Enron’s Skilling foresees breakdown of integrated energy firms

HOUSTON, Texas, Nov. 29, 2000–The president of the largest U.S. gas and power trading company Wednesday criticized independent power producers who are buying natural gas reserves and predicted “the collapse and demise” of large integrated energy companies.

For independent power producers to buy gas reserves “makes no sense at all,” Enron Corp. Pres. Jeffrey Skilling said at the Arthur Andersen annual energy symposium. “They are reintegrating. I don’t get it. Why not hedge it in the market.”

As “interaction” costs plummet and prices become more transparent, Skilling said, vertically integrated companies will begin to shatter. Instead of consolidation into bigger companies, he predicted a disintegration into “hundreds” and “thousands” of little companies linked together by communication.

Interaction�including the movement of information�has represented about half the cost of production up to now. But these costs are collapsing, Skilling said, thanks to advances in technology, including communication, and deregulation. To package gas to supply a power plant once took 2-3 years. Today, it can be done in less than a second on EnronOnline, Skilling said.

As each stage of production become more competitive in the future, Skilling said, no company will be able to excel equally in exploration and production, transportation, or refining and marketing.

Once they have completed the consolidation process, companies such as Exxon Mobil, BP, and national companies are “going to have to start thinking of fragmenting those companies,” said Skilling. He said much of the industry is overcapitalized, making it difficult to earn a compensatory rate of return on hard assets.

“We are just getting started on this,” he said, in a process that could last a decade.

Skilling said 80% of Enron’s earnings are generated by businesses that did not exist in 1990. He said the company’s energy service business has $16 billion in contracts and is growing 100%/year. In bandwidth, a business the company entered about a year ago, Skilling said the goal is to become the largest buyer and seller.

At a press conference, Skilling said the company is entertaining the idea of building a coal or gas-fired plant in Japan but has yet to select a site. Very high electric power prices and a deregulation make Japan a “very interesting market,” he explained.

Big gas price differentials among regions of the U.S., especially in California, are indicative of a supply/demand imbalance. “People will see that and build pipes,” he said. “We absolutely see an opportunity.”

Skilling said $6/Mcf gas is a “little high” and could begin to dampen demand. But $4/Mcf will stimulate LNG shipments into the U.S..