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Articles Archive
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June 2004
Customer Service
Gas trading technology vendors are finding that continued market volatility is attracting clients keen to manage their exposures. But new entrants are forcing them to pick a model and stick with it.
By PAUL LYON
Spending on energy trading IT systems is rising, if predictions by Meta Group, a Connecticut-based technology research and consultancy company, are to be believed.
The vendors agree - OpenLink, the New York-based risk management technology company says that it has noted an upswing in business since the start of the year, and other technology vendors say they are enjoying relatively healthy sales compared with last year."We were expecting modest, if any, growth this year," says Matt Frye, managing director of OpenLink's Houston office. "But our sales pipeline has filled out strongly, as there is growing optimism in the market." Frye attributes his strong sales to high market volatility as well as to increasingly stringent regulatory requirements. "Companies need to show regulators and shareholders they have a rigorous trading system in place able to meet the regulatory requirements of the Sarbanes-Oxley act," he says.
Michigan-based DTE Energy, for example, decided to sign up OpenLink to manage its natural gas, power, refined products, coal, and emissions trading activities. And the implementation marked OpenLink's first Linux installation - another differentiating service the company offers. In fact, one of the main reasons DTE chose Endur is because it is the only solution that supports Linux, according to Edward Finta, director of information systems at DTE Energy Trading.
Meanwhile London-based rival KWI has also noted impressive sales growth in the North American gas market. "Around 60% of our customers in North America upgraded their KWI software - and we have also signed up Epcor in what has proved to be one of the largest new deals of the year in the North American market," says Pete Gombert, KWI's executive vice-president of international operations. Although KWI's global revenues dipped from a high of £11.45 million as of May 2002 to £11.25 million in May 2003, projected revenues for May 2004 are £12.36 million, the company says.
Application Service Providers
While OpenLink and KWI provide solutions that require installations, New York-based vendor Kiodex is a different animal altogether. The company's flagship product, Kiodex Risk Workbench, offers energy companies and other corporates an entirely web-based risk management platform that provides independent market data integrated with proprietary valuation models.
Moazzam Khoja, Kiodex's Houston-based product specialist, says that the web-based functionality provides companies with a solid foundation for managing gas exposures -and is particularly useful for firms looking for reliable data. "Other vendors differ from us in the sense that they require huge up-front implementation costs, as well as maintenance fees," Khoja notes. "Instead, Kiodex offers a subscription-based service, which is renewable each year. Because of this structure, we are forced to prove our worth to clients on a daily basis."
Khoja says that for many companies, software installations can prove to be burdensome. Hedge funds looking to tap the energy markets, for example, benefit from the ease and quickness of signing up for a web-based system like Kiodex, Khoja adds.
Maybe so, but such application service provider (ASP) models are not the favored platform for large energy users, OpenLink's Frye argues. "There are a lot of software vendors with varying models, but few are able to offer a complete straight-through-processing [STP] solution," Frye says. "Fortune 500 companies are unlikely to use an ASP, as they are subject to stringent regulatory requirements that have effectively made a centralized application mandatory. Sarbanes-Oxley requires that companies maintain records from deal aggregation through to auditing, and OpenLink is able to provide the necessary solution - in a sense, we provide our clients with a central nervous system."
SunGard Energy Systems, a division of Pennsylvania-based risk technology company SunGard, also offers an STP solution in its Entegrate package. Mark Walker, senior vice-president of SunGard Energy Systems, agrees that few energy companies would want to sign up for an ASP model, and argues that ASPs are only suitable for smaller corporates.
Frye also admits, however, that both installation and ASP models are viable - depending who the client is. "An ASP could be a good choice for a small regional organization that doesn't need a consolidated view of its gas hedging," he says.
New Markets
But OpenLink has, in fact, had success in winning hedge fund business, as John D'Aleo, the company's New York-based managing director points out. Although he wouldn't divulge which US-based hedge fund uses OpenLink for its commodities trading, he did say that it was "one of the largest energy hedge funds operating out of the US". Additionally, major financial institutions, such as Deutsche Bank and Bank of America, also use OpenLink. And as more banks enter the gas trading space, looking to fill the void left by the exit of energy merchants, OpenLink says it is confident of winning further business.
Indeed, a number of firms are actively looking to tap gas users that have only just begun to look at trading technology systems. Bayer, the Leverkusen-based pharmaceuticals and chemicals company, for example, last month chose SunGard's Adaptiv trading and risk management product to support its commodity, foreign exchange and fixed-income trading operations. Adaptiv will be linked to SunGard's AvantGard treasury solution -already in place in Bayer's treasury operation - providing integrated risk management, trading, in-house banking and cash management. OpenLink also says that it is planning to sign up clients from the petrochemicals business.
Upswing
Planalytics, the Pennsylvania-based weather risk management technology company, is another company that has noted an upswing in interest among chemical companies looking to manage their gas price risk, says Paul Corby, Planalytics' senior vice-president. Planalytics GasBuyer is a web-delivered tool that uses proprietary year-ahead climate forecasts and inventory change projections, weekly Energy Information Administration storage data and real-time Nymex futures contract pricing to analyze natural gas prices and provide clients with daily buying, selling and hedging actions. Recent Planalytics signups include Dow Corning Corporation, the Michigan-based silicone products company.
Each vendor may have its own take on which model is best (whether it be an integrated solution, component-based, an ASP or a weather-sensitive driven model) - but the technology sector is still evolving. In fact, SolArc, the Oklahoma-based provider of supply and trade management solutions for energy companies, last month launched a new natural gas module for its SolArc RightAngle software. The offering was co-developed by Sprague Energy, the New Hampshire-based supplier of home heating oil, fuels and natural gas, which is currently implementing the software.
"Today's natural gas enterprise has to deal with many new constraints and requirements that were non-existent just two years ago, such as strict management of exposure limits on business party credit risk and compliance with internal controls and procedures mandated under the Sarbanes-Oxley Act," says Brad Anderson, chief executive officer of SolArc. "Consequently, current gas transaction systems are ill-equipped to handle these mandatory requirements".
Copyright © 2004 Incisive Financial Publishing. All rights reserved.
Used by permission. First published in Energy Risk - June 2004
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