As the saying goes, for Canadian natural gas marketers 1997 was a year when “one man’s trash was another man’s treasure”.
Enron had re-entered the Canadian marketing sector in 1993, following a 5-year non-compete. I know this because Enron’s exit from the Canadian marketing sector in 1988 created the job opportunity that changed the course of my career. Enron sold its Canadian marketing arm to the “Westcoast group” in 1988. Westcoast owned Union Gas Limited and its affiliates.
By 1988 I had spent 6 years at Union Gas, experiencing energy deregulation from the utility perspective.
By late 1988 Westcoast had merged 3 of its holdings, including the Enron marketing group, to create Unigas Corporation. Unigas was Westcoast’s unregulated marketing arm, with a primary focus on selling natural gas. Unigas sold to utilities and end users, to Canadians and Americans.
I joined Unigas in November 1988. My role had an Eastern Canada focus: Ontario and Québec, with a bit of activity in Manitoba.
About the “entrepreneurship highs”…
By 1993 I had left Unigas and joined with friends and partners to create Cibola Canada Energy Marketing Company.
This was not an unusual thing to do. Many of my ‘energy buddies’ had created their own independent marketing businesses. Some focussed on selling to the industrial-commercial-institutional sector, some focussed on selling to residential users…i.e., using door-to-door sales activity.
All of us were experiencing success. The market was ripe with growth and endless opportunity. Almost every marketer and consultant enjoyed the “entrepreneurship highs”. Businesses were built…quickly. As one of the more extreme 1990’s examples of “entrepreneurship highs” - one friend bought and parked a Rolls Royce in front of another friend’s home…the car and keys were a surprise gift given as thanks for help in ‘going public’.
Now…about the “entrepreneurship lows”…
Enron re-entered the Canadian market in 1993.
Enron had the mindset “go big or go home”.
That “go big or go home” strategy spread to the other major [not independent] energy marketing companies in Canada. From our independent perspective, “go big or go home” could be translated as “you are a fool if you buy from an independent marketing firm”.
Within 2 years, another saying joined “go big or go home”. That saying was “credit is king” and it could be translated as “you are an absolute fool if you buy from or sell to an independent marketing firm”.
Some major players – could it possibly have been Enron & friends? – pushed market pricing to very low levels throughout 1996.
In September 1996, a Canadian independent marketing firm became ‘offside’ to the point it could not meet its obligations. From our perspective, that meant we lost a large amount of low-priced supply. We were not alone. Other independent marketing firms also lost large amounts of low-priced supply. Many marketing firms, whether independent or deep-pockets, found themselves with a very negative mark-to-market position. The deep-pockets players didn’t lose much supply in relative terms and absolute losses of say $200,000 - $1,000,000 per hit didn’t dent the businesses too much. Smaller players, the independents, took the same $ hits however the relative impact was somewhere between very-troubling to catastrophic.
People reacted tentatively at first…during the first 2 weeks market pricing held…then market pricing started to increase about 1% per week…then 1% per day…then more…then it became almost impossible to buy at any price.
I know this because throughout 1996 I had been speculating natural gas futures. Consistent with our company’s physical position…we were bearish. We favoured shorting the futures market. The end result was, when we lost physical supplies we became even shorter and we doubled up on that problem by also being short in the futures market. That is a wonderful combination if you thrive on maximized stress levels and minimal sleep.
Throughout the last few months of 1996, once a week or so another independent marketing company failed. That increased tension in the marketplace. It was a time when experienced and tough business men were bewildered, shaken, and in some cases overtaken by emotion and tears. Many months later, I sat in the ‘audience’ at bankruptcy proceedings and watched grown men sit front-and-centre, outcasts in the eyes of most of their peers. These were very painful things to watch. In our business sector it was the Year of the School of the Hardest Knocks.
By November 1996 most of the Canadian independent natural gas marketers were very short and very squeezed. A number had failed. Many more would fail during the next few months…when the dust finally settled and prices softened.
“Go big or go home” had proven to be a winning strategy for the majors. Few independents survived that year when the most-powerful in the Canadian energy marketplace flexed their muscles.
But - we were lucky.
Within 4 weeks of the first supply-failure in September 1996 event we had made the absolutely agonizing decision to reverse our [commodity] position from ‘short’ to ‘long’.
That meant we faced one of two outcomes:
- If the market continued to rise for a few months then we would win. When I say ‘we would win’, I do not mean we would receive a windfall…I mean we would have an OK year….assuming our suppliers delivered.
- If anything else happened we would lose…I mean we would lose our business and face the bankruptcy experience…we would LOSE BIG.
We began to implement our strategy the day we made it. For some of us the first purchases were beyond painful. Each of those purchases solidified 6-figure accounting losses. Regardless, we had decided to go long and so we bought. And we bought more…and we bought even more. We didn’t haggle over price…we just bought from anyone who would sell to us.
Each time we bought gas in October, November, and December 2006 it sent buying signals to the market. Prices increased. And the pace of increase increased. Soon, our very-negative mark-to-market position had become very positive.
With our mark-to-market position reversed…we “lived to fight another day”.
We had survived the best and worst of the Entrepreneurship Highs & the Entrepreneurship Lows.