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The industry journal of energy trading, asset optimization and market intelligence

Friday, February 29, 2008 Volume 11

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Around the Desk

Gas Storage Box Scores & Market Buzz

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Lots of News Around the Desk This Week… Geopolitics owned last week and domestic politics seemed to own this week. That and really high oil and gas prices. And a rogue trader or two. And lousy economic indicators generally. In all, it was a good week to put past us. On the geopolitical risk side of things, we see some movement on the Turkey/Iraq/

PowerMovesThe Second Voyage of the GullibleOriginal market commentary by Dr. Robert Michaels, professor of economics, CalState, Fullerton In the decades after the Russian Revolution, nu-merous American and Eu-ropean writers turned up to see the emerging miracles of the Soviet Union. And miracles they were. Eve-rybody had a job, electrifi cation was in


Bam! MF Global Takes it on the Chin


Forward View


Weekly conversations with Joe Terranova, director of trading, MBF ClearingLast Week, The Forward View was all Over the Lot. Geopolitics had traders scrambling in every which way, it seemed, while all the world was assessing the collective comfort levels for $100 oil. That is, $100 oil as a new


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CreditAnalyzeredCr nalyzera y e The Desk Forward Curves

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Power Stats & Intel NRG Stream Page 17


Emissions Desk It made a big splash when the House of Representatives passed what we’ll call their Robin Hood energy bill this week: Steal production tax incentives from the oil company rich and give them to the renewable energy poor. Robin Hood schemes are always popular in the public imagination, especially when oil is fl irting with $103 per barrel and prices at the pump keep ticking up. But the likely

Weekly LNG & Gas Import Tallies

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Reducing Risk Exposure in the Energy MarketsBy Bruno Plaskow, senior business consul-tant, Financial Objects Energy DivisionExchange clearing is emerging as a key al-ternative to traditional bilateral trading, as companies engaged in the energy markets seek to gain greater control over their risk portfolios. In today’s volatile commodity markets, it’s now more crucial then ever to identify and secure necessary controls for managing exposure concentrations and further, to diversify traditional tra-

It’s Now the Final Stretch in the Gas Storage Business, Folks. Whatever transpires in the next four weeks will give you a pretty good indication as to whether this will be a good year or a bad year for your gas book. LNG is looking iffy. Canada supply forecasts keep

The Dust Factor, Part II Think decades-old satellite imagery of Saharan dust storms and atmospheric dust density, fl uctuating ocean temperatures and hurricane intensity patterns. Bet none of that stuff was covered in your CFA certifi cation or that fancy MBA program you muddled through. Nope, not likely. But if you trade power or gas these days, you need to know this stuff. Based on our recent conversations with atmospheric dust guru, Amato T. Evan of the Cooperative

An Otherwise Slow Thursday Morning was rocked into motion this week on the news of some seemingly lax risk management procedures on the re-tail side at MF Global here in the States. ‘Tis the season, it seems. One week we have hedge funds impaling themselves on the “widow maker” spread, and the next week we have French rogue traders wiping a few billion euros off the board. The story this week had another so-called


Energy Data Hub Extends Test Phase, Seeks New Participants When will we see the launch of the Energy Data Hub? Looks now like mid-Summer. Hub chief Bob Anderson tells us the current participants want to extend the hub’s test phase and expand the number of pilot test participants for another month or two.

NASDAQ Dips Digital Toe into Derivatives, Energy Sector This outfi t should be on your radar screen. Around the top of the year we ran a story about a technology fi rm and would-be OTC commodity ECN named Agora-X. The company, a subsidiary of FC Stone, is run by markets notable Brent Weisenborn. This particular fi rm caught our eye for a couple reasons, for one thing its very mission had some holy grail-like ambitions. It was planning to engineer a sophisticated online structured


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(POWER MOVES from page 1)full swing and the Moscow subway put Lexington Avenue to shame. Reporters sat in at meetings where happy workers de-termined how their collectives would fulfi ll the latest fi ve-year plans. American journalist Lincoln Steffens aptly summarized: “I have seen the future, and it works.” Today’s generation of the impressionable has a new destination – Denmark, where the future of electricity is un-folding. Worldwatch Institute says that it gets 20 percent of its power from wind, and “backup capacity is rarely needed.” An enterprising group of Danish wind advocates has taken the next logical step. Like the old Soviets they organize tours for foreigners, who actually get to talk with the prophets. Ener-gy Biz Editor Martin Rosenberg reported back in his January 2008 issue:

You are told the story (of wind power) by earnest, idealistic offi cials like Michel Schilling (described in a side-bar as ‘lawyer, slight of frame, 42, father of four’)… Some credit northern Europe’s culture of frugality and a strong commitment to the environment. Others cite a Nordic ethic… Citizens have a responsibility to shoulder the taxes and support the subsidies that make it possible to pursue renewable technologies… Couple that with a sense of pri-de shared by many Europeans, a sense of ‘we can show the Americans how to do it.’ (at 22)

Renewables won’t change just electricity, us rubes will also get transformed. Said rubes include “prominent clam chowder state denizens” who think a wind farm off Cape Cod will ruin their vistas. But wait until the rebirth. A Danish de-veloper displayed her “zealous enthusiasm” when she told Ro-senberg that the modern wind turbine “is a spectacular piece of art.” (at 25-6) Society’s governance itself will be renewed. The prime minister “has a vision of a society free of using fossil fuels… the task is now in the hands of a new minister for climate change and energy.” Climate change and energy, eh? Politics? Not a problem in new-age Denmark, says Schilling:

When it comes to energy we have had a long tradition in Denmark for vast political agreements going from left wing to right wing… (All the wind initiatives) are the re-sults of vast agreements. [at 30]

Rosenberg learns that wind’s intermittency is no pro-blem for the plucky Danes. Unlike us, they had the foresight

to pick the right location and the right size for their country: Danish energy planners neatly sidestep (intermitten-cy) because their nation has major transmission line con-nections to Sweden and Norway (it is actually dispatched by their system operator), whose hydroelectric power re-sources are about triple Denmark’s annual electricity con-sumption, and to Germany, which has diverse generation resources. [at 22]

Some fun facts: Denmark may have lots of wind ca-pacity, but in the Nordic-German region, wind produces just 2 percent of the power. Denmark pays premium prices for im-ports and gets low prices (sometimes zero) for exports. About half of its wind-generated power must be exported, which tells you a lot about who benefi ts from its subsidies. Subsidies? Of course they’re still necessary, but Schilling takes pains to re-mind us how costs keep dropping. Costs? The article contains lots of pictures, but sadly omitted a graphic from NUS Con-sulting Group that says it all:

And the politics? Never a problem. The Worldwatch quote is in “American Energy: The Renewable Path to Energy Security” (2006) at 16. Information on wind’s performance appears in Tech-consult, Analysis of Wind Power in The Danish Electricity Supply, 2005-2006, at http://www.wind-watch.org/docu-ments/wp-content/uploads/dk-analysis-wind.pdf; World Nuclear Organization, Nuclear Energy in Denmark, Dec. 2005, at http://www.world-nuclear.org/info/inf99.html Even the California Energy Commission understands. See their Review of International Experience Integrating Variable Renewable Generation, App. A (2007), http://www.energy.ca.gov/2007publications/CEC-500-2007-029/CEC-500-2007-029-APA.pdf. The graphic is in Richard Soultanian, “Global Electri-city Pricing,” Power Engineering International, July 2007. Bob Michaels is a professor of economics at California State University, Fullerton, and an independent energy sector adviser. Michaels has worked with some of the country’s leading energy companies. The views expressed in this column are only coincidentally the professional opinions of the author, his affi liati-ons or his clients. A noted speaker, Michaels is available for indu-stry events. Contact Michaels at [email protected].

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THE DESK Friday, February 29, 2008 3


(AROUND THE DESK from page 1)


US incursion front. The US and Iraq have fi nally, offi cially come out and suggested the Turkish army leave. Sort of. Iraq’s offi cial condemnation of the Turkish military’s incursion into Northern Iraq this week reminded us of an outtake from Monty Python’s Life of Brian. Recall in that classic fi lm, Brian was told by a Jew-ish rebel leader that in order to join his militant group, Brian “really had to hate the Romans.” To which Brian replied, “I do hate the Romans, I do I do…” “Yeah…how much?” the rebel leader queried. “A lot,” Brian said. “OK, you’re in.” Let’s re-member that a few thousand heavily mechanized Turkish troops backed by fi ghter-bombers, US-made attack helicopters and heavy arty crossed the mountainous border into Iraq last week, to go after Kurdish rebel leaders – technically, Iraqi citizens. On Tuesday, the Iraqi cabinet “expressed its rejection and condem-nation for the Turkish military interference, which is considered a violation of Iraq’s sovereignty.” And further, “The cabinet stresses that unilateral military action is not acceptable and threatens good relations between the two neighbors.” Tough guys. Wednesday the US “hoped” in the “strongest possible terms” that the Turks make the current campaign a “limited” one. Take this one off the pressure point list, folks, nobody cares… Hugo Chavez has been drinking paranoid juice again. This week he made the proclamation that state phone company workers from now on try to avoid English-language business and technical words and phrases. He called the seeping of Eng-lish words into common Spanish usage “cultural imperialism.” Yup. We’ve heard the same sort of thing out of the French for years, but for them, such a call is almost expected. But Chavez’s Venezuela as defender of the Spanish language? Hmm. Accord-ing to an AP story, “stickers and banners printed up by the com-pany exhort Venezuelans to ‘Say it in Spanish. Say it with pride.’” The government’s top fl ak said in a statement that Venezuelans must recover Spanish words that are “threatened by sectors that have started a battle for the cultural domination of our nations.” ...What does it really mean when you begin a sentence like “gen-

eralizations aside…” and then go on to make a sweeping gener-alization? Ask S&P. This week the fi rm released a new report on the credit strength of the oil and gas sector that said, despite oil and gas prices being nice and high (and the likelihood is good of them staying at their current, lofty levels), the future may not be so rosy after all. The S&P report, entitled “Ratings Roundup: Oil And Gas Credit Quality Was Healthy In 2007, But 2008 Could See Some Variability Among Sectors,” shows further that, generalizations aside, “in the various sectors of the industry and particularly refi ning, divergent trends have already begun.” Un-like in the past few years, when the whole oil and gas industry seemed to move in lockstep, “2008 operating results will prob-ably vary by sector,” said Standard & Poor’s credit analyst Paul B. Harvey. “Strong hydrocarbon prices should bode well for exploration and production (E&P) companies but are squeez-ing margins in the refi ning industry. Likewise, despite general expectations for E&P companies to spend more, we believe that heavy competition in North America will likely keep pressuring margins in oilfi eld services. The solid commodity pricing out-look has given the oil and gas industry, particularly E&P compa-nies, an easier time than most in the capital markets.” But al-though oil and gas issuers may retain access to capital, they will have to pay more for it, possibly harming their fi nancial mea-sures, the report says. “Of particular concern are companies in the ‘B’ rating category, which might fail to rein in spending if cash fl ows weaken,” said Mr. Harvey. “Their liquidity would diminish at a time of tightening access to credit.” ...SunGard’s Kiodex web-based risk platform nailed another hedge fund cus-tomer in London recently, this time BlueGold Capital Manage-ment, a new commodity derivatives hedge fund focused on en-ergy, softs, agriculturals and base metals. Julian Reis is the man-aging director at BlueGold in London… Another cold winter in the Ukraine? Gazprom had its hand on the on/off switch again this week and EU gas prices moved like a rice popper for a brief spell. Europe can’t diversify away from Soviet, er Russian gas soon enough, it seems. Ukrainian president Viktor Yushchenko

said Wednesday that the state oil and gas compa-ny, Naftohaz Ukrainy, had fully paid its debt to Gazprom for gas supplies received last year – paid in full, he said. Though Gazprom confi rmed that the check was received, it also said that no deal had been cut for this year – and thus the market jitters. Gazprom had earlier threatened to cut sup-plies to Ukraine by 25 percent or more on March 3 unless the 2007 account was settled. Gazprom also said there was a matter of about 1.9 Bcm of gas that was somehow unaccounted for, which Gazprom considered to be now part of Ukraine’s debt for 2008. Ouch… Next week ICE and NGX will begin to offer clearing and settlement services for physical OTC natural gas contracts. This is po-tentially huge, folks. Statements say that the fi rst two natural gas hubs available for cleared physical delivery will be PG&E citygate and GTN Malin, and that additional hubs here in the States will be announced soon. NGX’s clearing operation will serve as the central counterparty for fi nancials,

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(AROUND THE DESK from page 3)while guaranteeing physical delivery. We hope to have a more in-depth discussion with ICE folks about this great new oppor-tunity for the market next week…Mergers and acquisitions (M&A) within the energy sector are likely to increase this year, but companies may be challenged in securing ready capital, ac-cording to a recent survey by CFO Research Services and the CIT Group Inc. The study, “M&A in Challenging Times,” sur-veyed 529 senior-level fi nance execs at mid-market US and Ca-nadian companies. According to the survey, 48 percent of the surveyed execs consider M&A to be a “major part of their cur-rent business strategy.” Of those surveyed, 69 percent expect M&A activity to increase within the energy sector this year. When asked if the recent changes in capital markets will affect completing M&A transactions, it was a 50/50 split among the energy executives surveyed, the report said. “Half of the respon-dents said these changes will not affect M&A volume, while the other half said they will have an impact over the next 12 months.” Diffi culty raising capital (47 percent) and lack of transparency in the private company’s price, terms and other factors (38 per-cent) “posed the greatest challenges for middle-market compa-nies seeking to acquire other businesses, compared with what larger companies experience.” The survey found that 41 percent believe that accessing overseas markets was a primary motivator for their latest acquisition. Check out the report at http://mid-dlemarket.cit.com... NYMEX/CME dance to carry on... NY-MEX said this week that the two companies had extended their exclusive 30-day negotiation period to March 15. Not much detail was offered on the schedule change, but we reckon recent


signals by regulators may have changed the basic merger strategy somewhat. Folks close to the process tell us that “the deal will go through, don’t you worry about that…” Nobody will put a possible timeline on the deal though. Under the original terms discussed, shareholders of NYMEX would receive $36 in cash and 0.1323 of a share of CME’s common stock in exchange for each NYMEX share. Also, CME said it would maintain open outcry trading fl oors in NYC – but since the NYMEX building will likely be sold, where the new pits might be is a mystery… Speaking of the NYMEX building, here’s a chance to tap into a real-life trading seminar at that very site, while it’s still called the NYMEX building. On Monday, April 14, we recommend you plan to be at the World Financial Center, in NYC for a 1-day LIVE trading seminar hosted by MBF Clearing Corp. We at-tended a similar two-day event last fall – it was a fi rst rate event. Also featured at the seminar are the Logical Trader himself, Mark Fisher, Dennis Gartman, publisher of“The Gartman Let-ter,” Jon “Dr. J” Najarian, co-founder of Option Monster, and our own weekly columnist Joe Terranova, director of trading at MBF Clearing Corp. Space is limited to the fi rst 100 registered participants. All fees are donated to Make-A-Wish Foundation. For information on this event or to register, visit www.logical-trader.net, or e-mail [email protected] or call 212/845-5083…The New York Public Service Commission has ordered utilities to implement methods for measuring, monitoring and con-straining electric supply price volatility, and to fi le quarterly re-ports on power prices and volatility. The PSC approved an order in April 2007 implementing an earlier decision in which it deter-mined that utilities should continue to hedge commodity rates to reduce volatility of commodity supply service for certain cus-tomers, subject to the development of utility-specifi c guidelines. The order, issued and effective Feb. 26, implements the meth-ods the utilities are going to use, the PSC said yesterday. In the order, the PSC said that standard deviation and co-effi cient of variation (CoV) metrics, while generally acknowledged as wide-ly used tools for measuring the historical volatility of prices, should be used to establish goals instead of strict standards, and the utilities should pursue those goals but be free to respond to changing and unanticipated circumstances… More S&P cheery news… “It was a generally mediocre quarter for our rated re-gional bank universe, as several banks began to recognize in-creased problems in their loan portfolios and battened down the hatches in preparation for expected additional asset quality dete-rioration in 2008,” according to a report released today by Stan-dard & Poor’s Ratings Services entitled, “US Regional Banks Report A Weaker Fourth-Quarter 2007 As They Prepare For A Bumpy 2008.” “Still, for the most part, the sector performed better than some of its larger, multiregional peers, and the prob-lems we’ve seen so far remain within our expectations for the industry and have not yet reached the threshold of requiring negative ratings actions,” said Standard & Poor’s credit analyst Catherine Mattson… New York City Mayor Michael Bloom-berg has decided not to run for the US presidency. Bloomberg dropped the bomb in the New York Times this week, ending an almost year-long speculation that he was planning an indepen-dent shot at the White House. Bummer. “I listened carefully to those who encouraged me to run, but I am not and will not be

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(AROUND THE DESK from page 4)a candidate for president,” Bloomberg said in an opinion article in Thursday’s NYT…We heard from GasWag this week, another great Top 10 List. Here are The Top Ten Things Oil and Gas Traders Should Never Ever Say:

1. It’s not a loss until you make me take it.2. It has to come back!3. We’d make more money if we used wider stops!4. We’d never hire a rogue trader.5. Let’s take a fl yer on some electricity!6. We’re playing on house money now!7. Derivatives are “cash cows.”8. We are the Eli Manning of the trading business!9. We do whatever Boone Pickens does.10. The market is wrong!

As lawmakers and regulators react to rising energy prices, they should carefully consider the long-term value that the competitive electricity markets bring to power customers, according to a new study from the Compete Coalition. “Regu-latory efforts would be better directed at refi ning and improv-ing the competition model rather than returning to the cost-of-service regulated model,” says the study by National Economic Research Associates economist Eugene Meehan. The study takes an objective view of traditional mo-nopoly regulation and competitive electricity markets. After comparing and contrasting the benefi ts and risks of each model, Meehan’s study concludes that both in theory and in practice, restructured markets are more adept at creating incentives to make electricity production more effi cient, promoting increased demand-side management of energy consumption and stimu-

lating investments in alternative energy production. The fun-damentals of a competitive market make it a more appropriate model for addressing current and future energy concerns, the study says, because competition offers a broad range of suppliers and allows the customer to choose. Competition also provides feasible entry and exit and increased price transparency. The study says policymakers, who are under pressure to re-regulate competitive energy markets due to high power prices, should consider the longer-term benefi ts that can come if competi-tive markets are properly implemented, rather than focusing on short-term events that may push market prices above or below regulated rates. “Price increases are unpopular, and in the search for a villain, it is easy to blame competition. The facts, however, do not support the hypothesis that competition is the cause of price increases. The rise in oil and gas prices, equipment costs, impend-ing carbon control costs and the mandate to replace older and dirtier generation with alternative units are the primary factors behind these price increases,” the study says. “Both competitive and traditionally regulated states are seeing the impact of input price increases.” In order to meet future energy demand, the electricity industry needs to invest another $400 billion in energy infrastructure over the next 20 years, and here too competition can benefi t customers. Rather than ratepayers shouldering the risk of that massive construction expense, “the investment risk for generation plants is shifting from consumers to investors” in the competitive markets, the study says... Finally, we caught a clip that aired on the local Fox TV station in Houston about the alleged gambling activities of Choice Energy chief Jav Loya. The back story here is that Loya and some former employees of Choice brokerage are or were suing each other over some past money issues. OK, so far it sounds like another day in the voice broker business. Well, somewhere along the way in taped testi-mony, one of Loya’s accusers claimed that the high-profi le, very public Choice chief was a gambler (on NFL-related stuff) and so were his employees and some customers to boot. Since Loya is a part owner of a NFL football team, gambling is a no-no. Now the NFL is involved and they don’t seem particularly happy. One look at the clip from a past deposition by Loya and we can see why. We’re reminded of the Clinton tapes of legend. “What do you specifi cally mean by sex?” Or in this case, “do you deny that you bought and sold NFL futures?” “Can you be more specif-ic?” Loya replied. Ouch. See for yourself. We’re not sure about the gambling, but Choice’s Loya is famous in Houston among traders for his big client parties in Vegas and elsewhere, at least according to folks we spoke to. We’re not quite sure what this might mean for Choice if in fact NFL investigators fi nd some gambling mischief in Loya’s past, but it won’t play very well on his standing as an NFL owner, for sure. One trader we spoke to said if any of the past party stuff were to be aired publicly in court, it would read like a Danielle Steele novel. We can’t con-fi rm that statement, but it’s not the fi rst time we heard it either. But we never got an invite, and Ms. Steele was unavailable for comment. Brokers throwing wild parties? What will they think of next? The Loya clip is available on the publicly accessible Fox TV website at http://www.myfoxhouston.com/myfox/pages/News/Detail?contentId=5668269&version=1&locale=EN-US&layoutCode=VSTY&pageId=3.2.1. And so, there it is.

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(THE DUST FACTOR, PART II from page 1)Institute for Meteorological Satellite Studies at the University of Wisconsin at Madison, it now appears that the dust factor is rapidly edging its way into the more accepted forecasting methodologies of the industry’s leading hurricane seers. In last week’s issue we briefl y detailed some of the latest fi ndings made by Evan and his associates on the subject of how Saharan dust in the atmosphere will affect ocean temperatures in the North Atlantic, which in turn will signifi cantly impact the formation and intensity of hurricanes. The study, “Ocean temperature forcing by aerosols across the Atlantic tropical cyclone development region,” appeared in the latest issue of the academic journal, Geochemistry, Geophysics, Geosystems (G3). We asked Evan what remains to be known, before more folks in his area of expertise can signifi cantly up the accuracy level of hurricane season predictions to heretofore unknown levels, based on his latest research. Right now, he can assess and forecast dust patterns and their impact on ocean temperatures; and the science is already known about how ocean temperatures affect hurricane intensity and frequency. So if you can predict when the dust storms will form and why, you’ve pretty much closed the circle on potentially very accurate hurricane predictions. “This is what we’re working on now,” he says. Last week Evan told The Desk that it’s possible to look at dust storm activity in say June-July, take some measurements and suggest the effect on hurricane activity in August and September. Incidentally, his accuracy over the past couple years has trumped everybody, from Gray’s crew at Colorado State to any government service. But beyond this short-term stuff, he says, the current theory he’s working on may quite possibly add some extreme accuracy

to longer-term hurricane season forecasting as well. “It looks like we now also have some pretty strong evidence to support the idea that we can also predict dust storm activity six months ahead of time or more. This is what I’m currently working on.” This latest research is more focused on the local conditions in Africa that drive dust storms to begin with: historical patterns and shifts in the rainy season, the dry season and so forth. He says that if his latest research proves out his dust storm formation and trajectory theories, he should be able to predict with good accuracy dust storm activity in for example Q4, 2008, which can then be used to better predict Q2, 2009 hurricane behavior based on dust patterns and its relation to ocean cooling. Once this Q2 data is quantifi ed, tone could further formulate a reasonable set of predictions for the August-September ’09 hurricane season. “There are a lot of other variables involved here. For example, new research shows that Atlantic Ocean temperatures tend to drive a lot of other factors, like wind sheer. It’s what we refer to as a coupled system, that is, the atmosphere and the ocean fl uctuate together. We know that when you cool the ocean temperatures, you change the atmospheric circulations in such a way that would make it less conducive to hurricane formation,” Evan says. But he adds that it still appears that the dust comes fi rst, just in case you were thinking about that chicken-and-egg thing. “This kind of makes sense, and also is another point we hit on in our paper. In terms of active dust activity, it appears to kick off in February-March, then dies down and picks up again in May through July,” Evan says. Fundamentally there are other factors that impact ocean temperature, including surface wind and El Nino. “There are a lot of pieces to put together here, of course, in the context of hurricane formation and forecasting, but I think what we’ve done has helped us to understand a very important piece of the picture.” The fact so many eminent scientists blessed this latest work of research is a huge hit for Evan and his cadre of dust experts. He agrees that between this and the direction of his latest research, it could very well be a breakout year for this new science. “The CSU folks have been very helpful and encouraging in this process. But really, the group that has held the most interest in this, since we started publishing research on the subject a couple years ago, is the reinsurance sector.” No kidding. But it’s not always smooth sailing he says. “The academic world or federal support for academic research is much different from the commercial sector in just about every respect. Recently I had put in an application to have some research funded in the context of these dust theories, and it was rejected… We’re fortunate there is a real private sector interest.” So what do your dusty tea leaves say about Q2 or Q3 hurricanes this year? Evan was expecting the question. In the context of his latest research, he says, there already seems to be an “interesting, strong connection” between what’s happening on the ground over in this vast region of West

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(THE DUST FACTOR, PART II from page 6)Africa (the Western Saharan region over to Southern Libya and including Mali, Mauritania, Chad and heading down along the coast) and what future weather patterns might bring. “So,” Evan continues, “what happened last Summer is that there was a very late onset of the rainy season in West Africa. And late rain indicates drought. All the indicators I see tell me that if you have drought, you’ll have more dust storms later on.” Once the rains came, and since it was so late and everything was so incredibly dry, there was widespread fl ooding. Flooding means run-off and even greater destruction of vegetation. “So now we have a situation where we have this huge area of land which is even more degradated then it would have been otherwise. This is a situation that is extremely conducive to dust storm activity,” he says. Though anecdotal, his observations are based on monitoring of real-time satellite data. “Between December and now, West Africa has been lighting up like crazy… dust storm after dust storm. And not just in some localized areas, but across West Africa.” He admits that while he’s not yet had a chance to thoroughly check the numbers on atmospheric dust, “it looks pretty heavy across the region.” We couldn’t nail him down as to how the current dust factor compares to last year or the past 25 years. He’ll know this in early April, after he has a chance to assess the data from January-March, but he says “there is a lot of it right now, and

this will persist into the Summer…” So are we looking at a less intense hurricane season in ’08? “There are a lot of wild cards here,” Evan says. “What if we suddenly toss in a big-time La Nina event? If the water is just warm enough, we may have a lot of (hurricane) formations. But right now at least, it seems to me that we may not be going to see the kind of ocean temperatures we saw in 2004 or 2005. This is my indication, based on the current dust activity. This was the same story last year… but I think it (the Atlantic) could be even cooler than last year…” Cooler than last year? Last time we checked, last year was one of the lamest hurricane seasons in modern history due to cool ocean temperatures in the Atlantic, which Evan would have us believe was brought on by heavy dust density in the atmosphere. So there’s your answer. The only thing Evan sees that might trump what strongly looks to us like another lame hurricane season is a big La Nina event that could reduce the wind sheer across the basin. “That would likely trump all other factors,” he says, which would lead us to anticipate a more active hurricane season. And last time we checked, a small La Nina was developing in the wings… Amato Evan can be reached at [email protected].

The Desk’s Weekly Weather Box ScoresWinter 2007

LGA / Cumulative Pts Days 1-5 Days 6-10 Days 11-15 Days 16-30Total pts Ranking Total pts Ranking Total pts Ranking Total pts Ranking

EarthSat 273 4 258 5 56 3 50 3WeatherInsight 328 3 293 2 43 5 43 4

WeatherIntel 330 2 263 4 69 1 57 1Vendor Consensus 347 1 309 1 57 2 52 2

GFS 151 7 196 7 38 6GFSens Mean 175 6 217 6 47 4

ECMWFens Mean 255 5 279 3

ORD / Cumulative Pts Days 1-5 Days 6-10 Days 11-15 Days 16-30Total pts Ranking Total pts Ranking Total pts Ranking Total pts Ranking

EarthSat 261 5 273 4 53 2 46 4WeatherInsight 279 3 282 3 43 6 48 3

WeatherIntel 247 7 215 6 52 2 56 1Vendor Consensus 295 1 284 2 47 4 53 2

GFS 264 4 212 7 55 1GFSens Mean 249 6 293 1 50 5

ECMWFens Mean 291 2 271 5

Best Score = 420 Best Score = 420 Best Score = 77 Best Score = 63




(EMISSIONS DESK from page 1) history ($40.6 billion last year). Pelosi said the fi scally respon-sible way to put the US on a path toward energy security and energy independence is to repeal those oil subsidies and put the money, about $18 billion, into domestic clean energy and en-ergy effi ciency development. “It will spur the production of clean renewable energy sources and provide business with the certainty necessary to make long-term plans to build viable and sustaining markets for these technologies. This is all about answers in the marketplace,” Pelosi said. “That’s very important because (there are) so many people across the country who are being innovators, who are being disrupters, who are making change and this change cen-tering around energy is very important and this legislation is vital to them.” The bill has strong backing from farmers, who see it a chance to revitalize rural America through new revenue streams like wind power and biofuel production. National Farmers Union chief Tom Buis is among many pushing a three-year ex-tension of the production tax credit for wind power. Add to this the concept of “green collar jobs” – a new economy spawned by domestic employment in renewable en-ergy development and production – and the measure has the po-tential to capture the public’s fancy at a time when the country’s economic growth is sagging. There’s a lot of good will on both sides of the aisle for domestically produced energy and renewable power produc-tion, especially the extension of the wind and solar production tax credits. It’s widely understood that the momentum of those new energy industries will falter if the tax credits end, and re-newal of the credits has broad support. But the funding of the House bill as written spells doom. Domenici is already describing the legislation as “a puni-tive tax increase” on domestic energy production. Domenici said this week that instead of “wasting more of the Senate’s time on a proposal to punish American oil and gas companies,” lawmakers should be looking for a way to extend renewable energy credits before they expire without increasing Americans’ energy costs. “The last thing we should be doing at a time when America is increasingly dependent on foreign oil is making it tougher to produce our own energy,” he said. It’s worth noting that the House passage of the new bill fell largely along party lines, with a 236 to 182 vote. House Energy Committee ranking Republican Rep. Joe Barton called the December energy package “a recipe for recession.” This time around, Barton emphasized the need for more affordable energy to keep the economy from drooping further. “All sources of energy must be used and none can be written off. While we pursue new alternative energy sources for the future, we can’t forget that oil, natural gas and coal power America, and they will be with us for a long time,” he said. “The United States can pro-duce abundant supplies of affordable energy. We should make sure that we don’t abandon that capacity before new sources of energy are developed.” Sounds like this bill is in for a short and steep ride downhill when it reaches the Senate.

fate of the bill can be summed up in the reaction of the Sen-ate Energy Committee’s ranking Republican member Pete Do-menici: “Here we go again.” This very legislative provision was the deal-breaker in last December’s energy bill. At that time, the Senate put its foot down on the Robin Hood measure. Domenici said the provi-sion meant a certain veto from President Bush. That would quash the rest of the bill, including increases in energy effi ciency and fuel economy standards. So it goes on Capitol Hill. But the measure only failed in the Senate by one vote last time around, so now the House wants to push through the tax incentive package for renewable energy as its own measure, HR 5351, the Renewable Energy and Energy Conservation Tax Act of 2008. The charge is led by House Speaker Nancy Pelosi, Majority Leader Steny Hoyer and Ways and Means Committee Chairman Charles Rangel, the original bill’s author. Urging lawmakers to pass the bill from the House fl oor on Wednesday, Pelosi poured scorn on President Bush for sup-porting oil industry subsidies when gasoline prices are skyrock-eting and ExxonMobil is scoring the largest corporate profi ts in

http://www.nymex.com



(ENERGY DATA HUB EXTENDS TEST PHASE from page 1)


“We’re not going to open in April as we’d hoped,” An-derson tells The Desk this week. “We’re trying to validate our processes and make sure that, within a reasonable timeframe, the hub’s liquidity anonymity works and the data is ready to be published. We’re not there yet. (But) all the participants in the test phase indicate they are happy with the progress so far.” Currently seven mostly enormous energy companies are providing data for the test phase; the Energy Data Hub is tak-ing in real data without yet sending anything out. The hub staff and participant companies hold weekly or semi-weekly conference calls to discuss challenges –largely in data formatting – or alter-native hub uses or functions. Anderson calls it a team effort in technical development. “All the participants are very cooperative and these conference calls are very instructive,” he says. “And the input and management is actually a lot easier than expected.” The ease of use and collaborative dialogue is prompting Anderson to invite more companies to get involved before the hub goes live. “Originally I’d thought I would stop at seven, but now I think we can handle 15, no problem. We’re out there talk-ing to utilities, E&P companies, merchants, investment banks, etc., to get others who are interested in joining the test phase.” Taking part in the Energy Data Hub test phase does offer some advantages. For one thing, you get to have a say in the shape and function of the data hub, how its input is handled, the products it generates and how it delivers those products. An-derson also is looking into some kind of economic incentive that would reward those who took the time to participate in the test phase, once the hub goes live. “Most likely we’ll have a product panel which recommends and authorizes the kinds of output we’ll offer. So we’ll take advice from them,” he says. Another reason the data hub will be pushed back from the proposed April launch is a rethinking of the way it will be funded. “We are designed to be a service company for the indus-try and we want to hold true to our principals around a majority independent board of directors and that service role,” Anderson says. “Test-phase participants are talking with us about ways we can have participants provide us with the seed funding so that we don’t have to sign a deal with any particular company.” The corporate fi nancial structure of the hub is as im-portant to its success as its technological architecture. After nearly three years trying to fi nd a way to work with some of the traditional data redistributors and technology companies who typically handle this kind of trading data, Anderson has con-cluded that the Energy Data Hub has to be under a distrib-uted ownership rather than under a single company if it is to be an industry initiative as intended. The traditional redistributors would naturally want to do the whole thing themselves, so they aren’t likely to reach the point where they can share ownership with each other “until the data hub is up and running and they have to,” he says. “But I’m talking with a number of other large orga-nizations that are nonprofi t, some of them from the fi nancial industry, that might be great as an underlying supporter,” he says. “As more people learn what the Energy Data Hub is, I’m getting more and more calls from companies interested in that. This is such a complementary aid for their own business that it makes sense for them to help it happen.”

Departing from the traditional proprietary dissemina-tion of energy data is one of the primary functions the Energy Data Hub offers to the industry and the sky’s the limit in terms of what products will be created. In addition to serving as a catalyst for transparency in the industry, the hub is also “a cata-lyst for new delivery mechanisms around everything from price indexes to research to any use you can think of for the data. We don’t want to assume that the data hub is going to come up with every good idea associated with what to do with this data,” he says. “I like the idea of open use of redistributors of various types, whether it’s a big technology company or a news orga-nization. We’re going to continue on that path. The trick is to separate that business design from the actual fi nancial structure of the company itself.” A new energy industry with great transparency into both physical and fi nancial transactions and many points of de-livery, rather than the current model of narrow indexes designed by others, “knocks down a lot of barriers, you could say,” An-derson says. “We’re separating the information from the prod-ucts you create from that information. That’s why so many com-panies that create these products are excited, and the energy companies that are participating are excited. They have a new wealth of possibilities in terms of information services, from for-ward curve validation to analytical work to just about anything you can think of, whether you’re trying to use the data to make money or to report.” Anderson says they aren’t sure whether the Energy Data Hub will create some of its own products; it depends on the number of redistributors who take part in the hub. “We’re hop-ing we’ll do most all of our redistribution of the data through redistributors, and just have our Web site provide some interest-

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ing market metrics in terms of health and overall activity, fi nd-ing out who’s doing what with the hub data. It would be an educational thing, a launching pad for going into any of the other redistributors,” he says. “But at this point, there’s no tell-ing whether it doesn’t end up being a delivery mechanism for the data too.” The Energy Data Hub also holds great promise in terms of scalability. “Market designs are different around the world, but the transactions are there. The hub’s architecture is so open that it can handle that; whatever the market design may be doesn’t matter.” Beyond geographic scalability, the hub can also expand in terms of the commodities it handles. The hub will focus on the possible – power and gas – for the next year before expand-ing into other commodities. Anderson is hearing a lot of inter-est in moving into oil, storage, plant utilization rates and other areas. “There are some fascinating applications (for the hub).

a skilled job of jousting with analysts today in a late-morning conference call. He’s always been good at such things. And gen-erally speaking, it appears that Wall Street bought Davis’s line that the mistake in systems and procedures was isolated and the mistake has been fi xed. End of story. We recommend you give a listen to a replay of this conference call; it was a very polished appeal indeed. And the way things are going these days, it might be good practice to listen in. John Lothian, a Chicago-based trading adviser, offered the following comments in his daily market summary newslet-ter: After listing a bunch of anecdotal stories about otherwise decent traders doing stupid things, he said, “This business does funny things to people. The greed, the pressure, the pace all can play havoc with otherwise strong people. You can never tell sometimes why people do what they do. I know of people who have even killed themselves over losses in the market, losses in their lives and losses of reality and sanity,” he said. This time, nobody died (as far as we know) and if MF Global is to be take at its word, the problem was discovered, cor-rected and disclosed within about 24 hours, Lothian says. “From what we know, the violation of limits just occurred yesterday,

not for months or years. The system worked once the problem was discovered. The FCM has the re-serves to handle the issue. The clearinghouse did not have any issues with the FCM. The regulators, bank-ers and customers were notifi ed in a timely fashion. The CEO and acting CFO held a conference call, presented the facts and deftly took questions from investment banking analysts and journalists.” Lothian adds that, try as everybody might, there really are no technological silver bullets that eliminate all operational risks. “We still depend on people to make decisions. And humans are human. This industry has dealt with this type of risk for a long time. While the numbers in this case are signifi -cant, they pale to the billions and billions of dollars in risk the industry takes every day as open outcry and electronic trading occurs...” The moral of this story? French rogues still take the cake. And, of course, it might not be a ter-rible idea to run your ETRM system gap analysis more often than every 18 to 24 months.

(ENERGY DATA HUB EXTENDS TEST PHASE from page 9) Anyplace you have a lot of information coming from a lot of dif-ferent points which you’d like to serve up and make available to many, that’s where the data hub fi ts ideally,” he says. How does a new technology initiative like the Energy Data Hub tie into the growing interest in automating the power grid, and all the additional data that could produce? “The data hub isn’t a big organization, it’s just a very large database. That means the more data the better. The appetite the data hub has for information is insatiable, so the smart grid represents an-other layer of information that would fi t perfectly into the hub,” Anderson says. “The beauty of the business model is, I’m not trying to guess what people would do with that information. But we can make it readily available across many platforms for all those products to start coming out,” he says. “The hub is just the right sort of catalyst for massive amounts of data that enable useful products to quickly appear.” Contact Anderson at [email protected].

rogue trader in MF’s Memphis branch ringing up $141.5 mil-lion in losses on the broker’s account. Ouch. The trader was sacked Thursday and the loser wheat contracts were liquidated. Following the announcement Thurs-day morning, MF Global’s stock took a dive – at one point los-ing close to 20 percent of share value before stabilizing. The company said a trader named Evan Dooley was trading with his personal account, speculating on the price of wheat futures contracts on the CME, when it was “discovered” that Dooley had “substantially” exceeded his trading limits. Really. The CME said in a statement that MF Global remained in “good standing” with the exchange. CFTC offi cials said they were reviewing Dooley’s trades with MF Global and the CME. “As a general principle it is good not to trade what you broker,” a C-level brokerage exec opined late Thursday. Though the hit more or less wipes out the lion’s share of profi ts for MF Global over much of this year, we were none-theless impressed how quickly the company locked down the situation and began putting out the PR nightmare before it had much of a chance to develop. MF Global chief Kevin Davis did

(BAM! MF GLOBAL TAKES IT ON THE CHIN from page 1)

http://www.theice.com




(FORWARD VIEW from page 1)


fi xture in our lives. At the same time, ol’ T. Boone was going on about a $10-$15 sell off. And OPEC was considering new production cuts. Just another week in paradise, they tell us.

“These are some interesting markets,” Terranova began this week.

“The thing that strikes me is a bit different from what a lot of economists are saying. We heard this notion about ‘cyclical weakness’ in the US, for commodities in Q1 and Q2. We listened to the growing concerns about the US economic downturn. I think what we’re seeing, though, is that the structural supply issues that we face – the challenges which we face – in commodities seem to be trumping any concerns we may have about a downturn in the economy.”

Eh? As evidence, he points to long-dated oil contracts. If you trace out the crude board right now, all the way to Jan09, the market is priced above $100. If you step out even further, the market is above $97. Right now, the front of the board is $102. And in a normal bull structure, we should see the outer months at around $95, Terranova says. “But the entire board – every contract on the board going out to Dec2016 – every contract is priced above $97.25. It’s unprecedented.”

On Thursday, we noted that the front of the oil board was up $2.75. Well, the contracts going all the way out were also up something like $2.68.

“The whole board is seeing this precipitous rise. It’s not just restricted to the front of the board. If it was restricted to the front, spikes might be warranted, but probably unsustainable. What we see is long-dated contracts – the speculative buying interests, not only in the front but in the back of the board too.

This tells me there is an incredibly large fl ow of money into these markets. And secondly, the structural supply concerns that people have are well placed.”

***Observations and Forward Views. Last year, the S&P

and crude oil mostly traded in a lock-step formation. As the S&P went up, so did crude. But earlier this month, for the fi rst time in a very long time, we saw something new. “This month, that relationship (oil and S&P) begin to decouple. For years the conventional wisdom was that when crude goes up, you sell the S&P – we were all trained to think like this. But for the past couple years, I always got it wrong, because when crude went up, so did the S&P. Ten years ago if you told me crude would be trading at $70 and then asked where I thought the S&P would be, I’d have told you it would be a bloodbath. Yet, last year S&P posted historical highs. What you’re seeing now, these parabolic moves you see in commodities, I believe are all about money fl ow.”

***“I think that funds are realizing that they won’t see

very much alpha from the stock or bond markets this year. What I’m seeing now is a tremendous amount of money fl owing into this new asset class we call commodities. But there is a problem with this new asset class. Basically, it’s not big or broad enough, not like stocks or bond markets. The landscape in commodities isn’t big enough to handle the money fl ow.”

A short time ago, there were only so many places you could buy commodities. Think of it. In years past in commodities, the buying was always largely confi ned to the fi rst few months. Portfolio managers are now saying, “Hey if you think it’s going up, forget about the front of the board, go buy 2009-2010 contracts.” And with the advent of electronic trading, that’s now pretty easy to do. This is beginning to be felt across the sector, on several levels.

Terranova may be correct that the commodity markets may not be broad enough to suck up all the new investment in the most effi cient manner, but the market is certainly trying to respond rather quickly to all the new demand. Cases in point: the new ICE/NGX-cleared physical OTC offerings. The New NASDAQ/Agora-X options ECN. The DME. The Green Exchange. And on and on. The commodity sector is expanding like nobody’s business these days, but, as Terranova pointed out, there are a whole lot of unknowns out there. So perhaps all these new platforms will actually vault to liquidity in no time, simply because there is so much money looking for a new home. Lots of possible upside, but market direction is a bit hazy at this point. Alas. “New products are indeed popping up everywhere. Good point. Tell me one commodity-based ETF that was launched in the past two to three years where the underlying commodity hasn’t rallied in subsequent trade after the launch. You can’t do it… they’ve all rallied.” Terranova’s fi rm launched an ETF called MACI last year that has since done quite well, he says. “The beauty of that one,” he says, “is if you’re looking for exposure and not just to the front of the board, if you buy the MACI you get

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options platform for softs and energies. None of this “glorifi ed chat room” stuff that we’ve seen in the past, but rather “a pure algorithmic trading ECN,” as company chief Weisenborn described it to us. The other bit from our previous conversation was that Weisenborn had decided to run with the OMX folks for the primary Agora-X ECN platform. From January through some time later in the year, Agora-X was planning to launch its platform, replete with a bunch of look-alike contracts in crude, natural gas, sugar and other highly liquid OTC contracts. In January, Weisenborn admitted that he was in the process of casting the net for additional investment in the operation, describing the ownership structure as a “consortium.” This week, we read that the NASDAQ OMX Group agreed to buy a 20 percent equity interest in Agora-X from parent company FC Stone. Hmm. We wondered if this ownership shift would have any material impact on the rollout schedule for the new ECN. Weisenborn shot us a few comments on this and other questions late Thursday. “The impact (of the investment) isn’t so much on the production schedule. We’re well along in developing the technology platform with OMX,” he says. The fi rm is still looking at a mid-2008 launch date. “Look-alike contracts in major energy commodities and metals will be part of trading on Agora-X from day one, along with major agricultural products, and we are talking with major

(NASDAQ DIPS DIGITAL TOE from page 1) market participants about the platform,” he said. For the energy sector, this move can be read a couple different ways. For one thing, what we’re really looking at is NASDAQ’s fi rst real move into the commodities and derivatives business in the US, he says. “And they have chosen to partner with FCStone and Agora-X.” He says that the two fi rms – OMX and Agora-X – were already working together building the new options platform, “so the combination of NASDAQ and OMX, which closed this week, only strengthens that relationship. The investment in Agora-X brings together world-class expertise in exchanges and technology from NASDAQ OMX and in-depth experience in energy and agricultural commodities from FCStone. Together, we’re creating a trading platform that we expect to transform the business of OTC commodities trading.” Agora-X says it plans to provide “a more liquid, transparent over-the-counter market than anything out there now.” No small claim. “The ECN will take the place of what today is a call-around market among traders, with some communication by IM and “chat room” style platforms, Weisenborn says. “In Agora-X, the institutional trader or FCM will have a screen with bids and offers, reporting of sales and a level of pricing transparency that doesn’t exist today in the OTC business. Traders are telling us there is a crying need for greater liquidity, pricing transparency and faster trading to handle the growing volumes in OTC contracts…” And now, the operation has a big, rich, acquisitive uncle in NASDAQ/OMX. Watch Agora-X. Go to http://www.agora-x.com.

Tuesday, February 26, 2008 Today's Logical Trader ©

DAILY PIVOT RANGES High Low Settle Pivot +/- PIVOT RANGE

CRUDE J 9970 9775 9923 9889 17 9872 9906CRUDE K 9928 9747 9888 9854 17 9837 9871NAT GAS J 9391 9104 9218 9238 10 9228 9248NAT GAS K 9385 9120 9239 9248 5 9243 9253RBOB J 27036 26656 26854 26849 3 26846 26852RBOB K 27110 26781 26979 26957 11 26946 26968HEAT J 27734 27222 27598 27518 40 27478 27558HEAT K 27239 26800 27138 27059 40 27019 27099

THREE DAY RPR High Low Settle Pivot +/- PIVOT RANGE

CRUDE J 10033 9687 9923 9881 21 9860 9902NAT GAS J 9391 8784 9218 9131 44 9087 9175

(FORWARD VIEW from page 11)exposure to the fi rst six months. If you buy the equivalent of six contracts, you own one contract for each of the fi rst six months. It’s great for those looking for diversifi cation.” Since it’s generally agreed that the money fl ows won’t stop coming into commodities – simply because there isn’t any other place to go – and further that the most interesting investment innovations available today are coming out of this

sector, Terranova agrees that more products and more fl ows will defi ne this sector for a long time to come. “The only thing that scares me about the money fl ow is that not everybody can be right,” he says. “At some point, the commodity trade is going to get way too crowded. And, you’re going to see a wash-out like you have never seen historically. I have no idea when that might come. But it will come. It has to. Not everybody can win… and everybody is lined up just one way.”

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ding liquidity options. As we head into 2008, managing these particular risks effectively will take on a new urgency, as the fall-out from a variety of 2007 themes – such as the subprime crisis, dropping value of the dollar, climate change, crude prices, the US presidential election cycle and the Iraq war – become far more clear. Historically, energy companies have engaged in over-the-counter (OTC) bilateral trading. However, as more and more bad debts arise in the wake of the sub-prime crisis, energy companies – particularly those trading in commodities that are not backed by forms of collateral such as letters of credit – need to fi nd alternative ways of managing and minimizing their coun-terparty risk exposure profi les. It is really only during the past few years that clearing trades through exchanges has emerged as a recognised way of handling energy credit risk. In a similar manner to using a risk transfer product, the trading parties are exposed to the exchange as central counterparty rather than each other. Exchange mem-bers can either use the exchange as a broker to help them fi nd a counterparty trading at the right price or, if the trade cannot be contracted for whatever reason with the matched counterparty, the exchange can be used as a central counterparty which takes on both sides of the trade risk. This approach holds several benefi ts. By using an ex-change as a central counterparty, companies can consciously ma-nage the risk of trades – and even reduce that risk to an acceptable level. By using the central counterparty, potentially scarce credit lines with bi-lateral counterparties can remain unused, potenti-ally for use at a time when a crucial business-driven transaction is screaming to be done. On a market-wide level, the growth of exchange trading, and notably clearing, has contributed to price transparency and, as mentioned above, can also increase trading liquidity within the energy trading markets by providing addi-tional trading capability.

A Privileged Domain The major detracting factor for exchange clearing is accessibility. At present, clearing membership is comfortably available only to energy-related fi rms that can afford clearing membership fees and transaction charges. However, there is al-ways a way for services to fi lter down the food chain. Smaller companies, or those who may wish to use exchanges only on an irregular basis, can often access clearing services by broking their transactions through an exchange member. The member will then act as clearing broker for their client and place the trade with the exchange. The client still needs to pay to offset transac-tion fees and default fund contributions so it is worth shopping around to get the most competitive rates from members who provide broker services. Unless the client can negotiate a line of credit with the broker, any margin deposits made by the clearing member (broker) to the exchange will still need to be mirrored by the client. This can prove costly, especially when trading a variety of instruments across a number of exchanges. Increasing competi-tion with, for example, the emergence of ICE into the European cleared markets in the second half of 2008, may have a favorable effect on the cost of transacting. But for many it could still re-

main an expensive alternative to bilateral trading. It is highly advisable, if not highly desirable, for companies to understand their traded cost base so that this price comparison can be made. After all, it should be one of the corporate objectives for credit professionals to guide traders towards maximising their P&L margins, as well as safeguarding returns to shareholders. We should also not forget that clearing can be a fairly anonymous process, so companies who prefer to function on the back of relationship-building would probably use it sparingly.

The Rise of Energy Trading Exchange clearing has seen a steady increase in popu-larity over the past fi ve years. Within the shipping sector, for ex-ample, broker SSY has recently reported 50 percent year-on-year growth in screen trading through the globalCOAL platform, with clearing being done through LCH Clearnet. In the emis-sions market, strong western European links are being forged between European Commodity Clearing and Eurex Clearing to settle transactions and offer general clearing services to market participants. Eastern European exchanges – Prague, for example – will not be far behind. In the future, markets and competition in that country may well be driven by the advent of exchange trading and clearing. However, exchange clearing can put a strain on the rela-tionship between a company’s trading arm and its treasury depart-ment. For example, the margining process, where companies net down all their transactions with a single counterparty to create a net exposure fi gure, can often result in a requirement for extra liquidi-ty, whether in the form of cash or securities. When this occurs, the

(REDUCING RISK EXPOSURE from page 1)


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treasury department needs to be able to make a decision regarding the most appropriate (or available) form of collateral within the tight timeframes demanded by the trading environment. To deal with these issues effectively, energy companies wishing to engage in exchange clearing on a regular basis need to make sure the technology systems they use are up to the chal-lenge. Exchange clearing has big implications for a company’s working capital liquidity. As a result, the company’s cash ma-nagement, credit risk and trading arms need to work in harmony to ensure that the whole concept, and its inherent risks in times of adverse price movements, are completely understood. The act of trading requires rapid access to liquidity in-formation, while treasury departments need to be able to make accurate cash forecasts, both against actual and stressed scenarios for planning purposes. Furthermore, the regular monitoring of potential cash requirements, which could follow a wide range of adverse corporate event scenarios, is a mandatory requirement for senior management. This requires systems that are consi-derably more sophisticated than the traditional spreadsheet ap-plications that remain so prevalent in the energy sector. Companies need access to real-time liquidity forecasting tools to help analyse their portfolio at any time in calculating factors such as risk exposure and the fi nancial implications of individual or portfolios of trades. The latest real-time credit risk systems, such as Financial Objects’ energycredit solution and its liquidity stress-testing capabilities, are invaluable for rapid and fl exible management reporting.

A Permanent Solution? With the energy markets continuing to display volatility, it looks as if clearing is here to stay. Although clearing is unlikely to completely replace bilateral trading, it has rapidly become a global, multi-billion-dollar business, with revenue and profi ts in-creasing on a quarterly – not to mention annual – basis. Exchanges that offer clearing services have seen consistent, healthy revenue growth, helped by increasing popularity. There is currently a mar-ked increase in exchange, member and third-party participation. With ICE poised to enter the European clearing markets in 2008, we are likely to see further signifi cant changes. But as long as the cost/reward ratio for traders remains in balance, clearing looks set to remain a popular alternative to bilateral risk. However, to make the most out of this valuable risk management tool, companies must do more than simply cal-culate risk exposure. Being able to calculate the net cost versus value of each trade, with the ability to balance that against the cost of credit for each counterparty, is vital. To calculate this, companies must actively monitor trading activity by analyzing trade data to gain an accurate understanding of business costs. This will help companies decide when to use exchange clearing instead of bilateral trading for maximum benefi t. As ever, the bottom line is that shareholder and sta-keholder protection and return are paramount. But if trading liquidity can also be increased, then the clearing scenario should be a net win all round. Here to stay? It’s likely.

(REDUCING RISK EXPOSURE from page 13)




(GAS STORAGE BOX SCORES from page 1)changing. Summer looks like a hot one again, and in light of the building economic woes across the country, gas prices will be in everybody’s crosshairs like never before. Typically, this isn’t a great thing. And don’t get us started about the election season; we can already sense the mercury rising in the “bad guy speculator meters” of the presidential contenders. And now we hear talk about a stronger El Niño event this Summer? Can you say, nasty Fall Hurricane season after all? It’s still entirely possible. We’ve stopped accepting end-of-season predictions for storage, but it appears this week that a consensus is strongly forming around 1,275-1,350 Bcf. Next week’s pull looks to be in the -115-130-Bcf range. And with oil up, the bulls have it. A few short months ago we would have bet that this year’s natural gas Summer burn season would have been a bit sleepier than in the past couple years, as we seemed to be heading into a scenario we’ve seen already in recent years. Sure, there are always those momentary spikes and nasty events to throw off everybody’s charts, but in all, this year we were looking less remarkable than say the previous two years. No more. Considering what we now see as big unknowns and variables up and down the supply side and on the political risk side, we’ll hold back a few weeks before we start making a call on what Summer ’08 looks like. We would also like to invite you to register your own opinion on the subject, whether on or off the record. E-mail your comments to the editor at [email protected]....

*** Working gas in storage decreased to 1,619 Bcf as of Friday, Feb. 22, 2008, according to EIA. The draw from working gas storage of 151 Bcf is 7 percent more than the fi ve-year average of 141 Bcf and 4 percent more than last year’s net withdrawal of 145 Bcf for the same report week. EIA suggests that these modest differences likely refl ected the heating demand for natural gas, as heating degree-days in the lower 48 states were about 8 percent above normal levels during the report week, but were almost 7 percent below the level reported for the same week last year, according to the National Weather Service. All census divisions in the lower 48 states posted heating degree-days well below last year’s level, except for the West North Central, Pacifi c, and Mountain census divisions where heating degree-days were 19, 44, and 17 percent more than last year for the same report week. At 151 Bcf, the net withdrawal from storage marked the sixth consecutive week in which implied net withdrawals exceeded 100 Bcf, with working gas stocks declining 1,072 Bcf during the period. During the six-week period since Jan. 4, withdrawals from storage have averaged 162 Bcf per week, compared with the fi ve-year average of 157 Bcf for the same period. If working gas stocks decline according to the fi ve-year average for the remainder of the heating season, working gas in storage on March 31, 2008, will total about 1,335 Bcf.

*** Steve Gregory of Chicago-based WeatherIntel Services says that strong late Winter storms will continue to impact the nation during the next two weeks, but a strong moderating trend should begin after March 10. “The hemispheric weather pattern remains very dynamic, and the next major storm is expected to develop over the lower Mississippi Valley and then hit the Midwest and Ohio Valley around the middle of next week,” he says. He adds that high winds and possibly blizzard-

like conditions in some portions of the Midwest should also be expected. “This storm will be followed by another arctic outbreak in the Midwest and to a lesser extent, in the Northeast, by the end of next week. Temperature will begin to warm over the southern states later next week, while stormier conditions with near to slightly below normal temperatures begin to affect the western states.” He says that although uncertainty remains, there continues to be “excellent agreement between the deterministic, dynamic and empirically based probabilistic models that the primary long wave TROF over the central and eastern US will retrograde to the western states and begin to take on ‘classic Spring’ characteristics.” So it’s warming up soon. “The arctic basin is already beginning to warm dramatically, while convective forcing over the West Pacifi c due to La Niña will maintain a strong subtropical jet stream. Therefore, while temperatures will return to seasonal levels by mid-March in the Midwest and Northeast, relatively strong storm systems are still expected to cross the nation for the balance of March and into April, accompanied by heavy rains, unusually severe thunderstorm outbreaks – and even a few more heavy, wet snowfall events over the Rockies, upper Midwest and Great Lakes regions,” he says.

*** Dave Melita of Houston-based WeatherInsight, the guy who looks like he has once again nailed this year’s Winter patterns better than the rest of the meteorologists extraordinaire, says that the arctic air mass currently overwhelming the eastern one-third of the US will be “intense but brief. Next week features a resumption of strong Pacifi c systems crashing onto the West Coast that go on to add to the already record Midwestern snow pack. However, far less cold air will make it into the eastern US compared to recent late February arctic air outbreaks, leading to mainly rain with temperatures that are warmer than most model forecasts,” he says. Melita says we should look for a pronounced warm-up across the eastern half of the country during the upcoming weekend and early next week, followed by more storms and cooler air next week as the next series of Pacifi c systems traverse the country. Right now, he says, computer models “are at great odds in handling two storms arriving early (Tuesday, March 4) and late (Friday, March 7) next week, leading to high forecast variability across the Midwest and East during the six-10 day period. The bottom line is that in a similar manner to the way it dominated the majority of Winter, the coldest air and reinforcing snow events will be directed into the Plains and western regions of the Midwest. Lobes of cold air periodically returning to the East will be nowhere near as intense or expansive as the current arctic air mass overwhelming the Eastern Seaboard.”

*** Looking closer at this week’s Natural Gas Storage Lotto Box Scores, forecasts ranged from a low of -139 Bcf, which is -12 Bcf off the mark, to a high of -167 Bcf, or 16 Bcf off the mark. This week’s Extreme LowBaller Award winner was Ben Smith of First Enercast Financial. The Extreme Highballer Award went to David Tameron of Wachovia. Most folks were, on average, between 5-8 Bcf off the mark this week. The top spot this week was nailed by Michael Haigh of Societe Generale, who called a -152-Bcf draw, or 1 Bcf off the mark.




The Bentek Flow Model was best among independents at -148 Bcf, or 3 Bcf off the mark. The Desk Consensus survey was best among surveys this week at -154 Bcf. Including the Desk Consensus, the Big Five Surveys averaged -155.8 Bcf this week – about 5 Bcf off the mark. This category came in second among the three groups. BNP said -158 Bcf andReuters said -155 Bcf, while Bloomie and DJ once again tied at -156 Bcf. As a group, the 10 independents we now track again came in fi rst among the three groups, with an average forecast of -150.8, a mere 0.2 Bcf off a perfect score. PIRA called a -154 Bcf pull, Luke Larson of The Fundamentalist called a -159 Bcf draw and analyst Andy Weissman said -157 Bcf. Regarding Weissman, we inadvertently said that the Gas Wizard of K Street called a high -183 Bcf forecast last week, when in fact he called a -17 Bcf draw, a mere 1 Bcf off the mark. We have since adjusted the weekly box scores.

Gabe Harris of WoodMac called a low -143 Bcf draw and Ron Denhardt of SEER called a -146 Bcf pull. Steve Gregory of Weather Intel Services said -154 Bcf, Robry825, the mysterious model entity, called a -146 Bcf draw and Bentek Energy’s Flow model came in very good at -148 Bcf, second overall this week behind SocGen’s Haigh. Bentek’s S/D model came in at -155 Bcf. Here again we seem both Bentek Flow and S/D models coming in frighteningly close to the EIA print. The banks as a group came in third among the three categories we track, with a score of 157.18 Bcf. Haigh of SG called a near-perfect -152 Bcf draw, missing the mark by 1 Bcf. He did, however, nail this week’s Best of the Bestest Award for calling the draw better than any of the 25 forecasts we now track. Haigh is having a heck of a year forecasting-wise. Tim Evans of Citicorp said -155 Bcf, JP Morgan called a -146 Bcf draw and Morgan Stanley said -155 Bcf. BMO said -156 Bcf, The Woz (ICAP) said -147 Bcf, UBS’s Bill Featherston said -165 Bcf and David Tameron of Wachovia said a group high of -167 Bcf. TFS said -162 Bcf and Corny Boersma of FCStone said -160 Bcf.

(GAS STORAGE BOX SCORES from page 15)

Natural Gas Weekly Storage Forecast Comparison 2008

Storage ForecastsStocks (BCF) 4-Jan 10-Jan 17-Jan 24-Jan 31-Jan 7-Feb 14-Feb 21-Feb 1-Mar

EIA - 2008 1,770 - -87 -171 -59 -155 -274 -200 -120 -172 -151

EIA - 2007 1,752 - -71 -49 -89 -179 -179 -224 -259 -223 -132

Storage ForecastsCQ%

CorrectWeeks

#1 4-Jan 10-Jan 17-Jan 24-Jan 31-Jan 7-Feb 14-Feb 21-Feb 1-Mar

Bentek - Flow 97.55% 3 -92 -176 -60 -154 -278 -205 -112 -174 -148

Haigh/Société Générale 97.19% 3 -97 -175 -69 -156 -277 -204 -114 -172 -152

Speaker/JP Morgan 96.76% 1 -98 -168 -55 -158 -267 -202 -111 -173 -146

Bentek - S/D 96.18% 2 -97 -159 -73 -153 -275 -197 -127 -172 -155

The Desk Consensus 95.84% 3 -105 -166 -60 -155 -261 -191 -113 -172 -154

Gregory/WeatherIntel 95.46% 1 -98 -173 -55 -159 -264 -202 -106 -185 -154

The Woz/ICAP 95.03% -102 -165 -50 -158 -253 -204 -123 -176 -147

Bloomberg 94.89% 1 -109 -162 -57 -158 -258 -188 -118 -172 -156

PIRA 94.89% -101 -178 -49 -148 -270 -185 -110 -173 -154

Shah/RiverRidgeEnergy 94.67% -96 -160 -65 -147 -252 -197 -117 -167 -158

Weissman/FTI 94.24% 1 -105 -170 -60 -145 -264 -180 -107 -171 -157

Denhardt/SEER 94.24% -105 -165 -71 -160 -267 -190 -106 -175 -146

Robry825 (05) 94.24% 1 -104 -172 -53 -130 -266 -202 -108 -168 -146

Dow Jones 94.24% 1 -106 -165 -62 -157 -243 -188 -118 -172 -156

BNP Paribas 94.17% 1 -114 -163 -56 -159 -257 -186 -120 -174 -157

Larson/Fundamentalist 93.88% 2 -110 -171 -56 -154 -266 -192 -97 -183 -159

Byrne/Morgan Stanley 93.88% -100 -170 -65 -150 -260 -175 -115 -160 -155

Adkins/Raymond James 93.38% -119 -162 -62 -141 -260 -197 -121 -175 -164

Reuters 93.30% 1 -111 -153 -58 -160 -258 -184 -113 -174 -155

Harris/WoodMac 92.87% -98 -178 -62 -180 -262 -197 -100 -162 -143

Featherston/UBS 92.80% -115 -165 -65 -150 -255 -190 -110 -170 -165

Smith/Enercast Financial 92.73% -100 -173 -69 -145 -260 -190 -94 -168 -139

McGillian/TFS 92.08% -113 -164 -71 -163 -256 -185 -131 -174 -162

Tameron/Wachovia 91.94% -108 -165 -63 -159 -255 -176 -106 -176 -167

Boersma/FC Stone 91.86% -115 -162 -52 -164 -250 -192 -109 -180 -160

Evans/CitiCorp 91.36% 1 -105 -150 -60 -160 -250 -170 -135 -170 -155

BMO 91.14% -120 -164 -51 -168 -251 -185 -107 -166 -156



Power Stats & Intel From NRGstream

For more information click here to go to www.

Nrgstream.com.Let us know what

you think about this feature. E-mail your thoughts to johns@

scudderpublishing.com

Northern U.S. System Operators (MISO, PJM, NYISO, ISONE) – Peak Daily Average

Northern ISO’s [MISO, NYISO, ISONE, PJM] Average Daily Peak Prices based on hourly actual LBMP

Northeast ISO [NYISO, PJM, NE-ISO, Ontario] Demand vs. Demand Weighted Price

based on actual hourly demand and hourly reference pricing, Ontario pricing converted to USD

Canadian ISO / Natural Gas PricingAlberta (AESO) vs. Ontario (IESO) Peak Daily Averages, NGX Intra-Alberta Same Day

Power prices based on a daily average of peak hours settlement pricing, NGX IA Same Day Settlement

http://www.nrgstream.com




This report is a compilation of data along with corresponding analysis of the daily “volumetric” infrastructure changes within the US natural gas network. Examples would be storage data, LNG regassifi cations, pipeline maintenance or integrity issues, nuclear plant data as well as imports and exports of NG. Furthermore, this report dissects the rest of the energy complex as it relates to weekly reporting statistics, yearly averages, news items and weather events. And fi nally it also taps into weekly/daily market settlements, commodity relevance and summarizes all that is Energy Trading. LNG and Gas Import Charts courtesy of the daily energy data and analysis publication, The Fundamentalist. For a sample issue of The Fundamentalist, click here.

U.S. LNG Daily Interstate Pipeline FlowsPoint Pipeline Capacity 23-Feb 24-Feb 25-Feb 26-Feb 27-Feb 28-Feb 29-FebLake Charles,LA Trunkline 1,800,000 13,645 8,629 14,645 14,688 40,114 10,447 12,820

Cove Point, MD Dominion 1,000,000 123,508 87,232 122,648 141,491 249,102 241,243 168,419

Elba Island, GA SONAT 822,926 300,915 313,990 310,915 364,279 492,161 459,211 316,973

Everett,MA Tennessee 200,000 110,989 114,521 126,124 115,883 70,664 78,148 76,684

Everett,MA Algonquin 90,910 121,982 123,268 123,562 155,926 76,339 92,088 83,201

Gulf Gateway* Sea Robin 635,000 0 0 0 0 0 0 0

Gulf Gateway* Blue Water Columbia Gulf 690,000 N/A N/A N/A N/A N/A N/A N/A

Gulf Gateway* West Cam 603 Tennessee 700,000 0 0 0 0 0 0 0 Totals 5,938,836 671,039 647,640 697,894 792,267 928,380 881,137 658,097

Thursday to Friday Change (223,040)Percent Change -25.31%

INDEPENDENCE HUB Point Pipeline Capacity 23-Feb 24-Feb 25-Feb 26-Feb 27-Feb 28-Feb 29-FebIndependence Hub /West Delta 68 Tennessee 1,000,000 886,150 886,150 886,150 887,995 901,889 898,050 878,490

Natural Gas Imports / Exports23-Feb 24-Feb 25-Feb 26-Feb 27-Feb 28-Feb 29-Feb

Point Export Pipe Import PipeCanada Foothills PL N.Border N/A N/A N/A N/A N/A N/A

(gigajoules)Canada Alliance Alliance 1,946,928 1,915,787 1,902,427 1,847,268 1,836,518 1,908,132

Emerson TCPL ML Viking 516,924 514,828 519,794 553,960 540,847 527,676 (gigajoules)

Emerson TCPL ML Great Lakes 1,696,627 1,709,324 1,889,151 2,101,087 1,919,812 1,966,895 (gigajoules)

Niagara TCPL ML Tennessee 725,521 716,875 750,348 763,061 870,991 860,683 (gigajoules)

Chippawa TCPL ML Nat Fuels 262,788 262,144 262,139 268,879 401,100 516,807 (gigajoules)

Waddington TCPL ML Iroquois 1,073,823 1,063,274 1,102,324 1,116,459 1,224,778 1,205,994 (gigajoules)

Cornwall TCPL ML Niagara Gas Trans 34,809 34,059 33,181 33,599 38,514 37,514 (gigajoules)

Napierville TCPL ML North Country Pipeline 60,980 60,958 60,962 61,087 64,517 65,409 (gigajoules)

Phillipsburg TCPL ML Vermont Gas Systems 45,008 40,008 38,641 41,935 49,852 52,624 (gigajoules)

East Hereford Maritimes/TCPL PNGTS Pipeline 110,110 110,109 137,405 143,271 243,330 248,140 241,309 SUB-TOTALS = 6,473,518 6,427,366 6,696,372 6,930,606 7,190,259 7,389,874 241,309

Bailyville Border Maritimes Tennessee and Various 397,891 397,881 254,832 321,657 398,901 440,389 380,969 Dracut +Delivery/(Rec) 191,699 186,695 144,699 125,325 253,047 278,092 267,085

http://www.scudderpublishing.com/documents/Fundamentalist021508.pdf



For information about subscribing to the EnergyCurves service, contact Niall McCarthy of Logical Information Machines, Inc. at 312-456-3462, or e-mail to [email protected].

Houston Ship Channel Basis: February 28, 2008

-0.40

-0.35

-0.30

-0.25

-0.20

-0.15

-0.10

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11Source: Energy Curves LLC - www.energycurves.com

$MM

Btu

Months Seasonal Cal Year

ERCOT Seller's Choice Peak: February 28, 2008

50

60

70

80

90

100

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

Source: Energy Curves LLC - www.energycurves.com

$MW

Hr


Heat Rate: ERCOT SC Peak / HSC: February 28, 2008

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

Source: Energy Curves LLC - www.energycurves.com

Impl

ied

Hea

t Rat

e


http://www.energycurves.com






Front Month Basis (March 08) Select Hubs For Power (Source: EnergyCurves LLC)

Gas Gulf Coast Houston Ship -0.200Gas Gulf Coast Tetco East LA -0.025Gas Gulf Coast Tenn. LA (500) -0.035Gas Mid Continent Chicago 0.308Gas Mid Continent Demarc -0.535Gas Mid Continent MichCon 0.328Gas Mid Continent NGPL MidCon -1.023Gas Mid Continent Panhandle -0.995Gas Mid Continent Reliant -0.900Gas North East Dominion 0.521Gas North East TCO 0.426Gas North East Tetco M3 0.975Gas North East Transco Zone 6 1.385Gas West Aeco -1.180Gas West CIG -1.035Gas West El Paso Permian -0.895Gas West El Paso San Juan -0.850

Gas West Malin -0.350Gas West NW Rockies -1.105Gas West PG&E Citygate 0.055Gas West Socal -0.548Gas West Sumas -0.600Gas West Waha -0.670Power East NEPOOL Mass Hub 88.09Power East NY Zone A 72.63Power East NY Zone G 94.50Power East NY Zone J 110.63Power East PJM West 81.98Power ERCOT Ercot Seller’s Choice 57.75Power West California Oregon Border (COB) 70.63Power West Mid C(olumbia) 65.31Power West North Path 15 76.50Power West Palo Verde 70.88Power West South Path 15 75.81

Credit Risk Desk

CreditAnalyzeredCr nalyzera y eThe Following Analysis is Provided Exclusively to The Desk by CreditAnalyzer.com. This week’s high-lighted industry is Oil Well Services & Equipment. The individ-ual companies and their credit profi les are listed alphabetically by industry and name in the fi rst table below. The second table compares the industries by averaging the probability of default for each company in the industry. This data is available via a web-based database, which contains information on nearly 4,500 companies. The data is updated monthly based on new disclosure. To fi nd out more, or to search the database, by industry or by individual name, go to www.creditanalyzer.com.

Company Analysis: Oil Well Services & Equipment

Name Probability of Recovery Cost of Calculated Default* Rate Credit Credit Limit**Acergy SA (ADR) 0.123% 71.03% 0.036% 5.479 Allis-Chalmers Energy Inc 0.130% 70.44% 0.038% 1.604 Atlas Pipeline Partners LP 0.313% 61.13% 0.122% 4.465 Atwood Oceanics Inc 0.010% 97.63% 0.010% 3.217 Baker Hughes Incorporated 0.017% 92.00% 0.010% 43.063 Basic Energy Services Inc 0.086% 74.82% 0.022% 2.016 BJ Services Company 0.036% 84.05% 0.010% 11.391 Boots & Coots Intl. Well Inc 0.098% 73.44% 0.026% 0.341 Bristow Group Inc 0.127% 70.69% 0.037% 4.307 Bronco Drilling Company Inc 0.038% 83.48% 0.010% 1.653 Buckeye Partners LP 0.094% 73.88% 0.025% 5.207 Cameron International Corporation 0.109% 72.31% 0.030% 10.926 Caspian Services Inc 0.027% 87.10% 0.010% 0.358 CE Franklin Ltd (USA) 0.146% 69.21% 0.045% 0.700 Complete Production Services 0.072% 76.70% 0.017% 2.981 Core Laboratories NV 0.059% 78.82% 0.012% 0.612 Dawson Geophysical Company 0.020% 90.28% 0.010% 0.788 Diamond Offshore Drilling Inc 0.010% 97.63% 0.010% 16.714 Dril-Quip Inc 0.015% 93.33% 0.010% 3.536 Enbridge Energy Partners LP 0.240% 63.94% 0.087% 8.225 Enbridge Inc (USA) 0.320% 60.89% 0.125% 17.888 ENGlobal Corporation 0.199% 65.93% 0.068% 0.220 ENSCO International Incorporation 0.010% 97.63% 0.010% 17.201 FMC Technologies Inc 0.192% 66.31% 0.065% 5.082


http://www.creditanalyzer.com



(CREDIT RISK DESK from page 20)


FX Energy Inc 1.012% 48.69% 0.519% 0.213 Global Industries Ltd 0.053% 79.95% 0.011% 6.583 Grant Prideco Inc 0.010% 97.63% 0.010% 8.589 Grey Wolf Inc 0.030% 85.98% 0.010% 4.248 Halliburton Company 0.010% 97.63% 0.010% 60.140 Helix Energy Solutions Group Inc 0.117% 71.56% 0.033% 4.575 Helmerich & Payne Inc 0.026% 87.50% 0.010% 9.194 Hercules Offshore Inc 0.108% 72.41% 0.030% 5.257 Holly Energy Partners LP 0.055% 79.56% 0.011% 0.122 Hyperdynamics Corporation 20.000% 17.06% 16.588% 0.003 Inergy Holdings LP 0.437% 57.59% 0.185% - Infi nity Energy Resources Inc 0.151% 68.85% 0.047% - Magellan Midstream Partners LP 0.105% 72.71% 0.029% 3.740 McDermott International 0.189% 66.47% 0.063% 4.489 Nabors Industries Ltd 0.096% 73.65% 0.025% 21.133 NATCO Group Inc 0.063% 78.12% 0.014% 1.015 National-Oilwell Varco Inc 0.072% 76.70% 0.017% 25.205 Natural Gas Services Group Inc 0.039% 83.20% 0.010% 0.529 Noble Corporation 0.010% 97.63% 0.010% 20.251 Oceaneering International 0.064% 77.95% 0.014% 4.294 Oil States International Inc 0.067% 77.47% 0.015% 4.232 OMNI Energy Services Corp 0.128% 70.61% 0.038% 0.216 Parker Drilling Company 0.074% 76.41% 0.017% 2.410 Patterson-UTI Energy Inc 0.010% 97.63% 0.010% 9.344 Petroleum Geo-Services ASA (ADC) 0.021% 89.77% 0.010% 3.509 PHI Inc 0.138% 69.81% 0.042% 2.160 Pioneer Drilling Company 0.019% 90.83% 0.010% 2.292 Precision Drilling Trust (USA) 0.010% 97.63% 0.010% 5.598 Pride International Inc 0.026% 87.50% 0.010% 16.908 Rowan Companies Inc 0.049% 80.78% 0.010% 11.270 RPC Inc 0.039% 83.20% 0.010% 2.648 Schlumberger Limited (ADR) 0.027% 87.10% 0.010% 66.422 Smith International Inc 0.081% 75.46% 0.020% 19.605 Sunoco Logistics Partners LP 0.520% 55.75% 0.230% 2.968 Superior Energy Services Inc 0.058% 79.00% 0.012% 3.231 Superior Well Services Inc 0.015% 93.33% 0.010% 1.085 T-3 Energy Services Inc 0.025% 87.92% 0.010% 0.671 TEPPCO Partners LP 0.363% 59.56% 0.147% 4.707 TETRA Technologies Inc 0.143% 69.43% 0.044% 2.352 TGC Industries Inc 0.023% 88.80% 0.010% 0.215 Tidewater Inc 0.025% 87.92% 0.010% 7.914 TransMontaigne Partners LP 0.034% 84.66% 0.010% 0.894 Transocean Inc 0.011% 96.62% 0.010% 30.670 Trico Marine Services Inc 0.073% 76.56% 0.017% 2.701 Union Drilling Inc 0.025% 87.92% 0.010% 1.008 Weatherford International Ltd 0.047% 81.23% 0.010% 27.932 W-H Energy Services Inc 0.025% 87.92% 0.010% 4.701 Willbros Group Inc 7.799% 27.04% 5.690% 0.550 * Capped at 20%.** Probability of Default X (1 – Recovery Rate)** In millions; equals 1% times the average of (tangible net worth + annual working capital + annual cash fl ow from operations).

Name Probability of Recovery Cost of Calculated Default* Rate Credit Credit Limit**



(CREDIT RISK DESK from page 21) Average Number of Probability Companies Industry of Default in Industry

Average Number of Probability Companies Industry of Default in IndustryAdvertising 1.955% 23 Aerospace and Defense 2.327% 53 Air Courier 2.959% 7 Airline 0.645% 29 Apparel/Accessories 2.048% 43 Appliances & Tools 1.853% 16 Audio & Video Equipment 2.893% 19 Auto & Truck Manufacturers 1.772% 16 Auto & Truck Parts 2.598% 45 Beverages (Alcoholic) 0.316% 17 Beverages (Non-Alcoholic) 1.491% 19 Biotechnology & Drugs 8.156% 287 Broadcasting & Cable TV 3.273% 60 Business Services 3.377% 175 Casinos & Gaming 3.462% 39 Chemical Manufacturing 1.842% 87 Chemicals - Plastics and Rubbers 0.850% 16 Coal 2.610% 20 Communications Equipment 3.907% 141 Communications Services 4.000% 149 Computer Hardware 3.789% 25 Computer Networks 5.026% 37 Computer Peripherals 3.687% 45 Computer Services 4.316% 155 Computer Storage Devices 4.121% 21

Conglomerates 0.679% 22 Construction - Raw Materials 0.190% 18 Construction - Supplies and Fixtures 2.610% 27 Construction & Agricultural Machinery 1.158% 20 Construction Services 2.299% 69 Containers & Packaging 0.616% 28 Crops 2.695% 14 Electric Utilities 0.592% 79 Electronic Instruments & Controls 2.898% 150 Fabricated Plastic & Rubber 5.018% 18 Fish/Livestock 0.079% 5 Food Processing 0.609% 76 Footwear 0.221% 15 Forestry & Wood Products 2.620% 8 Furniture & Fixtures 2.009% 28 Gold & Silver 2.306% 37 Healthcare Facilities 2.849% 84 Hotels & Motels 0.312% 20 Iron & Steel 1.119% 20 Jewelry & Silverware 2.755% 8 Major Drugs 1.238% 17 Medical Equipment & Supplies 4.824% 185 Metal Mining 0.746% 25 Misc. Capital Goods 2.217% 93 Misc. Fabricated Products 1.689% 52 Misc. Transportation 0.452% 21 Mobile Homes & RVs 1.093% 7 Motion Pictures 4.153% 16 Natural Gas Utilities 1.111% 48 Non-Metallic Mining 0.257% 3 Offi ce Equipment 3.549% 12 Offi ce Supplies 0.274% 7 Oil & Gas - Integrated 1.813% 23 Oil & Gas Operations 2.035% 158 Oil Well Services & Equipment 0.486% 72 Paper & Paper Products 0.345% 26 Personal & Household Products 3.154% 42 Personal Services 0.771% 23 Photography 1.312% 6 Printing & Publishing 1.362% 35 Printing Services 2.696% 8 Railroads 0.144% 14 Recreational Activities 3.947% 28 Recreational Products 3.286% 39 Rental & Leasing 1.096% 23 Restaurants 2.468% 66 Retail (Apparel) 1.137% 51 Retail (Catalog & Mail Order) 5.601% 22 Retail (Department & Discount) 0.540% 16 Retail (Drugs) 3.539% 12 Retail (Grocery) 1.097% 25 Retail (Home Improvement) 0.443% 8 Retail (Specialty Non-Apparel) 1.751% 71 Retail (Technology) 5.483% 8 Schools 2.789% 19 Scientifi c & Technical Instruments 3.320% 101 Security Systems & Services 6.550% 23 Semiconductors 2.739% 191


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Software & Programming 4.440% 270 Textiles - Non-Apparel 1.452% 12 Tires 4.293% 5 Tobacco 0.245% 9 Trucking 1.426% 26

Average Number of Probability Companies Industry of Default in Industry

Average Number of Probability Companies Industry of Default in Industry

(CREDIT RISK DESK from page 22)

Waste Management Services 3.277% 26 Water Transportation 0.711% 37 Water Utilities 0.360% 15 Grand Total 3.070% 4,286

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D ESKD the ESK The industry journal of energy trading, asset optimization and market intelligence...

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