how to go forward in the oil markets

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---------------------- Forwarded by Jeffrey A Shankman/HOU/ECT on 10/02/2000
01:33 PM ---------------------------

Chris Mahoney
09/29/2000 02:16 AM
To: Mike McConnell/HOU/ECT@ECT, Jeffrey A Shankman/HOU/ECT@ECT, John L
Nowlan/HOU/ECT@ECT, Greg Whalley/HOU/ECT@ECT
cc:
Subject: how to go forward in the oil markets

CUSTOMER BUSINESS - EOL
Jeff - I think your ideas of adding marketing and research analysis to the
group are good starting points. I don't feel this will increase revenues for
us in 2001 as our efforts here are only to win volume from others in a thin
volume environment. Eventually the captured deal flow should help the group
trade from a better knowledge base but for the next year it will require a
significant recruitment and training effort. Both the recruitment and the
teaching process are ones that we need to focus on. Please let me know what
you have in mind on the recruitment side and I would like to highlight that I
feel there are very few people to teach the analysts and associates. I plan
on spending an increasing amount of my time working with the younger team
that I'm assembling in London. By end October, the London office will have
5 managers, 4 associates and 1 analyst in our group. This is a real shift
from the approach of the past where the focus was on recruiting directors.
Given our previous track record on recruiting from the outside (about 33%
success in terms of performing well and acclimating to enron) I think this is
the right approach but we must realise this is a slower process when we look
to revenue growth and one that will also require us to shift more focus
toward teaching. My plan is to put much of the associate resources toward EOL
marketing initially and see what talents they have for being marketing and
analysis. The one analyst joining the group is coming over one of the
consulting companies in London and I'm putting him in charge of drawing up a
list of potential customers in every European country. Please let me know if
you have any plans of bringing somebody in to organise globally the marketing
business. Can't help but feel that we are very marginal in the electronic
trading of oil and could lose all of our business in the near future. Having
seen the ICE demo I would prefer that system of ours because of volume. This
is a complaint that I have heard from many traders regarding the use of our
system. The challenge is how can we put up more volumes, more markets, and
tighter 2 ways to convince more people to trade with us and not get run
over. What do we know about the ESPEED system and what they are going to
have. I saw a Reuters story saying they were launching Oct 2nd with Koch,
Dynergy, Entergy, Willams, and a few others. Are we thinking about trying to
join up oil markets with either of these two sites and what are the plans if
we do begin some of the small customer basis we do have? This is area that
we giving a great deal of effort and attention to but what are our plans if
we fail to be the largest in this platform. I don't feel that in the oil
business we will be successful unless we can be the most preferred site
because most companies will not have two websites up on the computers. We
are having a difficult time getting anybody but the most aggressive trading
companies to look at our numbers so it seems difficult to believe the
industry will look at two different e-trading sites.

BUILDING THE PHYSICAL TRADING BUSINESS
This has always received luke-warm interest from Enron. I believe that the
inefficiency within the oil markets is not great enough to try and profit on
that
alone. So when we talk about going big that really means getting involved
in some kind of steel and trying to dominate certain aspects of the physical
business. Tankage and shipping are the easiest and quickest ways for us to
increase the business we are already doing in these areas with the shortest
financial commitment. Mike and Jeff you should be aware though that the
corporate commitment to be in the oil business has previously been poor. We
can
candycoat this subject but it is very clear that most of our competitors are
more aggressive on the credit and performance risk in emerging markets. We
have
a credit department that have done a poor job, if any at all, in getting out
there visiting with the national oil companies that we have to be able to
participate with
(petrobras, pertamina, petrolimex, sinochem, sinopec, egpc, nnpc) if we have
any real plans of significantly expanding our physical volumes. We are also
the
worst company in the oil business in putting out a contract that shows we
have a commitment to perform. Our contracts are also drafted with many
escape clauses that will be rejected by many end-users who will insist on a
greater performance guarantee. As we discussed briefly in Singapore, I think
there are several airlines that we could target in the U.S. for physical
supply. I will tell you now that legal would not accept the consequential
damages that the airlines have in their tenders. Previously, I have not
gone after this business because I didn't believe we would have the political
clout or sponsorship from those in your position to take legal on in such
matters. Please consider this (I will fax you a tender offer from Japan
Airlines) and lets discuss if we are ready to accept that if we fail we are
willing to accept that it could cost us several million dollars. That kind
of loss I have never experienced and seen it happen on very few occasions but
it is something that we have to accept if we want to go after the airline
business.

I will let you know more my thoughts about how we go should try to go
forward....this message was more to highlight how I'm trying to advance the
group along and what are the challanges we face at the moment. Lastly, on
that theme we are trying to work with IT over here to develop some systems
that will make us better suited to do customer business. At the moment
everybody is working off of individual excell spreadsheets and we are trying
to get toward a server based system
and options system that would be available to everybody and designed by IT
people instead of traders. I will let you know if we need any help from you
on this as intially we do seem to be getting stonewalled by the London IT
department.