IPE CEO bullish on exchange's post-merger success

Oct. 1, 2001
International Petroleum Exchange remains optimistic about its future success following its merger with Atlanta-based electronic commodity marketplace IntercontinentalExchange Inc. (ICE).

International Petroleum Exchange remains optimistic about its future success following its merger with Atlanta-based electronic commodity marketplace IntercontinentalExchange Inc. (ICE).

In a recent interview with OGJ, IPE CEO Richard Ward outlined how the London-based exchange came to choose ICE as a platform and pointed out some of the challenges ahead for the newly formed company.

IPE's choice of ICE

To some industry observers, IPE's selection of ICE came as somewhat of a surprise. The search for the ap- propriate trading platform took IPE the bet- ter part of a year.

In April 2000-shortly after the suc- cessful demutualization of the company-IPE held meetings with its members for input on electronic trading.

"The view of the members and the board was that IPE should develop its electronic capability, enabling it to go electronic sometime in the future," Ward recounted.

Following a review of IPE's existing technological capabilities and potential future requirements, the company's members reached the conclusion that it was not, in fact, a technology company, and a third party then was sought out, Ward explained.

IPE then waded through a list of 50 electronic platforms-a relatively "short list" for that particular time period, Ward recalled. The list of 50 was narrowed to 10, and then to 2: ICE and London-based electronic exchange London International Financial Futures & Options Exchange (LIFFE).

While LIFFE wished only to provide IPE with its technology, ICE went a step further with a merger offer.

Following that, conversations between IPE and ICE "just clicked," Ward said. Through an agreement with ICE, IPE determined that it would gain both technology and a foothold into the over-the-counter market.

"It's not often you get such a good fit between two companies, where the glove really does fit the hand and you don't have to chop off a few fingers," Ward said. "ICE is not only a technology company, [it's] a good technology company."

Other key strategic advantages gained through the merger, Ward noted, include placing OTC and futures trading on the same platform, with a single point of access for IPE's cus- tomers.

In mid-June, IPE's shareholders had tendered their shares to ICE, thereby clearing the way for the two firms to move toward completing merger proceedings (OGJ Online, June 18, 2001).

Upcoming challenges

In light of the complementary nature of IPE and ICE, the new firm faces numerous hurdles as well. IPE-which has been in operation for 20 years and has a customer base of more than 300 companies-faces a challenge with taking its operations fully electronic, Ward noted.

Engaging its customers in the transition process is not going to be quick or cheap, Ward said. "It's probably going to cost us about $10 million over the next 12 months," he said, and will involve many stages. With any of its spare time, Ward said IPE also will work with ICE staff on OTC clearing.

In addition, the new company plans to launch an initial public offering, about which Ward commented: "I wouldn't say it's way in the distance, it's just not tomorrow.

"An IPO has always been on the agenda-it was included in the offer document to IPE shareholders-and that is still the intention of the group ellipsebut there is some other business to get done first."

Another challenge will be to exploit the synergies between the IPE's futures contracts and ICE's OTC contracts.

IPE's third challenge-although not related directly to its deal with ICE-is to ensure that the Brent crude market remains the market of choice for its customers. This is of particular importance to IPE since the New York Mer- cantile Exchange's recent launch of one of two options contracts based on the Brent crude oil futures contract: on Sept. 6, for a Brent options contract; and the planned launch of a Brent-West Texas Intermediate spread options contract. The latter was postponed indef- initely on Sept. 20.

"We've built up the Brent market business over the past 13 years," Ward said. "What we need to do going forward is listen even more closely to our trading community to make sure that the IPE Brent is their market of choice when they come to the IPE to trade Brent."

Regarding NYMEX's launch of the Brent contracts, Ward said, "I'm not surprised that they've done it, and I'm not overly concerned, but I don't want that to sound like complacency. The challenge for us is to welcome competition-I think competition is good for business. I don't think actually splitting liquidity is good for business, though."

Future of futures trading

Regarding futures trading in general, Ward predicted an increase in the volume of business in Europe on the natural gas side.

"The [European] gas markets are quite immature compared to the US," where there exists a vibrant, competitive market for gas, Ward noted.

An integrated gas market across Europe will find it difficult to suc- ceed, he said, especially with the dominant positions currently held by companies such as Gaz de France SA and Ruhrgas AG.

"On a wider European context, this dominant position of some of these ex-state gas monopolies needs to be addressed before it's going to be possible to actually see an actively traded market."

Presently, ICE is in talks with all the major European players to try to get them involved in the OTC business, Ward said. The OTC business is very different from the futures business, Ward said, and the success criteria for the OTC contract is very different from the futures contract: "Futures contracts are all about very large volumes, large liquidity, on a very small number of contracts, whereas OTC contracts are the other way around: low volumes and a very large number of contracts.

"In looking at the European marketplace, I think there will be more op- portunities, initially, to offer OTC products traded electronically for Europe than there will be to offer futures contracts.

Meanwhile, Ward said, the oil markets are being "very well served." At the moment, he reckoned, the launching of another oil futures contract is "pretty unlikely."

Price influences

The futures market has had a great influence on oil and gas prices, Ward commented, and the process has changed quite a bit over the years.

Historically, traders priced off dated Brent, but a decline in the marker crude's production in recent years has forced traders to think more closely about whether that's an appropriate pricing benchmark, Ward observed.

As a consequence, IPE introduced a Brent-weighted average (Bwave), or the weighted average for all the crude oil trades that go through the futures ex- change each day.

"What has happened with us introducing the Bwave is that we are now seeing some producers contemplating pricing off that market, rather than pricing off the dated Brent market," Ward said.

"Now that's quite a shift in attitude, particularly when looking at some of the Middle Eastern countries and their approach to pricing their oil."

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IPE CEO Richard Ward
Regarding NYMEX's launch of a competing Brent futures contract: "The challenge for us is to welcome competition-I think competition is good for business. I don't think actually splitting liquidity is good for business, though."