Insight: Wall Street's energy rivals - Big Oil, a French utility, the Koch brothers
By Jonathan Leff
NEW YORK (Reuters) - As a historic oil and gas boom transforms the U.S. energy sector, Wall Street is losing the battle to remain the partner of choice for energy producers and major consumers seeking to protect themselves against volatile prices.
In the thriving Texas Permian oil patch and beyond, banks are being edged out by a handful of the world's biggest corporations including BP Plc, Cargill and Koch Industries.
With Wall Street hamstrung by growing regulatory restrictions, a recently finalized ban on proprietary trading and increased capital requirements, these corporate behemoths are leveraging their robust balance sheets and savvy global trading desks to capture as much as a quarter of the global multibillion-dollar market for hedging commodity prices.
New risks have arisen this year that could tilt the scales further, as the Federal Reserve considers limiting banks' ability to trade in real physical markets, the kind of deals that are increasingly important for many of the smaller and mid-sized companies at the fore of the U.S. energy renaissance.
Just ask Alan Barksdale, president and chief executive of Red Mountain Resources, a conventional driller in the Permian Basin. Early this year his company was shopping for a counterparty to execute derivative trades that would protect some of its near 900 barrels of daily production from a possible price drop. Barksdale, a former investment banker, was looking to lock in "costless collars", a type of specialized options trade.
After reviewing a number of offers, including some from Wall Street firms, he chose BP Energy Corp, a unit of the oil and gas major's trading division. In part that was because BP was already working with the firm's lenders. But Barksdale was also interested in a partner who could one day take physical delivery of his crude, potentially netting Red Mountain an extra dollar or more per barrel.
"As you grow as a company, you'd like some flexibility to get some physical delivery," Barksdale said. "When you're dealing with somebody who is long a commodity, you get better service."
Ten years ago, only a handful of banks would have likely handled such a trade. Over the past decade, however, more than a dozen rushed into the commodity trading business, acting as lenders, counterparties and risk managers. Continued...