As many of you may know, we are in the process of conducting research into the impacts of the recent and ongoing market shifts on companies participating in the evolving commodity markets. We received very good response so far and a preliminary review of the data is providing some interesting, albeit, early insights into the current state of the markets.

As one might expect with the recent loss of the banks and other trading firms, liquidity is being impacted. However, so far, the data indicate the impact may be larger than some had anticipated. Again, though the results are still coming in, the trend is clear…

We are continuing to collect data for what will be a very interesting and illuminating study of the market. If your organization is active the in energy commodity markets and you have the opportunity to participate, please click below. It should only take 5 to 10 minutes to complete the survey and your responses will be kept confidential.

www.utilipoint.com/2/Commodities2008/

An article in the Telegraph.co.uk paints a disturbing picture of the scientific bodies tasked with monitoring global temperatures and advance of “global warming”. The article, found here, points out some very serious flaws with a recent release from NASA’s Goddard Institute for Space Studies (GISS) in which they declared that this most recent October was the hottest on record. The only problem was that just about every geographic region in the world was reporting lower than normal temperatures and, in some cases, record snowfall. Ultimately, it took a couple of “non-official” websites to sort out the mystery of the obviously incongruent data. Seems the GISS model repeated September temperature data from Russia in what should have been obvious mistake. It appears that Dr. James Hansen, the head of GISS and a close ally of Al Gore, was more than willing to accept an obviously ridiculous result from his model as long as it supported his case.

As the Telegraph article points out…A GISS spokesman lamely explained that the reason for the error in the Russian figures was that they were obtained from another body, and that GISS did not have resources to exercise proper quality control over the data it was supplied with. This is an astonishing admission: the figures published by Dr Hansen’s institute are not only one of the four data sets that the UN’s Intergovernmental Panel on Climate Change (IPCC) relies on to promote its case for global warming, but they are the most widely quoted, since they consistently show higher temperatures than the others.

Spam, the “potted meat product” of choice for survivalists everywhere is apparently in such demand that its maker, Hormel, is having a hard time producing enough.

I guess I’m going to be forced to load up on Vienna Sausages when stocking my own bunker. Apparently you can still get other “potted meats”, such as Underwood Deviled Ham Spread, but having been forced to eat it as child (including as an ingredient in grilled cheese sandwiches), I think I would rather join my dog in eating rocks. I haven’t had that stuff in more than 30 years, but I swear I can still taste it.

I had the opportunity to meet with the SunGard Energy executive team yesterday to get an update on their product strategy and development progress.

While I think SunGard would be the first to acknowledge past difficulties in reconciling a wide and sometimes conflicting product line, what I saw yesterday was an organization that’s operating in lockstep internally and has been executing on a broad strategy to better position their product offerings. Though I’m not at liberty to disclose too much ahead of their announcements planned over the next couple of months, I will say that they have made substantial progress on their previously announced plans to fully integrate their various individual products into a comprehensive solution for the multi-commodity, physical and financial, wholesale energy markets. Keep your eyes on SunGard Energy…

It seemed that with their acquisition by ICE, Yellow Jacket had gone very quiet, almost dormant, other than their weather derivatives business. However, this morning, they’ve issued a new press release detailing a new product, YJ Block, which they describe as “an automated block-trade function that supports broker execution and submission of cleared over-the-counter (OTC) natural gas and power trades, as well as ICE WTI and ICE Brent Crude Oil futures blocks.”

According to the press release…

“YJ Block leverages YellowJacket’s instant messaging and real-time data platform already relied upon by more than 150 commercial trading and brokerage firms. This new patent-pending feature helps automate broker negotiation of complex trade strategies by removing the need to enter, verify and submit multiple trade tickets for one transaction.
“YJ Block is specifically designed to create efficiencies for natural gas, power and oil brokers in the options market,” said Jacob Pechenik, Chief Executive Officer of YellowJacket. “The ability to submit customer trades for clearing automatically to back-office systems with a single click allows brokers to spend more time on transactions rather than manual processing.”
YJ Block is currently used by three OTC brokers following a successful beta test. During the initial rollout, YJ Block reduced costly errors by approximately 75% while reducing entry time three-fold. Additional benefits include:
– One-click submission to ICE’s block trade facility, ICEBlock, for all off-exchange negotiated deals, regardless of the number of legs. Typical off-exchange block trades require the submission of each individual leg for clearing;
– Model-driven delta suggestion and leg premium allocation, leading to fewer deals broken while in delta negotiation;
– In addition to more accurate calculation of premium, YJ Block enables faster deal submission and less paperwork for brokers and the back office;
– Straight-through processing of executed trades directly to broker and customer back-offices, replacing previously manual trade processing;
– Fewer costly errors and trade busts; and,
– Real-time risk management for traders, compared to delayed or end-of-day trade entry, reducing operational costs and multiple ticket entry for brokers and traders.
YJ Block features free real-time front month Henry Hub and ICE WTI Crude futures prices. ICE is offering additional broker rebates on natural gas trades submitted for clearing via YJ Block. More products and enhancements will be added to YJ Block in 2009.”

It’s encouraging to see that ICE is pushing ahead with Yellow Jacket’s technology. However, I still hope to see YJ expand their IM-based trading tools into the wider peer-to-peer physical OTC natural gas and power markets, allowing physical traders to automate and integrate IM-based trades between their industry trading partners. Unfortunately, given that doing so may pull some trades off the ICE platform, I don’t think it’s going to be a priority.

Still for broker executed and cleared options trades, it looks like YJ’s technology is being put to good use.

A couple of weeks ago, my associate Gary Vasey and I were in Geneva to attend EMart, the energy trading show. We stopped by one of the local bistros for lunch and were soon joined in the restaurant by an elderly couple and their friend. They all sat together at a table next to ours, ordered their meal and coffee (with an extra saucer) and proceeded to enjoy a lovely afternoon respite….

Now, I don’t consider myself to be a germaphobe, but dogs don’t wear pants.

Speaking of dogs…funny story…

The younger of our two black labs has, just this weekend, decided that rocks make good eating. The only problem is that they clearly don’t make good digesting. Sometime in the wee hours of this morning, she started firing these golf ball sized rocks out of her “hind quarters” like a canine mortar, coating her crate and the surrounding furniture, walls, floors and rugs with unspeakable substances. Despite the valiant hours-long efforts of my dear wife to clean and disinfect the area, our house may be a total loss, leaving burning it to the ground as our only option.

Prior to drop off at the vet this morning, we’ve scored 3 large rocks and seashell. No telling what else is in there.

Quorum Business Solutions, better known as Quorum, is clearly a leader in the upstream oil and gas space. Their TIPS gas plant accounting system has been a mainstay of the marketplace for years. Their products covering land management, division order management, production accounting and other E&P activities have been extremely successful and have fueled tremendous growth for the company over the last decade.

Several years ago they also entered into the ETRM market with their gas marketing application Quorum Gas Marketing. After a flurry of sales, they’d gone pretty quite as far as the product is concerned. However, a couple of weeks ago, they announced a new sale of Quorum Gas Marketing to Mustang Fuel Marketing, an Oklahoma based company involved in gas and oil exploration and production, natural gas gathering and processing, and natural gas marketing.

Does this signal a resurgent push for the product and increased competition in the E&P ETRM market?

SunGard Consulting Services is presenting a webinar on “Evolving to a Single, Timely & Accurate Source of Commodities Market Data”

If multiple channels of market data, and their reconiliation, are overwhelming your organization, you should check it out. It will be next Wednesday, November 12th, 2008 at 2-3 pm EST.

For more information, click here.

The election of Barack Obama as the 44th President of the US is clearly a historic achievement and one well deserved as he certainly ran the better campaign.

However, unless you are invested in a favored alternative energy technology like wind or solar, Obama’s election does not bode well for the energy industry. He has not been shy about voicing his views and stating his proposals to “reshape” America’s energy future. Unfortunately, the plans that he’s proposed, if fully enacted, would most likely destroy any hope that America could economically transition to that future.

Amongst his priorities are a return of the windfall profits tax (which will lead to significantly reduced oil production in the US), reinstating the moratorium on offshore drilling, and enacting the most aggressive cap and trade program in the world that would, in his estimation, bankrupt coal-fired generators, not to mention potentially create hyper-inflation as the “skyrocketing” cost of energy ripples throughout the economy, impacting everything from bread to bulldozers. And, despite his push to kill coal as our primary source for electric power, he’s also stated that he’s not a fan of nuclear power and wouldn’t support its expanded use unless new technology can addresses “safety and environmental concerns”.

Should he have the political support in congress to enact his agenda (which, without a constituent uprising, he does), the “old” energy industry in the US is going to suffer greatly. However, the real impact will be on the average citizen who has just recently started to see relief from record gasoline prices. In a couple of years, we are very likely to be nostalgic for the good ol’ days of the summer of 2008.

UtiliPoint International is conducting research to examine the impacts of the recent and ongoing market shifts on companies participating in evolving commodity markets, and we would very much appreciate your input.

To participate in this survey, please simply click on the link below and complete the questions online. The process will likely take around 5 to 10 minutes.

In return for participating in this survey, UtiliPoint will provide respondents with a management summary of the results of the survey when completed. UtiliPoint appreciates your contributing to the industry’s understanding of this important area.

All responses will be kept strictly confidential. To begin taking the brief appraisal, simply click on the following web link:

http://www.utilipoint.com/2/Commodities2008/

If you have any questions, please contact Gary M. Vasey, Ph.D in Europe at +42 0533 433 822 or gvasey@utilipoint.com or Patrick Reames in the U.S. at 713.917.6731 or preames@utilipoint.com

For those that know me, it will come as no surprise that based on current polling data, I’m probably going to be pretty disappointed with the outcome of the election tomorrow. I’ve tried to stay out of the political fray on this blog as much as possible. However, with the quotes by Sen. Obama that have surfaced over the last couple of days (including such things as “…more aggressive (cap and trade) than anyone else’s…”, “…somebody wants to build a coal power plant, they can, but it will bankrupt them…”, and “…under my plan of a cap and trade system, electricity rates would necessarily skyrocket…”), I’m growing increasingly concerned about whether the economy can withstand what’s about to happen over the next several years.

Pricing coal out of the market, potentially resulting in the shutdown of a whole lot of coal fired generators, and pounding consumers with “skyrocketing” costs for energy, and everything energy related, including gasoline and anything produced with any energy product (I guess that would be everything), doesn’t seem to be a recipe for economic success in a period of recession.

Of course, we do have a congress that has signed their willingness to rebate another round of $500 checks to help stimulate the economy…hmmm. Maybe that will go to partially offset the “skyrocketing” energy prices, at least for those that qualify for such a rebate. Or, maybe it will go to help offset the higher taxes that will be paid in the very near future under the plan that originated by a guy in green tights somewhere in the Sherwood Forest…Oh, wait, if you’re one of those paying the higher taxes to fund “tax reductions” to those that don’t pay taxes, you’re probably too rich to qualify for the $500 dollar check…Oh well, I guess you can just pull the money to pay for the higher energy costs out of your 401k…Darn it, I forgot that my 401k has taken a 40% hit in the last few weeks and that going forward, dividends are going to be taxed and capital gains taxes are going up, and there’s always that nasty early withdrawal penality…I’ll guess I’ll just have to cut back on extravagances, like contributing to my 401k and trying to accrue any other type of savings…yep, running up debt on credit cards may be the answer…and I can always work another job. I wonder if the new Civilian National Security Force will have any part-time openings.

Yeah, I’m glad the election is just about over. It’s always better to just get on with it, rather than sit around and worry about it.

This was forwarded to me by blog reader Sean…

Suppose that every day, ten men go out for beer, and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ‘Since you are all such good customers,’ he said, ‘I’m going to reduce the cost of your daily beer by $20. ‘Drinks for the ten now cost just $80.’ The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share’?

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

‘I only got a dollar out of the $20,’ declared the sixth man. He pointed to the tenth man, ‘but he got $10!’

‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times as much as I!’

‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’

‘Wait a minute,’ yelled the first four men in unison… ‘We didn’t get anything at all. The system exploits the poor!’

The nine men surrounded the tenth man and beat him up. The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

Credited to:
David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

While Triple Point has recently released a raft of announcements noting multiple sales of products derived from their acquisition of INSSINC earlier this year; according to the rumor mill, they are not talking about what would be the largest license deal in the history of the ETRM/CTRM market.

According to multiple sources, the company has closed a deal with Cargill to supply Commodity XL to their global trading operations in a transaction that’s valued somewhere in the neighborhood of $20 to $30 million dollars in licenses alone. Again, while Triple Point isn’t talking (”we don’t comment on rumors”), it’s been known for some time that Cargill has been looking to upgrade their systems and has been talking to multiple vendors. If the rumor is true, and all indications are that it is, the total deal size could be north of $60 million with services and support. Given Cargill’s global reach and wide portfolio of traded commodities (including agricultural and energy), this deal would certainly be further validation of Triple Point’s strategy of reaching beyond just the energy space and focusing on the wider commodities markets.

In previous conversations with the folks at Triple Point, they’ve said that they’re not seeing any slowdown in the markets, despite signs of distress on the part of some of the other vendors, including a significant layoff last week at one of their competitors. It clearly doesn’t take many deals like this one to make for a very good year.

Russia, Iran and Qatar are moving to create an OPEC-like consortium for natural gas. While the Qatar and Russian representatives say the “gas triorka” is not intended to set global prices for natural gas, the Iranian representative to the group, Oil Minister Gholamhossein Nozari, has said, “There is a demand to form this gas OPEC and there is a consensus to set up gas OPEC”, with the obvious intention of trying to control global natural gas prices in a manner similar to the oil group.

The three countries control more than half the world’s reserves of natural gas and Russia is Europe’s biggest supplier of imported gas. Additionally, Qatar is the fourth largest exporter of LNG and Russia is continuing to build out new LNG export facilities in order to increase their capabilities. Iran has recently backed off large development of LNG facilities due to economic sanctions; however, they are working with the Russian gas giant, Gazprom, to expand their export capabilities via pipeline.

Europe clearly has the most to lose if a true market cartel in natural gas develops. Russia currently supplies about a quarter of Europe’s gas today and is projected to supply about a third of the continent’s needs within the next decade. Additionally, while the Middle East countries currently export little LNG to Europe, those exports are expected to rise as gas demand increases and Europe’s native production declines. Given their dependence on imported gas, Europe has tremendous exposure should such a cartel wish to apply economic or political pressure.

The US is currently less exposed. With the exception of long term purchase agreements, LNG imports into the US are basically dead and will remain so as long as North American gas prices remain comparatively low to those of the rest of the world (where longterm crude indexed contracts keep LNG prices fairly high). However, should the US consumption require significant new LNG supplies in the future (as many forecasts indicate), a gas cartel of made up of the likes of Russia and Iran, could be very bad news.

UtiliPoint International is conducting research to examine the impacts of the recent and ongoing market shifts on companies participating in evolving commodity markets, particularly as they apply to the physical players in the market. Additionally, we’re looking at the impacts to the ETRM/CTRM software used to manage transactions in this volatile environment.

Based upon the early responses to our on-line survey, we’re getting some very good insight into a number of emerging issues around risk management, market liquidity, and credit risk management. While we’ve seen a number of terrific responses to date, we want to make sure to include as many firms and traders as possible to ensure the most accurate picture of this very important topic.

So, if you’re with a firm trading energy or commodities, we would really appreciate your taking our on-line survey. For your efforts, we’ll send you a management summary of the final report.

To participate in this survey, please simply click on the link below and complete the questions online. The process will likely take around 5 to 10 minutes. We sincerely appreciate your help in contributing to the industry’s understanding of this important topic.

And remember, all responses will be kept strictly confidential.

To begin taking the brief appraisal, simply click on the following web link: http://www.utilipoint.com/2/Commodities2008/

If you have any questions, please contact Patrick Reames in the U.S. at 713.917.6731 or preames@utilipoint.com; or Gary Vasey in Europe at +42 0533 433 822 or gvasey@utilipoint.com.

Unfortunately, he wasn’t much help…

Good news though - my vacuum broke last night, so at least now not everything sucks.

Allegro just announced a new enhancement to their product offering, one that moves them ahead of the competition in terms of fully integrating the major electronic exchanges (22 exchanges in total) directly into their system. As they say in their press release…

“This latest enhancement of the ExchangeConnect component provides two-way exchange connectivity (view and capture, bid and offer) to 22 derivatives exchanges, including NYMEX, CME, EUREX, ICE, and the Dubai Mercantile Exchange (…). Allegro users benefit from an automated business process incorporating direct market interaction with derivatives exchanges into a single platform. Traders can see real-time market data, submit or cancel market orders, and pull trades - without duplication of effort.”

Allegro has been working with Trading Technologies International, Inc. to bring that company’s capabilities in aggregating exchange data and ability to execute cross exchange trades from a single screen into Allegro ETRM product. Allegro has embedded that technology in their product, creating a seemless environment where traders can view and interact with the markets directly within their ETRM system, reducing the time and effort in required to view multiple screens, analyze multiple scenarios, and create duplicate entries of transactions. Bottom line, it accelerates the traders interaction with the exchanges and in this business, time is truly money.

This is going to be the next “have to have” capability for ETRM systems. Hats off to Allegro - they’ve really raised the bar in the ETRM market space. You can get more info here.

Don’t forget to get signed up for UtiliPoint’s North American Conference being held in The Woodlands this year. The event will be next week, Oct. 16 & 17. We’ve got a great line-up of speakers, including:

- Barry T. Smitherman, Chairman, Public Utility Commission of Texas
- Jeffrey E. Sterba, Chairman & CEO of PNM Resources, Inc.
- Raymond E. Gogel, Vice President-Customer and Enterprise Solutions and Chief Administrative Officer of Xcel Energy
- Donald P. McConnell, Corporate Senior Vice President and President, Battelle Energy Technology
- Peter Hartley, George & Cynthia Mitchell Professor of Economics, James A. Baker III Institute for Public Policy Rice Scholar Academic Director, Shell Center for Sustainability Rice University
- Michael Murphy, Partner, Pillsbury Gobal Sourcing, Pillsbury Winthrop Shaw Pittman LLP

The theme of this years conference is The Smart Utility and Energy Company. While its not on the offical agenda, your humble blogger is rumored to be involved in some sort of a debate over energy policy…

Click here for more info on the conference.

UBS is the latest victim of the ongoing credit crisis. The company announced earlier today that they are shutting down their softs and energy commodity trading groups, sending several hundred traders and support folks to the unemployment line. This shut down is somewhat ironic in that UBS was the company that came in to sweep up what was left of Enron, and now those last remnants are going by the wayside.

I used the term contagion in the title to this piece purposely (and couldn’t resist the allitteration). What we are seeing is truly a contagion - this market is suffering a viral infection that attacks credit. Not only are we seeing financial traders bailing out, we’ve seen solid companies brought to their knees due to credit linkages to failed financial institutions (like Constellation), and we are now experiencing the impacts in commodity pricing. Crude is being driven lower as many trading shops that have held long positions are being forced to prematurely liquidate those positions due to margin calls brought about by their declining credit worthiness. Several market analysts are now pointing to $50/bbl as being the target if this infection continues to spread. What would a hard dive to $50 do to hedge funds, merchant traders, and even producers?

The upcoming vote for the $700 billion bailout will be telling. Even if it passes, it will take time for the impacts to start to take hold. Sure, Wall Street may react positively as raw emotions and frayed nerves start to settle a bit and cash will start to come back into the markets; however, getting the system up and running will take time and time is not on the side of many of these companies. If the bill fails to pass…who knows. Could the Credit Crisis Contagion become the Andromeda Strain?

UtiliPoint IssueAlert
Patrick Reames

Energy Trading and Risk Management (ETRM) software providers have been enjoying considerable success over the last several years. With a market buoyed by higher commodity prices, high levels of volatility, new regulation and reporting requirements, and new market entrants, software vendors have been making some serious hay. These companies have been seeing new records for unit sales and revenues and have struggled to keep up with demand. However, at UtiliPoint, we’ve been projecting that the rapid market expansion, while not necessarily ending, would be slackening as there is only so much growth that’s sustainable over the long term in a market of this type. In our recently released 2008 North American ETRM Market Analysis and Sizing Report, we’ve forecast that slowing, projecting market growth this year to be substantially down from the double digit growth rates of 2006 and 2007. Our forecast has been based upon a number of dampening forces which started emerging in energy commodity markets in the first quarter and have reached a crescendo within the last week. These forces are now hammering many in the energy commodity markets and have started, and will continue, to impact sales of software products servicing those markets.

The Financial Services Crisis is Being Felt in the Physical Energy Markets

The dollar magnitude of the transactions in the energy commodity markets demand that players have ready access to credit, and by extension, a solid balance sheet. Credit is the oxygen that keeps this market alive. Consider a common sized transaction for natural gas: 10,000mmbtu/day for a month. At current market prices, that transaction is worth around $2.25 million. Small trading shops may be buying and selling up to a half of a BCF of gas per day, meaning their exposures will be north of $100million prior to the end of the month settlements. Mid-sized traders, those up to 1 BCF/day, will have exposures measured in the hundreds of millions of dollars, with the largest companies, those trading several BCF/day, having multiples of that. This is not a “cash on the barrelhead” business. These trading companies rely on ready access to quality credit reserves to provide assurance to their trading partners that they can meet their obligations despite any negative market developments. If market players start to doubt the credit worthiness of one of their trading partners, they will stop selling to that company in order to reduce their exposures, leaving that suspect company dead in the water and unable to meet their obligations to the companies they’ve sold product to.

Last week saw the crash of Constellation Energy for this very reason. Despite the fact that Constellation’s energy trading group was successful, generating up to 80% of the parent’s revenues, the markets were increasing uncomfortable with the quality of the firm’s credit due to the failure of Lehman Bros. (who held a less than 6% stake in the company) and the suspect nature of a few banks who were proving relatively modest credit lines to the company. As a result of credit downgrades associated with Lehman’s demise and the questionable credit lines, many of Constellation’s trading partners started to pull back and the company’s stock plunged 45% in a single day. Ultimately Constellation was salvaged via a fire sale to MidAmerican Energy at $26.50/share, less than half its price just 10 days ago.

When Enron collapsed over the period of a few days in Oct. 2000, most companies couldn’t react in time to shield themselves from losses – they had already sold significant volumes to Enron based on credit ratings that were ill-informed and ultimately far too optimistic. These companies, unable to recoup their losses, took significant bad debt write-offs, contributing to the demise of many them. It was only after banking and financial services firms stepped up and into the market did any semblance of confidence return. Not only did these financials enter the markets directly through acquisition of existing trading companies or expansion of their own subsidiary commodity trading groups, they also extended and backed credit lines for other players. The recovery of the energy markets, catalyzed by the entrance of the financial companies, brought the ETRM solutions market out of the doldrums and fueled significant market growth for a number of the larger vendors.

With the market taking several years to emerge from the damage caused by Enron, credit managers have, for good reason, increased their diligence, and in some cases have become hypersensitive when it comes to counter party credit exposures. However, until recently, if a counterparty had one or more solid lines of credit from one of the major banks or financial services companies, credit managers were pretty comfortable with the source and were more willing to extend credit. The source of the credit helped assure them that the transactions were adequately backstopped in case something bad happened.
However, the sub-prime lending crisis has changed all that. With 3 of the 5 largest financial services companies imploding and with major banks, like IndyMac, going under, there are few if any golden backstops these days. Credit managers are seeing the quality of their counterparties’ credit being impacted as firms such as Bear Sterns, Lehman Brothers and Merrill Lynch have either gone under or have had to be rescued by larger entities.

Even for those energy trading companies that have been able to maintain sold credit, those credit lines are being exhausted more quickly as commodity prices have taken off. Simply put – a doubling of the price of a commodity will double the credit exposure for a same sized transaction. Credit has become a limiting factor for growth for many companies as commodity prices have continued their steady rise over the last 24 months.

With credit being impacted by the ongoing financial market crisis and higher commodity prices, the oxygen is clearly being sucked out of this market and ETRM system providers are starting to feel the impact.

Budgets have Absorbed Higher Prices

Producers have always been a steady market for ETRM vendors, making up 10 to 20 percent or more of the system sales in any given year. With the run-up in commodity prices, many energy producers generated profits beyond their budgetary projections. This unexpected influx of cash enabled many to upgrade their systems earlier than they may have otherwise; improving their transaction management capabilities at a time they needed it the most.

Unfortunately, this accelerated replacement cycle in the producer space will create some hangovers for vendors. As UtiliPoint’s research shows that the normal replacement cycle for these systems averages 5 to 6 years, pulling many of these future deals forward will take some license sales opportunities out of the market for the next couple of years. For many of the energy companies that had stayed with their legacy systems through the period of rapidly escalating prices, the recent slump in commodity prices has them rethinking near-term system purchase plans. With budgets developed last year during the upswing in the market, the recent sell-offs in commodities are forcing a number of companies to re-examine and potentially delay planned expenditures for IT infrastructure.

Some Positives

Despite many troubling developments in the market, there are some positive trends that should provide opportunity for ETRM system providers.

With crude having traded close to $150/bbl recently and still hovering around $100/bbl, industrial scale consumers of crude-based products continue to adopt aggressive price hedging strategies. UtiliPoint is anticipating that these industrial-scale consumers, including transportation companies, railroads, and airlines, will continue to seek out ETRM system capabilities to better manage their energy purchases and hedging strategies.

We also expect to see continued growth in the market for systems servicing non-energy buyers, such as agricultural product producers and traders. This market has been emerging for the last 18 months and should continue to drive new sales for the vendors that have capabilities in the space.

An additional bright spot in the market is the widening acceptance of ASP or “Software as a Service” (SaaS) solutions. These solutions, delivered over the web, have been selling well in the last couple of year as they enable smaller market participants, such as municipals, to acquire ETRM capabilities at a lower price and with less implementation effort. Given their appeal to the lower tiers of the market (a segment likely to be lest affected by the credit crisis), we believe the ASP/SaaS software vendors will continue to see success and enjoy good market growth.

Some Vendors More Impacted than Others

2006 and 2007 saw solid growth for most of the solutions providers – the rising tide lifting all boats. 2008 and 2009 don’t appear to offer the same widespread opportunities – there will be winners, but there will be more losers than in past years. Vendors that have been successful in the industrial, fuels, and non-energy markets (such as Solarc, Triple Point and Allegro) should continue to see success. Additionally, companies like OATI, OilSpace and others that can service the ASP/SaaS markets will also continue to sell products. Still, there is little doubt that all vendors will feel the impact of the turmoil in the markets, although some much more than others.