Enron Ascending

Part IVJeff Skilling

 

Introduction

Enron’s breakout in the early 1990s centered on natural gas commoditization. Enron Gas Marketing (EGM), renamed Enron Gas Services (EGS) in 1991, was the locus for turning the power-generation market from coal to gas as part of Enron’s quest to become the world’s first natural gas major. This bold vision, which had deep public policy implications (via environmentalism), began with gas demand but quickly went to supply in order to allow end users to get their preferred product.

The EGM/EGS heyday marked a high point for the natural gas industry. Other marketers, the most prominent being the U.S. Natural Gas Clearinghouse (later NGC, then Dynegy), also sprang up in response to the business opportunity created from mandatory open-access (MOA) rules promulgated by the Federal Energy Regulatory Commission (FERC).

By the late 1980s, EGM was supplementing its short-term (spot) sales with multimonth and multiyear contracts. (The large capital requirements of the industry—estimated by Enron to be $25 per Mcf per year from exploration and production to marketing and transmission to power generation—required price certainty under long-term contracts.) In the early 1990s, EGS created a macromarket in gas products. The old days, when one company’s gas would literally flow point to point, gave way to network economies and financial (derivatives) trading.

Between 1990 and 1993, Enron’s burgeoning natural gas merchant function would expend $60 million on ...