Environmental Financial Markets Work, 2005
o Energy as an Asset Class for Hedge Fund Diversification, 2006
o Evaluation and Benchmarking of Information Technology at North American

Leveraging UtiliPoint
The new TRM Executive Service is designed to ensure technology and business executives at companies engaged in energy commodity trading have the tools and knowledge to remain a pace of a rapidly evolving industry. Given the market’s volatile nature, in terms of prices, supplies, and technology, UtiliPoint has designed this service to ensure that these executives can better anticipate new developments and trends, allowing them to be proactive, and spend less time trying to catch up with the markets.

If you would like to learn more, you can contact Dr. Gary Vasey in Europe at gvasey@utilipoint.com or via phone at +420533433822, or in North America, please contact Patrick Reames at preames@utilipoint.com or via phone at713-917-6731.

With Hurricane Gustav ripping it up in the Caribbean and projected to take aim at either Louisiana or the northwest Texas coast, market analysts are predicting at least a dime to quarter rise in gasoline prices as the storm is forcing evacuations and shut-in of platforms across a large swath of the Gulf. This happens every time a storm starts rattling around in this region. Why? Because the Gulf accounts for more than a quarter of US production and a solid majority of US refining capacity.

One of the tenents of a solid risk management strategy is diversification. In this case, a very reasonable diversification strategy would be extending our production outside of the Gulf and maybe even think about locating some additional refining capacity on either coast, helping to reduce price shocks everytime a storm blows up.

Last week the New York Times, a newspaper not normally considered a big supporter of US oil interests, published a pretty insightful article covering the conundrum faced by the major Western oil companies - falling production during a period of record high prices. As the article points out, most of the world’s oil is not controlled by big Western oil companies; in fact, over the last 30 years, these companies’ share of global production has fallen from over 50% to around 13% this year. The other 87% is controlled by national oil companies, those government owned entities that are much less responsive to the needs of the global markets and much more concerned about their own local interests.

As noted in the article, Western oil companies are being pushed out of many of the most lucrative and promising exploration areas as the state owned entities (SOE’s) and their national leaders are seeking to take a larger slice of the profits and gain more control over an increasingly scarce resource. While that behavior may be understandable and possibly even expected, in most cases these SOE’s are less technologically advanced than western companies and are controlled by political appointees who are, in turn, directed by politicians or dictators - leaders whose primary interest is advancing their own geopolitical goals, not meeting the energy needs of the world.

The Times article puts it this way…

But many energy experts say these "peak oil" theories are misplaced. They say the world is not running out of oil -- rather, the companies that know the most about how to produce oil are running out of places to drill.

"There is still a lot of oil to develop out there, which is why we don't call this geological peak oil, especially in places like Venezuela, Russia, Iran and Iraq," said Arjun Murti, an energy analyst at Goldman Sachs. "What we have now is geopolitical peak oil."

Western companies are far better than most national oil companies at finding and extracting petroleum, experts say. They have developed advanced exploration technologies and can muster significant financing to develop new fields. Many of the world's exporting states, however, have spurned their expertise.

You can read the article in its entirety here.

The 2008 North American Market for Energy Trading, Transaction and Risk Management (ETRM) Software - Market Analysis and Sizing Report

This UtiliPoint study provides the latest analysis of the trends impacting the market for ETRM software in North America, and provides a quantitative analysis of the size of the market for those applications. Included in this report are:

1. Market developments and results from 2006 (the time of the last UtiliPoint study on the market size for ETRM software) through the end of year 2007, including:

a. An analysis of the commodity types driving new product sales
b. Energy and software trends impacting the market for ETRM products
c. Estimates of the size of the ETRM products market for both years, including new license sales, incremental license sales (sales to existing customers), associated support and maintenance, and services associated with implementation of new ETRM systems

2. A review of 2008 year to date activity and an examination of market trends impacting current and future sales of ETRM products and solutions

3. A review of the 2008 Market Size for ETRM software, including:

a. New license sales, incremental license sales, associated support and maintenance revenues, and services associated with implementation of new ETRM systems
b. Estimated total market size for 2008, 2009 and 2010
c. Detailed market size information for 2008 including:
i. “Virgin” vs. Replacement market size
ii. ASP or SaaS ETRM market size
iii. Market size by commodity
iv. Market size by front-, mid- and back-office functions
v. Market by Market Segment

4. Discussion of market dynamics of each of the market segments

5. Discussion of market requirements/functionality

6. Review of UtiliPoint’s sizing methodology and process

This 36 page report is the most comprehensive examination of the North American market for ETRM products available, and is critical information for investors, software firms, consulting organizations and others to support investment decisions and guide the allocation of resources (both capital and human).

The report is available for purchase online here.

This study was sponsored by The Structure Group and RiskAdvisory (A Division of SAS).

It’s been a while since I’ve had a chance to update the ol’ blog. I’ve had my head down, trying to finish up the 2008 North American ETRM Market Sizing Report. As I’m getting darn close to getting it done, I wanted to get caught up on a few things.

First Solarc recently announced that they had closed a deal with Buckeye Energy Services to use RightAngle to manage their refined products business. For those that aren’t familiar with Buckeye Energy Services, they are a sub of Buckeye Partners, LP. The company owns more than 5,400 miles of pipeline and operates another 2,200 miles for other companies. They also own 63 refined petroleum products terminals. Not bad for a company formed just last year. You can see the press release here.

Triple Point, on the same day, announced that they had signed Klesch & Company Limited, “a London-based investment firm focusing on control equity investments across a broad spectrum of industries”. Klesch will use Triple Point’s Commodity XL and Visual Cockpit to manage its commodity and risk operations for natural gas, oil and metals. A little about Klesch…”Founded in 1990, Klesch & Company has made investments valued in excess of $14 billion across Europe, the United States and Asia, with acquisitions including businesses from established public companies such as Alcan, AEGON, Deutsche Telekom and Dynegy.” You can read more about it here.

On the rumor front, SunGard Energy has apparently closed a “huge deal” in Europe. While the company is being tight lipped about releasing any information, the deal apparently cuts across several SunGard product families and, if the numbers I hearing are correct, is probably the largest European ETRM deal in recent memory.

Finally, I’ll leave you with this…Mahatma Gandhi, as you know, walked barefoot most of the time, which produced an impressive set of calluses on his feet. He also ate very little which made him rather frail. Given his odd diet, he also suffered from bad breath. He was a…(prepare yourself ’cause this is going to hurt)…super calloused fragile mystic hexed by halitosis.