The rise and fall of Enron:
The History of the Natural Gas Industry Natural gas, primarily methane, was originally an unwanted byproduct of petroleum extraction. For many years when an oil well vented gas it was simply flared; i. But people eventually learned the uses and virtues of natural gas and built pipelines to convey it to the cities where it took the place of coal gas for residential and industrial lighting and heating.
The market for natural gas has three major types of economic units: In a competitive market the fluctuations in the supply of natural gas creates fluctuations in the spot market price of gas. Such uncertainty in the price of gas creates problems for the suppliers and customers.
The suppliers who are making decisions about exploration for natural gas worry that they may invest in development of fields only to find a downturn in the market price which may result in losses.
Customers, such as electrical power generators, face investment choices between equipment to use natural gas or fuel oil. They worry that they may invest in equipment for one type of fuel and later find the alternative would have been more economical.
This led to businesses entering into long term contracts for natural gas. It also led to the government trying to eliminate the price uncertainty by price controls. The natural gas industry became heavily regulated. The unavoidable problem of price controls is market shortages. Often the participants in an industry under price controls do not perceive the source of the shortages as being price controls.
In the case of the pipeline companies, particularly in the late 's and early 's, they had customers whom they could profitably serve if only they had additional supplies of gas.
The pipeline companies entered into long term contracts with suppliers to take all the gas the suppliers wanted to sell them at a specified price. Those long term contracts could have specified the maximum amounts the pipeline companies were committed to purchase but they did not. At the time it seemed to the pipeline companies that they could use all the gas they could get.
These long term contracts to buy any amount of gas at a specified price were called take or pay contracts. When the demand for natural gas declined in the 's the pipeline companies found themselves committed to purchase gas for which they had no customers.
This put the pipeline companies with take or pay contracts in a financial bind. The situation became worse when the government started to deregulate the industry. The flood of gas developed brought the price of gas down and the pipeline companies found that the take or pay contracts committed them to buying an unlimited amount of gas for long contract periods above the market price of gas.
Under such take or pay contracts the suppliers could not only market their own production at above market prices but buy up gas on the market and extract a premium from the pipeline company they had a contract with.
It is easy to see how the pipeline companies in the 's would be under financial stress to restructure. Houston Natural Gas had pipeline running east-west and included lines for serving the Florida market and the California market.
InterNorth's pipelines ran north-south and served the Iowa and Minnesota markets. InterNorth had been operated conservatively and had little debt.
This made it a target for corporate raiders who sought to use its cash holding and borrowing capacity to extract funds for themselves.
After fending off one takeover attempt InterNorth officials were looking for another pipeline company to merge with that would reduce their attractiveness to corporate raiders.Nov 02, · The Rise and Fall of Enron.
NOV. 2, Continue reading the main story Share This Page. Continue reading the main story. Earlier this year, most companies would have loved to have Enron.
The story of Enron Corp. is the story of a company that reached dramatic heights, only to face a dizzying fall. Its collapse affected thousands of employees and shook Wall Stree t to its core. At Enron's peak, its shares were worth $; when it declared bankruptcy on December 2, , they were trading at $ the rise and fall of enron: a case study The Enron scandal was one of the largest corporate bankruptcies that the world witnessed in and it led to the complete fall of Enron Corporation, a large energy based company in America.
Nov 02, · Editorial on rise and fall of energy company Enron, which reaped huge profits out of California's energy woes earlier in year and now has seen stock crash amid serious questions about its. Compounding the problem toward the end was the precipitous fall in the value of Enron stock. Enron conducted business through thousands of SPEs.
The most controversial of them were LJM Cayman LP and LJM2 Co-Investment LP, run by Fastow himself. Growth for Enron was timberdesignmag.com , the company's annual revenue reached$ billion US.
Itranked as the seventh-largest company on the Fortune and the sixth-largest energy company in the world.