crude and products trading update ,
 Mark and Greg, =20

FYI, below is an update from John Nowlan on Q3 issues surrounding the crude=
 and products P&L.  I thought you would find this informative as to what is=
 going on.  Mike

3rd Quarter update
Recent steps taken to manage crude and products
As you are aware the big changes this year have come from breaking the vari=
ous businesses into their respective area and giving the lead to managing t=
he business to a specific individual e.g. J. Goughary - Gasoline, C. Mahone=
y - Distillates, N. Clarke - Resid, S. Bland - Petchems, B. White and D. Sc=
hroeder - Crude.  This was done to give more business focus and ensure as w=
e build the mid marketing and origination groups we have the right trading =
structure.  As for origination and mid marketing we have been very successf=
ul building out the USA org and now will be looking to add some talent in E=
urope.  Origination likewise we have been successful in the crude and produ=
cts area with Randy's team.  On the petchem side, I have been interviewing =
extensively over the past week and hope to have one very strong addition fo=
r Doug, Tim O'Neal, and two very highly rated associates coming from EBS. A=
s for the trading itself, I imposed trading limits on all traders 3 weeks a=
go and, as will be addressed next, we are not losing much if any money on o=
ur daily trading rather the losses are coming from primarily one huge struc=
tured position.  Lastly, we have been quite aggressive in divesting of any =
individuals, which were not helping us to achieve the goals, which we have =
set forth.  Bill Briggs, Phil Clifford and Andrea Hauser will all be leavin=
g the group.

3rd Quarter loss explanation
Losses to date:  $40.23 million
$30.79 is in the ERAC book (i.e. Don's big P+ and Nymex swap position)
?=09$23.34 is due to Vega, Theta and Gammas
Vega:  $4.30
Theta:  $16.72
Gamma:  $2.30
?=09$5.2 due to curve shift
$5.2 million in distillates
?=09$1.3 million we discovered in a mis -marked curve when Bill Briggs was =
terminated.
?=09$5.52 million is curve shift (inventories we are holding globally in a =
falling market)

P+ issues and management
Two key problems:
1.=09Correlation marked on the Cal 02 is still too low, we need to raise th=
is correlation.
2.=09Nymex option position, which was put in the book to hedge the P+ posit=
ion, is too large and mis -marked, i.e. the market is 3.20 and we are marke=
d at 2.85.
Solutions and steps forward:
We have $15 million to correct some of this problem and that was getting do=
ne late last week.  Don has been talking to Koch and BP in restructuring th=
e P+ book and moving a portion of the CAL 01 and early 02 position out as f=
ar as 03 so we have smaller, more manageable positions.  Ideally over the n=
ext week we hope to get the book to a position where the theta bleed goes f=
rom $270k/day down to around $100k/day.  This is worth $5.1 million a month=
 to us.  Lastly, once we get through the next few months a significant piec=
e of our exposure rolls off.

In summary, the "day trading" the group has done has been steady in a very =
choppy market; it is the ERAC structure, which is tainting us.  It would be=
 useful to you if Rob, Don and I got together with you to go over all the s=
pecifics some time this week, as it is difficult to handle by Email.

John Nowlan
mark.frevert@enron.com, greg.whalley@enron.com