ENERGY TRADING RISK MANAGEMENT - · PDF file4 Energy Trading & Risk Management .com Energy trading ... A CRO is responsible for assessing and planning for potential risks

+ENERGY TRADING

RISK MANAGEMENT

A Supplement to

CONTENTS

www.ogfj .com � Energy Trading & Risk Management 1

PROFILESPROFILES

2CONTENTS2CONTENTS41012

1416

182022

New strategies for managing risk – Erica Shillings

Risk issues diff erent for upstream companies – Don Stowers

Thriving in volatile markets – Allegro

OpenLink’s cMotion revolutionizes the integrated energy marketplace – Openlink

The E&P risk management conundrum – RiskAdvisory (a division of SAS)

Transparency and transactional fi delity for managing market risk exposure: A defi ning point for commercial excellence – SolArc Inc.

A Recognized leader in consulting and software for today’s demanding energy markets – The Structure Group

Auditability of trade process controls – Trade Capture

Only real-time, straight-through-processing, multi-commodity solution – Triple Point

2 Energy Trading & Risk Management � www.ogfj.com

Software companies have recognized that oil and gas companies have a unique set of concerns and that cookie-cutter products designed for

other industries will not do the job. As a result, they have developed sophisticated decision-support tools that take into account the complex

physical logistics and immense financial risk of E&P companies.

Don Stowers, OGFJ Editor

different for upstream companiesRisk issues


E ff ective risk management has taken a quantum

leap in recent years. The fi nancial markets have

led the way in developing and implementing

fundamental risk management principles, and the energy

industry has been quick to adopt similar standards for

commodities trading and to manage enterprise-wide risk.

Software companies have been proactive in develop-

ing programs designed specifi cally for oil and gas compa-

nies that enable them to market physical products like

crude oil, natural gas, gasoline, diesel fuel, jet fuels, and

other refi ned products, while monitoring price risk, credit

risk, market risk, and other forms of risk in a real-time

environment. New software off erings have also improved

the effi ciency of back-offi ce operations and such func-

tions as scheduling and transportation.

In recent years, vendors have begun providing soft-

ware for land managers, drilling supervisors, production

managers, trading and risk managers, and accounting,

auditing, and compliance staff . The best of these “pro-

ducer services” modules are fully integrated with other

software components – including third-party applications

– and address virtually every aspect of the business.

Application-specifi c software modules enable users to

track drilling and production operations and allows them

to monitor equipment inventory, administer leases, fore-

cast gas volumes, reconcile oil and gas production with

revenues, allocate production volumes back to individual

wells and income to interest holders, manage contracts,

ensure regulatory compliance, and manage price, volatil-

ity, credit, and other market risks.

Legacy systemsThe energy trading and risk management (ETRM) systems

described above are not employed by everyone. Many

fi rms continue to use old-fashioned spreadsheets, legacy

systems, or internally-developed systems that have a

backward focus – that is, they rely on records of past

events and produce reports based on history in an eff ort

to determine the future. However, this is starting to

change as more and more energy companies are starting

to recognize the value of forward-looking software solu-

tions to help them make sound business decisions.

Plainly, companies today are not satisfi ed with a mere

presentation of historical data, even if it is presented in a

visually-appealing manner. They need dynamic software

tools that assist them in decision making and execu-

tion. As a result, the leading vendors to the industry are

migrating their software from recording the past and

producing “autopsy” reports to a comprehensive system

that supports business processes and controls with

improved analytics to support decision making.

Real-time decision support is an important feature

to users. Several vendors off er live data feeds that help

in decision-making. Traders and hedgers can improve

their profi tability by gaining a deeper understanding of

markets, supported by advanced decision analytics using

live market and pricing data. The best-of-breed software

automatically performs real-time analyses and simula-

tions, even across multiple commodities and variables,

with user-specifi ed risk profi les and constraints.

One vendor described its producer services module

as “a fl exible tool that combines accounting, sales, data

inventory, and contracts in a way that was once impos-

sible, or prohibitively diffi cult, to pull together.” By incor-

porating the new capabilities of this module with existing

software applications, producers are able to improve

their back-offi ce operations, eliminate data redundancy

issues, and streamline every aspect of accounting, such

as managing ownership changes in producing properties

and calculating actual volumes to the custody transfer

point on the pipeline.

As savvy producers seek software that can provide

them with the functionality to address their data manage-

ment, scheduling, and reporting requirements, vendors

have been quick to respond. Today several choices are

available that provide a rich set of valuable features and

functionality that are capable of capturing and managing

the division of interest detail, owner imbalances, market-

ing arrangements and pipeline connectivity for each

individual well.

The producer services functionality can easily accom-

modate joint operating agreements (JOAs) and take-in-

kind (TIK) marketing provisions, split connectivity, and

dedications. The modules take into account diff erent

natural gas components present at the wellhead, such as

fl ash, condensate/retrograde, PTR, residue, etc., and are

able to determine distinct component volume for each

well as it is aggregated with others for one, or for many,

custody transfer points (CTPs) defi ned in the system.

Deals are then created or updated at each CTP.

Software providers to the oil and gas industry clearly

have customized their approach to meeting the needs of

their clients, and this has greatly improved the effi ciency

and risk management capabilities of upstream compa-

nies. In addition, producers now have analytical function-

ality they only dreamed about previously. OGFJ

New strategies for managing risk

Since the collapse of Enron in the fall of 2001, companies

that sell crude oil, natural gas, and refi ned products have

been taking extra precautions in their energy trading

and risk management (ETRM) strategies. This includes many E&P

companies that participate in the futures market, primarily for

hedging purposes.

“Trading has gotten a very bad connotation after Enron,” says

Patrick Reames, vice president, energy trading and risk manage-

ment, in the Houston offi ce of UtiliPoint International Inc., who

noted that trading volumes are recovering but are still not at the

level they were in 2000-2001.

With regard to risk management, companies either have a

chief risk offi cer (CRO) or a trading control offi cer (TCO) who

reports on the status of energy commodities. To protect them-

selves against energy trading risks, companies either use ETRM

software that they themselves develop, or more commonly, they

install commercial software that can be purchased off the shelf.

While most E&P companies interviewed for this article say

they are satisfi ed with their current risk management software,

they are keeping an eye on the newest technology to upgrade

and to ensure they have done their utmost to mitigate risk

throughout the enterprise.

4 Energy Trading & Risk Management � www.ogfj .com

Energy tradingEvery company has a diff erent pursuit in mind in terms of energy

trading. Some companies trade oil, gas, or derivatives, while oth-

ers may focus solely on emissions trading.

According to Reames, “Asset-based companies, like E&P

companies and refi ners that have naturally long positions, are

engaged in trading-like activities. Virtually every one of them

will be in the futures market, hedging at least a portion of their

physical position. However, few of the companies will be taking

positions that could be considered speculative, as that changes

their profi le with credit rating agencies like Standard & Poor’s

and also with stockholders, not to mention the increased capital

requirements and possible eff ects on their balance sheets. Most

of the top 10 producers have separate trading arms that may

be taking what could be considered spec positions, but they are

well controlled and limited.”

Derivatives are

used in risk manage-

ment for their ability

to off set specifi c risks

like interest rate risk

and exchange rate

Erica Shillings, OGFJ Correspondent, Houston

Many E&P companies are participating in energy trading and trading-like activities, say industry observers. To be successful, they need to be aware of the risk associ-ated with trading and the latest ways in which to monitor and manage that risk.

“Asset-based companies, like E&P companies and refi ners that have naturally long positions, are engaged in trad-

ing-like activities. Virtually every one of them will be in the futures market, hedging at least a portion of their physical

position.” – Patrick Reames, UtiliPoint International

risk. Other forms

of derivatives, such

as over-the-counter

derivatives like swaps

and forward contracts,

can be created to

match a company’s

specifi c needs. Stan-

dardized derivatives

that trade on futures

exchanges sometimes

leave small risks because the standardized contracts are rarely

equivalent to the risks.

Among energy trading operations, Joe Gorder, executive vice

president, marketing and supply, for San Antonio-based Valero

Energy Corp., said, “We trade in all energy markets including

futures, derivatives, and cash markets.” While Valero does not

trade emissions, the company has been trading energy products

since the beginning of the company’s operations in early 1980.

In terms of energy trading, Larry Meriage, vice president,

communications and public aff airs, of Los Angeles-based

Occidental Petroleum Corp., said, “Our company is primarily

focused on the sale or marketing of our equity production of

crude oil, natural gas, natural gas liquids (NGLs), and power. We

also source the energy requirements for our chemical businesses,

cogeneration activities, and oil fi eld operations. Our company

also optimizes and trades around our physical assets to provide

better services, price management, and hedging activities for

our customers. As part of this latter activity (optimization and

trading), we utilize all of the standard fi nancial instruments in the

energy market including futures, swaps, and options.”

In terms of emissions trading, Meriage added, “We do not

currently trade emissions, but we have watched the develop-

ment of this emerging market with great interest.”

When asked about speculative trading, Meriage said, “We

engage in limited speculative marketing and trading activities,

but then only in the most liquid of the energy markets. This

activity is closely monitored and strictly limited on a daily basis

through our marketing and trading controls and limits.”

In-house trading operationsWith regard to energy trading, some companies use registered

brokers and other companies house the essential departments to

exercise greater control over the operation. Many E&P compa-

nies have an in-house trading desk to organize and manage all of

the trading activities, and some of the larger vertically integrated

companies (oil majors, NOCs, IOCs) have trading fl oors staff ed

with dozens of traders.

“We have an in-house trading operations that manages all our

over the counter (OTC) instruments, but since we are not a clear-

ing member of [the New York Mercantile Exchange, or NYMEX],

we use regulated brokers for our futures trading activities,” said

Meriage.

As for in-house trading operations within Valero, Gorder said,

“We use brokers and also trade directly with other companies.”

The role of the chief risk offi cerA CRO is responsible for assessing and planning for potential

risks. The title and job responsibilities of a CRO have changed

over the years and vary from one company to the next. The

primary duty of a CRO is to make sure that the company is in

compliance with all regulations. Additional job responsibilities

include monitoring possible risk and incorporating risk manage-

ment principles within a company.

A CRO also faces the following challenges:

• Applying data assumptions, models, methodologies, controls,

and risk metrics in regard to all commodities for market, volu-

metric, and credit risk

• Constructing a cohesive vision of risk/return across business

units and processes

• Put in place a solution that meets a company’s needs.

At Occidental, Meriage noted, “Our company has a trading

control offi cer (TCO) who is described as the chief risk offi cer for

energy commodities in our risk control policy. The TCO reports

to an individual who reports to the chief fi nancial offi cer (CFO).”

Valero also has a TCO who reports to the CFO. “This provides

the necessary checks and balances to our program,” said Gorder.

Hedging purposes“A hedge is a valuable aspect of energy trading,” commented

Peter Fusaro, founder of Global Change Associates in New York

City.

Fusaro explained that a hedge is taken out to specifi cally

reduce or cancel out the risk in another investment. Hedging can

reduce exposure to an unwanted risk, while allowing a company

to profi t from an investment. This strategy has been proven very

profi table when trading energy products. More companies seem

to be catching on to the strategy of hedging and the advantages

it provides.

At Occidental, the primary purpose in using fi nancial energy

products is to economically off set or hedge exposure to price

and market risks with respect to storage inventory volumes and

to provide various mechanisms to suppliers and customers.

“Our company does not regularly hedge its equity produc-

tion,” Meriage said.


“We trade in all energy markets including futures, derivatives, and cash markets. . . We use brokers and also trade directly with other companies.” – Joe Gorder, Valero Energy Corp.

According to

Reames at UtiliPoint,

“Banks and other

fi nancial-based institu-

tions are now into

commodity trading.

The majority, particu-

larly hedge funds, are

trading solely fi nancial

products, but many,

such as UBS and JP Morgan, are trading physical products as well.”

At Valero, Gorder said, “We mainly trade to hedge our inven-

tory positions.”

Risk managementRegardless what is traded within companies – such as crude oil,

coal, natural gas, electric power, etc. – various types of risk need

to be taken into consideration. Risk management strategies

include:

• Relocating risk to another group

• Avoiding risk

• Lowering, or mitigating, the negative eff ect of risk

• Accepting the consequences of risk

In terms of energy trading, fi nancial risk management focuses

on risks that can be managed using fi nancial instruments.

Despite the type of risk management that is involved, all corpo-

rations, large and small, have risk management groups that are

designed to practice informal and formal risk management.

As applied to corporate fi nance, risk management is a proce-

dure for evaluating, monitoring, and controlling the fi nancial risk

of a company.

In terms of project management, risk management includes

the following activities:

• Planning how risk management will be used in a particular

project (including risk management tasks, responsibilities,

activities, and budget)

• Assigning a risk offi cer who is responsible for foreseeing

potential project problems

• Maintaining a live project risk database, with each risk having

the following attributes: opening date, title, short description,

probability, and importance. Alternatively, each risk can be

assigned to a person who is responsible for its resolution by a

certain date

• Creating an unknown risk reporting channel that provides

each team member with the means to report risk that he or

she can predict in the project

• Preparing mitigation plans for risks selected for mitigation.

The purpose of the mitigation plan is to describe the what,

when, by whom, and how work will be done to avoid risk or

minimize the consequences of the risk if it becomes a liability

• Summarizing planned and possible risks, explaining the useful-

ness of mitigation activities, and evaluating the eff ort spent on

the risk management

According to Meriage, Occidental has built a series of risk

controls into energy marketing and trading operations that

provide in-depth protection against the risks associated with

marketing and trading activities.

“Our company utilizes a combination of controls that limit

credit risk, operational risk, price risk, and liquidity risk to provide

a robust safety net,” Meriage said.

Risk management softwareCompanies are continually on the alert to potential risk and

precautions to take to avoid, reduce, or minimize that risk. Risk

management strategies include implementing the latest risk

management software.

ETRM software can be tailor-made to fi t the company’s assets,

commodities, and strategies. The main purpose of ETRM soft-

ware is to oversee all aspects of energy trading operations.

“We use risk management software for our physical and risk

management systems, which we call our ‘systems of record.’

These software systems were purchased from TransEnergy,

Allegro Development, and Triple Point Technology. We are gen-

erally satisfi ed with our current physical and risk management

software, but we are also looking at the possibility of upgrading

or modernizing some of our older systems.” said Meriage.

While most of Occidental’s software is off -the-shelf, Valero

developed its own trading and risk management software to be

used in conjunction with commercial software.

“We developed our own internal program for tracking our

cash trading, use Triple Point for the tracking of our futures and

derivatives trading and SAP’s Trader and Scheduler Workbench

(TSW) to track our inventories and movements,” said Gorder.

S&P credit ratingsRatings by such groups as Standard & Poor’s are crucial to a

company’s fi nancial well being. Credit ratings are impacted by

the degree to which a fi rm exposes itself to risk in its various

forms. Since the cost of money is determined largely by one’s

credit rating, companies want to achieve the highest possible

credit ratings.

“Occidental is rated A- by Standard & Poor’s, and we use

a conservative approach to managing liquidity risk in order to


“Our estimates are that energy trading is a $3 trillion busi-ness in notional value with crude oil at $1.5 trillion and natural gas at about $600 billion.” – Peter Fusaro, Global Change Associates

continued on page 24


C omplexity and volatility have long been energy industry

facts of life. Volatility can take many forms: price insta-

bility, business deregulation, tightening environmental

regulations, the need to enter new markets or dealing with tra-

ditional markets suddenly shifting. These market realities place

increasing demands on energy companies to remain nimble. At

the same time, volatility off ers signifi cant opportunity to organi-

zations that can readily adapt and manage change.

Armed with advanced energy trading, transaction, and risk

management (ETRM) software, energy companies can turn the

ability to adapt into a strategic and profi table competitive advan-

tage. Utilizing an ETRM solution designed from the ground-up

to embrace change—rather than react to it—and one which is

scalable across the front, middle, and back offi ce, improves busi-

ness agility and performance. An ETRM solution supporting this

level of adaptability must utilize the latest technology and must

provide advanced functionality to:

• enable new, more complex types of transactions yet to be

created,

• support more complex logistical decisions,

• give users better understandings of volatilities and market

dynamics,

• allow more fl exible management of business processes,

• free users from the limitations created by “information silos”

by ensuring that all relevant processes and information can be

readily integrated,

• permit more effi cient handling of variables such as constraints,

tariff s, and fees,

• help companies accommodate change at any scale, from enter-

prise-wide reorganization to individual user preferences, and

• enable companies to deploy and modify ETRM solutions more

quickly to keep pace with changing business imperatives.

A tall order, attainable with software technologies already

developed and deployed by Allegro. Through a next-generation,

modular design, Allegro solutions deliver these critical capabilities.

Handling new types of transactionsCompanies are gradually gaining deeper understandings of

risks and opportunities embedded within new market dynamics.

As these understandings grow, professionals are creating new

types of physical and fi nancial transactions. The number of new

transaction types is increasing and markets are already seeing

increases in transactions involving multiple commodities, swaps,

swings and spreads, multi-leg options, multiple tiering price

mechanisms, deals featuring FX and weather derivatives, and

other complex features.

Complex transaction types are commonly beyond the capabili-

ties of today’s software, thus requiring workarounds. For example,

users may need to manually disaggregate a complex deal into a

series of vanilla transactions. However, manually disaggregating

deals into smaller pseudo-transactions invites complications, espe-

cially if a deal’s terms are later modifi ed. These smaller transactions

can get out of sync, spawning database discrepancies. While such

discrepancies can be manually adjusted, this tactic often cascades

into further discrepancies—signifi cantly reducing the advantage of

using integrated ETRM software in the fi rst place.

Allegro provides the decision support tools necessary to

properly represent even the most complex hedging and risk

management transactions and strategies including cross com-

modity, cross currency and hybrid.

Managing physical processesAn adaptable ETRM solution must guide increasingly complex

physical decision-making in virtually every energy commodity,

and help users structure and administer correspondingly com-

plex physical contracts. The solution must assist in determining

optimal actions, predict fi nancial outcomes, help users under-

stand and manage risks associated with each physical process

step, and support strategies to mitigate those risks.

For example, schedulers frequently encounter a new well

coming on line in the middle of the month. Pipeline capacity is

often constrained, and production moved to storage. Injections

to storage are valued at current month prices. When withdrawn,

production will be sold at the current month’s price. From the

producer perspective, the fi nancial impact is dependent on the

scheduler’s ability to eff ectively manage pipeline capacity and

volumes. If prices are up, royalty owners obtain a greater return.

If prices are down, the producer will take the loss. Also, other

choices can be made such as choosing another market or an

alternate route.

Allegro equally supports physical and fi nancial workfl ows,

integrating data from deal capture through scheduling, settle-

ment, and fi nancial reporting and compliance—raising effi ciency

and improving decisions based on more-accurate, physical posi-

tions and margin calculations.

Predicting volatilities and optimal pathsMarket volatilities impose the greatest challenges on traders and

risk managers who make physical and fi nancial transaction decisions

day-to-day. Decision support must adapt by delivering superior

analytics, simulation and optimization tools integrated with real

time, streaming market data. Such tools give professionals better

understandings of volatilities and market dynamics, and provide

more accurate price curves and other forward views.

Users can quickly simulate the impact of diff erent decisions

and varying market conditions. Optimization routines can help

Thriving in volatile markets


By Lisa Chiranky, Director, Global Marketing – Allegro


select optimal paths of execution from the hundreds of permu-

tations possible such as with multi-leg options. Risk managers

can develop more eff ective hedging strategies for mitigating

volatility eff ects.

Also, hedging and optimization require fully integrated infor-

mation. For a production company, this might include data com-

munications with fi eld, SCADA, and treasury systems to clearly

understand volumetric information and counterparty exposures.

It may also include market data, plus information from pipelines,

brokers, and exchanges, enabling greater insight into risks such

as volumetric, price and counterparty risk.

Allegro’s software automatically captures and integrates these

information resources with its advanced analytical and decision

support tools. Potential risk behavior can be observed under

various market conditions, and this information can be used to

support decisions regarding option exercise and other risk man-

agement activities within chosen risk profi les.

Accommodating process changesAs corporate policies, strategies, alliances, and internal controls

evolve, business processes evolve with them. These changes may

be far-reaching, for example restructuring entire approval hierar-

chies, with approval paths and individual authorizations redefi ned

throughout the enterprise. Such reorganizations also require new

workfl ows for document drafts, redirecting confi rmations and reset-

ting automated alerts and reminders in integrated software.

An ETRM solution designed for fl exibility allows companies

to convey specifi ed contractual obligations to a new party, for a

specifi ed time span or indefi nitely from a specifi ed date.

Allegro accommodates even the most complex changes

providing messaging, automated version control, confi rmations

and alerts, shared calendars and related features facilitating col-

laboration among individuals, teams and counterparties.

Embracing numerous variablesCompanies continually face changes in taxation, fees, compli-

ance rules, contractual stipulations, and a myriad of other vari-

ables. In addition, deal-specifi c variables may include counter-

party information, deal number, volume/quantity specifi cations

(unit, frequency, rate), locations (multiple points of delivery),

pricing formulas, product quality, duration, and supply and

demand load shapes.

Allegro allows users to defi ne an unlimited number of

variables, such as brokerage, transport and management fees,

and demand charges. It also permits defi nition of standard or

user-defi ned formulas to calculate charges, logic gateways to

determine when charges should apply, and allocation routines

that express which party pays what portion of the charge, under

what terms and in which currency.

Adapting at any scaleTo be truly fl exible, businesses must adapt to complexity and

volatility at any scale—and at any point in the business process—

including enabling users to self-customize their digital work-

space, satisfying each user’s desktop productivity preferences.

At the enterprise level, a scalable solution must allow business

relationships, as well as processes, to be redefi ned quickly and

easily, seamlessly integrating processes and information.

Allegro is highly adaptable and scalable—from adapting

new corporate policies or approval hierarchies to an individual’s

choice as to which information to display, how to arrange it

on the screen, and which links will be most readily accessible.

Further, Allegro user-confi gured executive dashboard displays

enable drill down to any level to accommodate preferences.

Deploying and modifying solutionsIn some cases, to remain nimble, a company may need to deploy

a new, more adaptable ETRM solution. A wise approach com-

bines a component-based solution with a phased implementa-

tion strategy. This combination permits early deployment of the

most critically needed functionality, addressing the area where a

company is experiencing the greatest challenges.

Subsequent deployment phases follow a declining “pain

gradient” until a total solution is achieved. Each phase adds

functionality, returning value to the enterprise while seamlessly

integrating into the full solution. Phased implementation using

modular software components also allows the solution plan itself

to be readily modifi ed in response to market volatilities.

Allegro’s service-oriented architecture is a component-based

solution. Process-specifi c functionality can be added incremen-

tally, with those functions providing the greatest ROI and/or

meeting critical requirements fi rst, with additional functionality

integrated as resources and budget become available.

ConclusionDesigned from the ground up to provide fl exibility, Allegro’s

multi-commodity software is based on a modular architecture

characterized by Web services and availability of a large number

of independent, easily integrated software components. Allegro

facilitates rapid change of business processes by separating the

processes themselves from underlying data.

When applied throughout the solution, and combined with a

service-oriented architecture and other technical features, this

decoupling strategy makes Allegro software adaptable enough

to keep pace with the extreme complexity and volatility of

energy markets.


Allegro1445 Ross Avenue

Suite 2200Dallas, TX 75202

www.allegrodev.com214-237-8000

OpenLink’s cMotion revolutionizes the integrated energy marketplace

Seamlessly integrated within OpenLink’s industry-leading

Endur framework, OpenLink’s cMotion is a new software

module designed as a comprehensive logistics solution

for crude oil, refi ned products, coal, LNG, and soft commodities.

cMotion complements OpenLink’s existing logistics applications:

gMotion for natural gas, and pMotion for electric power.

Endur is a full, cross-asset framework supporting Straight-

Through-Processing (STP) from the front- through back-offi ce

that delivers full functionality and product coverage for today’s

traders, risk managers, and operations professionals in the

energy marketplace. This new STP solution off ers visibility and

single entry management of transactional data. When transac-

tional information changes, it is readily available throughout the

system.

cMotion was designed and developed by OpenLink’s trans-

portation and petroleum industry experts for rail, truck, crude

and products pipelines, barge, and vessels. These transpor-

tation modes share several things in common: the products

transported have quality and quantity measurement require-

ments; there is a time delay between receipt and delivery of the

product; the transactions for these products carry substantially

more information than other types of transactions; and pricing is

sometimes based on events other than those typical to natural

gas or electricity.

A comprehensive solutionA diverse group of industries stand to benefi t from cMotion,

including large, integrated crude producers and refi neries, pet-

rochemical supply chain organizations, large integrated energy

fi rms that make hydrocarbon procurement activities in support of

power generation, and independent trading fi rms or banks seek-

ing an integrated solution for energy and commodity products.

cMotion supports multiple commodities, grades, and trans-

portation types, manages nominations and nomination group-

ings, such as product commitments, transportation schedules,

and inventory movements, while at the same time handling

dates, such as nomination dates and changes, and delivery dates

supporting event-based pricing, valuation and payment. Addi-

tionally, cMotion can record deliveries, such as actual quantity

/ quality and price adjustments, and ticket pricing / valuation,

track action item “to-do” lists, and store documents and settle-

ments.

Not only can cMotion manage multiple commodities types,

such as crude oils, NGL and LPG, refi ned products, petrochemi-

cals, coal, LNG, agriculture, etc, but it can also track standard

and reported quality measurements confi gured into Endur for

a given product. Each measurement line item defi nes type,

unit, and value. Any number of products can be confi gured

into cMotion for each commodity type. Multiple transportation

types can be handled through confi guration with a scheduling

module, such as VLCC vessels, lightering vessels, barges, trucks,

pipelines, and railcars.

New features create new advantagesIn weighing the pros and cons of integrating cMotion into a com-

pany’s business model, it is important to obtain a certain level

of control on the specifi c advantages the module can off er. cMo-

tion enhances Endur’s already vast off ering of features as well as

those specifi c to the transporting of crude oil, refi ned products,

coal, LNG, and soft commodities.

For instance, the user will be able to create volume strategies

that will give ultimate fl exibility in managing trade volumes and

transportation. The new functionality allows the user to break

apart and strategize the transaction in the following ways:

• By location on a multi-location deal

• By period on a multi-month deal

• By partial volume

• By complete deal in the strategy

• By organizing similar trades by quality, location, or transporta-

tion methods

• By single or multiple waterborne voyages

• By single or trainload rail movements.

The system captures delivery ticket and inspection report

information for each loading or discharge event. All dates asso-

ciated with the receipts and deliveries of product are maintained

in the system. Quantity and quality measures are recorded.

Pricing adjustments can also be made to the deal price, using

quality-based conditions confi gured on the transaction.

Additionally, Endur has been enhanced to allow for the pric-

ing, valuation, and payment triggering to be based off of event

dates such as bill of lading date, notice of readiness, commence-

ment dates, or any other user-confi gured event date. This func-

tionality allows for the settlement of large monetary liabilities,

based on events, not on the monthly billing cycle common to

other products.

Calculating demurrage and delayDemurrage can best be defi ned as the monetary penalty

incurred from delays associated with the transportation of com-

modities. Most signifi cantly among the types of demurrages

are those in connection with the movement of commodities by

ocean going vessels. With cMotion, demurrage calculations

quantifying the signifi cant delays, and resulting charges, can be

derived down to the minute.


By Matt Frye, Managing Director – OpenLink

This statement of excess time or “lay time statement” can be

quickly generated by cMotion. This statement can then be com-

pared to similar documents presented by vessel owners. Also,

the demurrage calculator will prove helpful when attempting to

pass these charges through to commercial counterparties who

may consequently be responsible for the delays. The cMotion

demurrage calculator will assist with the all phases of calculating,

invoicing, tracking, and organizing demurrage claims in the vari-

ous stages of the contentious settlement process.

Mark-to-intent valuation, action items, and inventory managementThe concept of mark-to-intent is to calculate the mark-to-market

valuation of a product at an intended location other than the

location on the deal -- at a delivery date later than the load date

on the original supply deal. The mark-to-intent valuation gives

a better representation of the movement of crude oil, refi ned

products, coal, LNG, and soft commodities because of the time

delay in delivering the product. Natural gas and electricity on

the other hand, can be modeled as concurrent receipts and

deliveries.

Extensive notifi cations and documentation are required when

dealing with the physical movement of commodities. To better

aid commercial and operations personnel in the arduous process

of aff ecting a physical commodity transaction, cMotion employs

an Action Item list or “To Do List.” This list serves as a means of

automatically communicating data at the completion of a trans-

action or other signifi cant event such as a scheduling nomination.

Notices to concerned parties can be confi gured, customized and

conveyed to commercial counterparties, operators, transporters,

inspectors, etc. cMotion uses the list of actions to ensure that no

activity falls through the cracks.

cMotion also greatly enhances Endur in the area of inventory

management/valuation. Endur will now handle diff erent inven-

tory accounting methodologies, such as:

LIFO – Last In, First OutFIFO – First In, First OutWeighted Average

The value of delivery into the inventory tier/average will be

the cost of the supply plus transportation, adjusted for any unac-

counted for volumes.

Simple, custom solutions cMotion gives a client the ability to blend products together

to yield a diff erent product, often with the intent of meeting a

minimum commercially accepted quality. Blending and tracking

of inventories by quantity and quality can be managed using

cMotion’s Inventory Manager, thus simplifying this burdensome

task.

Another simplifi cation comes in the area of document

management. OpenLink has enhanced Endur to include linking

documents to key areas of the system. These areas include

contracts, transactions and nominations. The user can create a

link to any type of stored document, a hyperlink to a document

management system, or store the document completely in the

Endur database. This gives the user added information at his/

her fi ngertips, specifi c to the job function being performed.

cMotion was designed to capture and manage all of the

information required for the extensive notifi cation and report-

ing processes within this industry. Standard reports required for

logistics notifi cations; contract notifi cation and confi rmations

are part of the system. Most importantly, these reports are

customizable by the client. cMotion provides the tools needed

to quickly and accurately report information for external and

internal purposes.

Companies seeking to streamline business and maximize effi -

ciency are encouraged to explore this new functionality in Endur

and to take advantage of these cutting edge technological tools

in the marketplace. As the global energy market becomes more

competitive, the cost of lagging behind can quickly erode a

leveraged position that means the diff erence between profi t and

loss. OpenLink’s cMotion is the next generation for scheduling

and control, and the future for the integrated energy market-

place.

About the author

Matthew Frye is managing director of OpenLink’s Houston divi-

sion. He has 20 years of experience in energy markets, including

trading, risk management, and operations software. Frye leads

a team of business analysts and software engineers focused on

dynamic, integrated solutions for energy trading fi rms. He can be

reached at 713-655-9600, or [email protected].

About OpenLink Founded in 1992, OpenLink is a leading

developer of energy and fi nancial trading, risk management, and

operations processing software solutions. The company’s Next

Generation eXtensible (NGX) platform supports the most rigor-

ous business requirements of fi rms trading in crude products,

energy, interest rate derivatives, fi xed income securities, foreign

exchange, money markets, metals, softs and other commodities.

OpenLink’s global client base includes 70+ clients such as Banco

de Mexico, Bank of America, Bank for International Settlements,

Bank of Canada, HBOS Treasury Services, Bridgeline Holdings,

Citigroup Global Market, Inc., Deutsche Bank, Enbridge, Nexen,

Shell, Statoil and Vattenfall Europe Trading. Headquartered in

Long Island, New York, and with offi ces in London, Houston,

New York City, Berlin, Sydney, and São Paulo, OpenLink employs

more than 370 professionals worldwide.


OpenLink Financial Inc.1502 Reckson Plaza

15th Floor, West TowerUniondale, NY 11556

www.olf.com516-227-6600

The exploration and production industry is slowly moving

toward the realization that they need information tech-

nology systems to do more than assist them with drilling

holes or transporting oil and gas. IT has facilitated operations,

but it has not been viewed as an all-important decision-informing

system for their fi nancial transactions.

That is changing. Assessing credit risks, quantifying cash fl ow-

at-risk and building what-if pricing scenarios are becoming more

important to the industry. Ignoring these exposures can bring great

peril but many E&P companies aren’t equipped to assess the data

that’s available to them from inside their company in order to make

decisions that could greatly aff ect their fi nancial standing.

Simply put, sound fi nancial management of E&P companies

should include more sophisticated risk management information

technology. While external regulations like Sarbanes-Oxley, FASB

and Committee of Chief Risk Offi cers best practice standards

may not specifi cally mandate robust risk management systems

for E&P companies, there is a growing sense among the super-

majors, like BP and Shell, that such systems are worthwhile.

Indeed, external forces that aff ect companies’ ability to raise

capital may demand that more risk management technology is

employed. For evidence look no further than Standard & Poor’s,

the credit rating agency which created a methodology to evalu-

ate energy companies’ risk management as a factor contributing

to their debt and credit ratings. That’s sure to instill some degree

of trepidation into the capital-intensive E&P industry.

Historically, E&P companies have invested minimally in their

risk management systems by either procuring out-of-the-box sys-

tems or by building their own, often in a hodge-podge manner

involving the extensive use of spreadsheets. Both options have

their strengths and weaknesses.

Nonetheless, it is our belief that E&P companies have no choice

but to evolve their information systems for risk management

purposes. The fi rst step, as we’ve seen in the utility industry, is con-

solidating data from disparate systems. Once the data is clean and

maintained in real-time, there is an opportunity to integrate that

data so that it creates meaningful, actionable information. Once

E&P companies consolidate and integrate, they will likely fi nd that

they are sitting on a proverbial gold mine of actionable data.

Eventually the data could allow them to create advanced risk

analysis and guide senior management’s calculation of specifi c

risk statistics. For instance, companies will be able to create

what-if scenarios for those times when, say natural gas goes from

$7 to $15 and then back to $5, or crude goes from $57 to $75

per barrel, all in a 12-month period. There’s no end in sight for

such extreme volatility, when threats of terrorism and war build

speculative premiums into the world market’s oil and gas prices.

Or when, say, a Saudi oil minister issues a statement saying

there’s still at least a 150-year supply of crude.

The end-goal of modern risk management information

systems isn’t predicting every cause and eff ect for fl uctuating

markets. Instead, the end goal is to guide reasoned decisions

using real-time data integration and manipulation. The end goal

is to dispense with using historical, theoretical assessments or

external forecast services. Today’s volatile markets – and outside

rating agencies – are increasingly demanding that capital-inten-

sive E&P companies watch their cash fl ow-at-risk, a vitally impor-

tant metric for company health. Building better scenarios for

cash fl ow-at-risk should be a major catalyst to E&P companies’

consideration of these new systems.

The decision treeE&P companies considering new risk systems should evalu-

ate their needs from a business perspective, both physical and

fi nancial, and a technology perspective of data, analytics and

reporting. Depending on the size of an E&P company, there are

four categories of systems from which to choose: in-house built

(includes outsourced), confi gurable risk frameworks, black-boxes

and a fourth category we will call a “grey-box.”

• In-house systems start as a project with the (unrealistic) scope

of meeting all user requirements -- the panacea of technology

projects. From initial requirements to project planning through

coding and delivery, the project typically turns out only a frac-

tion of the desired functionality and often is over budget and

over due. Another drawback of systems built in-house is the

eventual, almost inevitable, lack of documentation. It is eventual

and inevitable because during the build out, documentation is a

“high” priority that never seems to be completed. Vendor sup-

plied software has matured to a point where the in-house option,

if chosen, is more of a political decision than a business decision

forcing IT departments to justify their staffi ng decisions.

• A confi gurable risk framework is just that: a starting point

that provides the plumbing (data integration layer), analytical

tools (programming environment) and reporting (portal, web)

to confi gure a risk solution that can meet a high percentage

of user requirements. The focus is on the methodology (the

“how”) rather than reinventing the analytical wheel. Flexibility

is paramount. Risk frameworks cannot be implemented part-

time because they require strong project management skills

and a committed project team.

• Black-boxes are systems and software that are purchased from

a third-party vendor. They are well known to the industry but,

because they are built by someone else, they lack transparency,

something that is becoming more of an issue with the advent of

The E&P risk management conundrum

By Louis Caron, Leigh Parkinson, and Peter Sofarelli – RiskAdvisory (A division of SAS)


Sarbanes-Oxley. Black-box solutions are “easier” to implement

and provide a data model, canned analytics and reports. But,

since each company’s business model is as unique as a human

fi ngerprint, it is hard to design a black-box system that can meet

all user needs. A vendor will customize the solution to the point

where the code stream essentially becomes an in-house build

(eff ectively outsourcing) and diffi cult to support. Additionally the

“canned” abilities of black-boxes make them laggards in terms of

supporting all the new products and contracts.

• Grey boxes are similar to black-boxes but they have the

additional feature of being confi gurable, or transparent,

open-code solutions. A grey box combines black-box with a

confi gurable risk framework to provide the benefi ts of each

(rapid implementation, fl exibility) while avoiding the pitfalls

(build from scratch, lack of transparency). Grey boxes take a

risk framework and add a methodology to calculate risk and in

some instances provide a graphical user interface (GUI).

These categories are not mutually exclusive: many fi rms

choose a best-of-breed approach combining any or all of the

above. But again, the devil is in the details. In this case the

details lie in the integration of the “breeds,” a daunting task

which can consume enormous amounts of scarce resources and

bring a project and/or system to its knees.

To state the obvious, a risk strategy needs to incorporate

both business and technology dimensions. The latter has a criti-

cal piece that is often overlooked: data integration. The focus

of many risk projects is on how the analysis is generated and/or

presented. In the end, though, an analysis/presentation focus

is not valuable unless the basic data is integrated and verifi ed.

Additionally, any technology project which the fi rm undertakes

must provide appropriate change management and business

process re-engineering in order to ensure success.

About RiskAdvisory (A division of SAS) RiskAdvisory is a leading provider of integrated risk solu-

tions to energy companies operating in today’s volatile energy

commodity markets. Founded in 1995 by accomplished energy

risk professionals, the company has provided risk software solu-

tions, management consulting and educational services to more

than 220 clients in the global energy sector. Headquartered in

Calgary, Canada, RiskAdvisory produces software solutions that

are used by a growing number of well-known energy companies.

RiskAdvisory was acquired by business intelligence software

leader SAS in 2003. www.riskadvisory.com

RiskAdvisory (a division of SAS)

Suite 970401 9 Ave SW

Calgary, AB T2P 3C5www.RiskAdvisory.com

403-802-4452


,

T o achieve success and maintain competitive advantages,

energy companies must make informed decisions regard-

ing the management of risk exposure and business unit

performance. They will be judged on the caliber of their actions to

ensure commercial excellence in the face of volatile energy markets,

performance management issues, and rigorous accountability

measures.

In our work with SolArc customers across the energy

industry spectrum, we have found that the success of these

initiatives hinges on having accurate and comprehensive

information on which to base risk management decisions.

Among other things, that means seeing commodity price risk

as the market allows you to trade, and thus, manage that risk.

The market price exposures resulting from the movement and

transfer of physical commodities, as well as the associated

financial derivatives activity, must be holistically viewed to

understand the true risk as it relates to market volatility.

This is commonly referred to as “seeing your physical and

paper activity together.” This requires transparency and

transactional fidelity to fully understand the market exposures

presented by both physical and financial activities. Trans-

actional fidelity pinpoints up-to-the-minute accuracy and

transparency in prices, positions, exposures, and secondary

costs – while simultaneously avoiding costly errors in bad data

entry, manual input, and missed market opportunities.

A comprehensive trade management platform offering

transactional fidelity separates the players that are merely

reactive (i.e., poor position visibility, unrecognized market

exposure) from those who are proactive by having an under-

standing of all market risks, and the ability to mitigate those

unwanted exposures.

Lifecycle visibilityA company can achieve commercial excellence when a physi-

cal-to-financial “virtual view” is available for all transactions,

along with a comprehensive analysis of risk exposure. In a

single unified stream of transaction management and work-

flow processing, a best-in-class enterprise trade management

solution brings all transactions - physical and financial - under

a single umbrella for straight-through processing and robust

analysis of price exposures and deal economics.

Companies using nominal homegrown IT systems can quickly

discover that piecemeal IT is a market liability. They will be

unable to meet the computational requirements of energy’s

increasingly complex supply routings, trades and optionali-

ties; making it a fragmented system adrift in a mushrooming

sea of traded volumes, calculations, and risks. Companies that

rely heavily on spreadsheets often lack the ability to h,andle

standards and controls, along with scal-

ability issues to adhere to new market

behaviors and business requirements.

For a company to correctly measure

and manage exposures resulting from

energy transactions, the trade manage-

ment solution should:

Effectively capture, value and

manage commodity volumes

• Assess the best-available volumes

throughout the transaction cycle, at

any place and time (by no,mination,

schedule, actualized, etc.)

• Tie commodity volumes to market

value and changes in profit and loss

due to location, quality, structure,

time effect and exposures

Transparency and transactional fidelity for managing market risk exposureA defining point for commercial excellence


Figure 1: Commercial excellence chart

By Brad Anderson, CEO and president – SolArc Inc.

Link cash flow management with risk management

• Deconstruct price risk exposure into components that can

be managed

• Superior reporting flexibility

Manage overall company exposure, cash flow, and credit

instruments

• Utilize direct transactional data for enhanced, experience-

based credit control

Provide extended risk analytics

• Through tools, such as Value-at-Risk (VaR) analytics and

appropriate stress and back-testing protocols

Provide a clear, end-to-end view of deal capture

• From deal input through risk management

• Capture, report, control and account for each and every

transaction and resulting market exposure

Non-stop risk assessmentMuch as you would not consider driving down the street with

your eyes closed, managing risk in the energy industry without

a complete assessment of exposures presents an unaccept-

able level of danger in navigating the potholes and collisions of

unwanted risk associated with energy commodities. Many energy

commodities, by their sheer physical nature, exact minute-

by-minute demands for non-stop assessment of market price,

location, trading

strategies, time

period, scheduling,

credit risk and more

at multiple points

in the transaction

cycle.

A company

must understand

the basis risk of their physical position, as well as the underly-

ing whole price exposure. The ability to decompose risks into

individual components is crucial to identifying, quantifying and

managing the exposure at all levels. However, a robust solution

is required to produce and manage the necessary information at

various levels of price data granularity. Although some func-

tionality may be embedded in an IT system, it may not be easily

reported and understood.

Managing for excellence Commercial excellence is the result when actionable analysis of

the causes of day-to-day P/L changes may be “drilled down” to

individual transaction/trader, counterparty, portfolio, strategy

or scenario. Management has the information needed to adapt

and take maximum advantage of changing circumstances when

the enterprise trade management solution provides an accurate

and forward-looking view of an energy transaction, and eff ec-

tively captures the market exposures and any shifts in P/L due to

price, credit, product quality and volume. This can be especially

important in markets for crude petroleum, refi ned products,

and coal where transportation time is signifi cant and blending a

commodity produces changes in quality and valuation.

Many companies focused on commercial excellence rely on

a best-in-class enterprise trade management solution that com-

bines the best of risk exposure analysis with high-fi delity physical

and fi nancial transaction management. This allows management

to optimize commodity positions, avoid hidden exposures, and

assess strategic market moves. In addition, a fully automated,

integrated, and fl exible enterprise trade management solution

enables a company to implement corporate-wide procedures

and modifi cations, defi ne and regulate staff actions, and ensure

compliance with corporate governance and external regulations.

About SolArc

SolArc Inc. is a leading provider of supply, trading and risk

management solutions for global commodities companies. The

fl agship product, SolArc RightAngle, integrates deal capture,

scheduling, inventory management, pricing, accounting, position

reporting and risk analysis in a single platform solution. SolArc

serves companies across the commodities industry including,

Chevron, ConocoPhillips, Marquard & Bahls, Virgin Atlantic

Airways, Getty Petroleum, Anadarko, Koch Industries, United

Airlines, Merrill Lynch, Tesoro Corp., and Tyson Foods.

SolArc Inc.9701 Richmond Avenue

Suite 250Houston, TX 77042

www.solarc.com918-594-7320

(outside the US)888-594-7320


Transactional fi delity pinpoints up-to-the-minute accuracy and transparency in prices, positions, exposures, and secondary costs – while simulta-neously avoiding costly errors in bad data entry, manual input, and missed market opportunities.

A recognized leader in consulting and software for

today’s demanding energy markets

The Structure Group has been an integral part of restruc-

turing energy markets. We have helped launch many

of the energy markets we serve today with consulting,

software and services. The considerable knowledge and experi-

ence we have demonstrated along the way is unparalleled in the

industry and has enabled us to off er the skill and agility to help

our clients proactively respond to continually evolving markets.

Our focus is on collaboration At Structure, we view our clients as our partners. We listen to their

specifi c needs and then provide our services and software in a

consistent yet fl exible solutions model that maximizes their success

in energy markets that are continually changing. Energy trading

and risk management, human performance, business process, asset

management, solution integration, market readiness/impact assess-

ments, market entry assessment – these are all areas where we

focus our considerable energy industry expertise.

Structure’s nMarket® gas Building on the success of Structure nMarket® for power, the

leading transaction management system for North American

wholesale power markets, Structure nMarket® Gas is the fi rst

packaged software product that is pre-confi gured to comply with

specifi c pipeline transaction standards. Structure nMarket for

gas off ers out-of-the-box pipeline integration for nominations,

scheduled quantities, and allocation/balancing statements.

Partnering with one of the largest gas traders in North

America, Structure pretests all NAESB transactions sets and pro-

prietary transactions in real-world environments for all supported

pipelines. As a result, Structure nMarket customers only have to

test connectivity rather than the transactions themselves. Struc-

ture nMarket allows you to standardize on a single nomination

management platform across multiple pipelines.

Structure nMarket provides the electronic capabilities for gas

marketers to connect with interstate and intrastate pipelines

to communicate nomination, scheduling and invoicing transac-

tions. The Structure nMarket suite includes the tools to manage

transactions, communicate with pipelines and calculate shadow

settlements, whether you nominate with the pipeline through

EDI, spreadsheet, by fax, email or via electronic bulletin boards.

Bid week pipeline operations statusDuring Bid Week, the trader and scheduler utilize the Notifi ca-

tions Monitor to receive an up-to-date status on pipeline opera-

tions for their critical pipelines. This status enables the trader

and scheduler to make transportation decisions around the

operational constraints of the pipelines.

Real-time, straight through processing provides timely nominationsAs the deals are nailed down and the transportation nominations

are entered, Structure nMarket receives the transport nominations

from the deal or scheduling system through seamless integration

via standard APIs. Structure nMarket takes control to transform the

data values and format the data to the requirements of the destina-

tion pipeline. Structure nMarket sends the nominations to the

pipeline, monitors the status of the communication and provides

the results back to the legacy system. All of this is accomplished

in real time, straight-through processing to give the scheduler the

most fl exibility within the nomination deadline.

Updated pipeline communication through entire nomination lifecycleThroughout the month and throughout the day, a scheduler’s nomi-

nations on a pipeline have to be changed to accommodate busi-

ness changes and those changes brought about by confi rmations.

Structure nMarket stays with the scheduler through all of these

changes and continues to format and communicate the information

to the pipeline. In addition, Structure nMarket provides views so the

scheduler can see all of the distinct changes made to nominations

throughout their life cycle including the latest value applied to the

nomination for nominated quantity and scheduled quantity.

Better monitoring of pipeline positions and expense accrualAt the end of the gas day, the pipeline provides a fi nal-sched-

uled-quantity statement to Structure nMarket. This scheduled

quantity becomes the best-available-quantity on that pipeline

until estimates of actual fl ow are available.

After the gas has begun to fl ow during the month, Structure

nMarket continues to import statements from pipelines, giving a

continually improved best-available-quantity for the scheduler to

use in monitoring pipeline position. This same information is also

used to calculate shadow estimates of the settlement expenses

that will be due on the pipeline. This shadow settlement process

has been successful in assisting Structure nMarket clients to

monitor their expenses during the month, support daily mark-to-

market and transport expense accrual.


Notifi cation monitoring throughout the monthAs the month progresses, Structure nMarket continues to add value

to the scheduler’s and trader’s daily operations by providing Noti-

fi cations monitoring of all the subscribed pipelines and continuing

to provide nominations to the pipelines. When pipelines provide

estimated allocations during the month (through Imbalance state-

ments and/ or Allocation statements), Structure nMarket uses those

estimates to update the best-available-quantity used in shadow

settlements. All of these tools work together to provide better posi-

tion management for the scheduler and trader.

More accurate end-of-month settlements, superior reporting and analysisAt the end of the month, the pipeline provides an invoice to the

shipper to inform them of their fi nal expenses for the production

month. This invoice is imported into Structure nMarket and can

be compared to the expected expenses that were run for shadow

settlements. The calculated shadow settlements or the

pipeline invoice can be selected for actualiza-

tion and payment to the pipeline.

With Structure nMarket’s seamless

integration and robust, logical data

models, reporting and analysis are

made easy. All Structure nMarket

calculations and volumes as well as

transaction data can be retrieved to

build reports for pre-trade or post-

trade strategy analysis.

Structure nMarket’s standard APIs

make integrating with traditional trading

and scheduling packages or custom applica-

tions simple. The XML-based architecture can be

mapped to any database, API or spreadsheet. Nominations

can be integrated at the deal or schedule level – Structure nMarket

does all the work to get the data in the appropriate format for each

model type. Outbound APIs provide multiple levels for quanti-

ties and expense amounts to feed into billing systems to facilitate

counterparty settlement.

Quality support available from structure’s development centerStructure maintains a support desk in our Houston software

development center. Our professionals, who have market-spe-

cifi c knowledge of the products, answer help-desk calls dur-

ing business hours and handle most requests within a 24-hour

period. After-hours support is available on a contract basis.

Client support web site provides on-line access to technicalinformation and software downloads Structure maintains a client support Web site that serves as a

central repository for product-related information and technical

specifi cations, a mechanism for downloading software releases

and access to client status report information.

Training enables clients to take full advantage of product functionalityStructure off ers a broad array of training services both for clients and

on behalf of our clients. Such training includes product-specifi c training,

market readiness training and market concept training. Training classes

are off ered at our Houston offi ce or at the client site. Training programs

are typically one- or two-day sessions. This training allows Structure to

proactively assure that our clients understand market changes, under-

stand how these changes aff ect our products and services, and how

they can best leverage our products and services.

Structure consulting servicesOur in-depth experience in energy transaction management, trading

and risk management; asset management, technology deployment,

integration and training gives Structure an edge as a leader in consult-

ing services for both market/pipeline operators and participants in

competitive energy markets. We apply a consistent yet fl exible set

of consulting standards to address each business challenge through

assessment, analysis, requirement defi nition, planning,

documentation, simulation, forecasting, commu-

nication, training and management.

Systems, processes and people are

all studied and optimized as part of

Structure’s consulting program.

Structure’s business solution suite

includes full-fl edged program man-

agement to smaller-scale implemen-

tation and integration projects – all

documented and reusable for similar

projects within the same business. Our

repeat engagements at so many clients are

a testament to our professionalism and com-

mitment to success.

Structure Consulting Services Optimize:

• Wholesale energy trading and risk management

• Energy market readiness

• Communication and collaboration with business partners

• Business processes

• Human performance

• Asset management

• Software application evaluation and selection

• Technology solution integration

• Project management

• Retail market participation and revenue management

The Structure Group2000 West Sam Houston Parkway South

Suite 1600Houston, TX 77042

Voice: 1.713.243.7160Email: contact@the structuregroup.com

www.thestructuregroup.com.com


E lectronic energy trading is a revolutionary paradigm.

Never before has there been so much potential for elec-

tronic connectivity between trading counterparties. As a

result, traders, hedge funds, banks, brokers, and exchanges are

moving into the fi eld of electronic trading at an increasing rate

as evidenced by the trade volume statistics that are announced

and seemingly eclipsed each month.

This is an era of unprecedented challenges and opportunities

for companies in the energy industry. Record high oil prices, a

signifi cant increase in cross border trading, heightened aware-

ness to comply with Sarbanes-Oxley, and the emphasis on the

need to improve the speed and timeliness of reporting are just

some of the business issues that risk managers, compliance offi -

cers and fi nance groups are agonizing over these days.

Today, companies are evaluating new procedures for helping IT

deliver (and ensure) tighter audit and compliance methodologies to

protect the integrity of key business assets – applications and data.

There is an increased emphasis on process controls and information

transfer to ensure consistency, accuracy and auditability.

Manual processes have their place in trading systems but

have notable limitations. Deal tickets, confi rms, contracts and

invoices are typically labor intensive because they rely on paper

documents and physical fl ows of information. Every new trade

introduced to the process is a fresh event which must fl ow

through these physical channels for successful completion.

Lapses are inevitable even at the best run trading companies. A

single incorrectly entered trade can have great consequences.

In theory, every manually entered trade exposes the company to

the risk of human error. As trade volumes continue to increase

so does the likelihood of a grave error. Fixing processing errors

after the trade by unwinding positions that went wrong can be

time consuming and very costly.

How can an organization involved in energy trading improve

the transparency of its trades and enable better monitoring of

progress and status? Here are several areas to consider:

• Adoption of a straight-through-processing system (STP)

• Traceability of transactions and versioning

• Segregation of duties and role-based access

• Security through access control

• Assessment of Compliance

STP is about eff ective risk management, at the client and

institutional levels. Trade problems develop when incorrect data

is introduced in the post trade scenario, as a result of human

error or process ineffi ciencies. This clearly is one aspect of a

trading operation that can be managed and controlled by using

an appropriate technology framework. The adoption of an STP

system contributes towards improved business effi ciencies and

streamlined operations. The benefi ts accruing to companies that

have adopted STP technology include the following:

• Reduced settlement cycle: Achieving seamless integration will

be an enabler for shorter settlement cycles to assist with both

domestic and cross border trades.

• Reduced counterparty risk: Once a trade has been executed,

there is an element of uncertainty between all parties on the

status of the trade. STP helps reduce such counterparty risks.

• Reduced operational risk: Automating the process from

execution through to settlement reduces manual processes

and provides a more timely and accurate position assessment

and report.

Today companies are embedding many sustainable key

performance indicators. However, far too few are monitoring

and evaluating the eff ectiveness of the processes that lie behind

them. In order for energy trading companies to meet the report-

ing challenges in place today and in the future, they need to

construct a coordinated and consistent approach underpinned

by standardized and repeatable processes. Under- investment in

enterprise wide trading and risk management reporting systems

will continue to mean that accurate and reliable data will be dif-

fi cult to extract leading to an over-reliance on spreadsheets and

manually keyed data.

Internal workfl ow enables companies to manage transactions

within an auditable control framework. Management must be

able to assess how that workfl ow can withstand scrutiny, which

requires a framework with a clearly traceable path of transaction

entries, changes, and deletions. Transaction correctness can

be ensured if the path of any single transaction or aggregation

of transactions can be revealed in detail. Best practices mean

securely implementing WWWWH logging – who, what, when,

where, how- for every step of the transaction.

Typical reasons for changes to a transaction might be that the

trade was entered improperly, or additional information added,

or terms modifi ed. A trader needs to send his 50,000 barrels

to a delivery port instead of pickup at a load port. Logging

the WWWWH aspects of the changes made allows complete

traceability throughout the history of a transaction. Another

way for STP software to enhance traceability and account-

ability is through versioning controls, a way to easily dial back

through every step of the transaction. Flipping back through the

transaction history of a trade should lay the information out in

WWWWH fashion. Compliance offi cers should evaluate STP trad-

ing software with these requirements in mind.

There is a complementary benefi t from solid logging of trans-

action recording: best practices in roles and procedures once

implemented can be monitored with ease. If any transaction can

be queried as to who did what, by when, and for whom, the role

of a particular duty –say, entering agreed-upon modifi cations in

Auditability of trade process controls


terms- can be formally designated. In other words, trading software

off ering completely documented transactions and versioning can be

leveraged to drill down and institutionalize the roles of the various

players in the transaction. An anomaly on a report can immediately

be traced back to the employee who failed to update a price, event

or enter a transaction. Silo practices between departments should

be sought out, questioned and eliminated since consistency and

best practice are the objectives. Processes should be documented

and wherever possible automated.

The COBIT framework mentioned by Sarbanes-Oxley is

Control Objectives for Information and related Technology,

a roadmap of best practices and a respected guideline. Role

designation of the type above off ers Compliance Offi cers a way

to assess adherence to COBIT security principles of segregation

of duties and RBAC – Role-based Access Control. Security in

trading software relies on the standard information technology

mechanisms of access control, privileges, and logging.

RBAC also adheres to the principle of segregation of duties. The

ability to enter, change, or review a trade must not be in the hands

of just one individual. Tying these separate abilities/roles to diff er-

ent groups ensures that no one person can author a trade from

beginning to end. When assessing for sound transaction recording

processes, management should look for role-based access controls

that conform to the principle of “least privilege.” If traders are

not responsible for entering changes, they should not be allowed

change privileges; only the parties responsible for entering changes

should have those privileges. Management must be subject to

the same standards. The ability to read a report should not imply

the ability to change the data. Constraining that privilege adheres

to the COBIT principle of segregation of duties. In the case of an

enterprise wide trading system, design which removes permissions

from senior management is a hard sell. It is fundamental to remem-

ber that the reasons for process controls are the benefi ts of reduced

risk, effi ciency and auditability.

Compliance assessment begins with documented procedures.

Interactions between people and systems, people and people

and even systems and systems are often poorly documented, are

hard to follow and almost impossible to audit. Process automa-

tion has to accommodate human decision-making, as well as

management review and control. Compliance assessment begins

with documented procedures. All the process controls discussed

above require careful planning in setup and documentation,

and frequent reassessment of their eff ectiveness. Once these

controls are in place, many benefi ts will be realized in terms of

consistency, accountability, and accurate reporting. While it is

true that assessing the auditability of trade process controls may

result in expensive changes, it is also true that bringing process

controls in line will result in reduced risk and profi table synergies.

Corporate rhetoric will always focus on achieving goals,

targets and key performance indicators because these missions

infl uence executive compensation and shareholder value. Energy

trading companies need to consider ways in which they can

better integrate and automate processes, and improve control

in order to cope with an increasingly complex and regulated

reporting environment. Trading and risk management systems

are vital since every manual process presents a risk of variation,

ineffi ciency and lack of control. Trading and Risk Management

systems should be easy to use, but hard to bypass; provide

tight control of processes but allow them to be continuously

improved; and pervade the company but allow for trades to be

conducted quickly and effi ciently.

To request more information about TradeCapture and how we

can provide value to your business, please contact TradeCapture

at +1-203-327-7000 or send an email to [email protected].

Andy Ettinger, CISSP infrastructure manager at TradeCapture Inc.

Steve Oppenheimer, chief marketing offi cer at TradeCapture Inc.

Trade Capture1 Landmark Square

20th FloorStamford, CT 06901

www.tradecapture.com203-327-7000


C ommodity XLTM is Triple Point’s fl agship solution and

is the only commodity trading and risk management

system that works across multiple commodities, in real-

time from front-to-back offi ce. It is an integrated solution that

profi tably manages the complex, ever-changing requirements of

physical and fi nancial markets.

Commodity XL is a real-time system that helps customers of

all sizes gain business intelligence for better decision making,

streamline trade processing, reduce transaction costs, maxi-

mize supply chain effi ciencies, precisely measure and manage

market risk, evaluate performance, and ensure regulatory and

accounting compliance. It was built specifi cally for high volume,

complex transaction management organizations. Commodity XL

utilizes a component architecture that provides what you need

today with the ability to plug-in additional functional compo-

nents in the future to grow and adapt with your business.

Multiple commodities, globally Commodity XL delivers unique functionality for each commodity

you trade including oil, metals, power, natural gas, coal, freight

and softs. Each module has been specifi cally designed to fully

support the particular requirements of that asset class.

At the same time Commodity XL is a common platform that

enables aggregated risk management and consolidated back

offi ce effi ciencies. Commodity XL encompasses global and

regional requirements to support your entire enterprise.

Operational and management benefi tsCommodity XL delivers business intelligence for better decision

making, streamlines operations, and provides reporting and

audit trails for compliance and control allowing you to turn day-

to-day operations into better business results.

Business intelligenceReporting – with Commodity XL, every screen is a report

showing information in real-time. Sort, fi lter and group all data

according to the needs of each business area. Drill down or

across to the lowest level of detail or roll up to view data in

aggregation.

Analysis – Commodity XL provides real-time analysis models

at multiple points in the life cycle of a transaction, including P&L

attribution, margin analysis, VaR and “what if” scenarios. It also

has seamless import/export integration with Excel for additional

analysis.

Streamlined operationsWith straight-through processing, your organization eliminates

data re-entry and resulting errors. In addition, delays in data

reaching each person in the transaction chain are eliminated

resulting in faster decision making in markets where every sec-

ond counts. The reduction in data errors coupled with integrated

processing results in lower transaction costs.

Compliance and controlCommodity XL provides one version of the “numbers” across

divisions, products and geographies. All documents are stored

automatically for audit purposes and all reports required by reg-

The only real-time, straight-throughprocessing, multi-commodity solution

Figure 1

Multiple commodities, globally

Op

erat

iona

l & m

anag

emen

t ben

efits

Integrated real-time transaction management


Figure 2

Value-at-Risk is one of many comprehensive risk management tools in the Commodity XL solution.

By Julie Preuss, Director, Marketing – Triple Point Technology, Inc.

ulations are generated. Every change to the system is captured

and documented for a detailed audit trail to ensure accountabil-

ity for SOX, FAS 133, IAS 39, and S&P risk.

Integrated real-time transaction managementCommodity XL is designed to deliver all the required function-

ality and support every role throughout the life cycle of both

physical and fi nancial commodity transactions. From executive

to trader to risk manager to scheduler to accountant, Commod-

ity XL provides the right information, presented in the proper

format and delivers the results you require.

Next-generation platformThe Commodity XL solution suite is built on the most advanced

platform in use today. It is standards based and enables you to

plug-in the solutions you need now with the fl exibility to easily

add functions later. The Commodity XL platform seamlessly

integrates with your overall IT environment and does not require

complicated or non-standard maintenance. We invest signifi -

cantly in research and development to ensure that Commodity

XL uses the most advanced technology that delivers database,

middleware and operating system independence along with

unparalleled scalability.

Unmatched people and servicesNo one knows more about the commodities trading industry,

better understands your needs, or possesses more experience

than Triple Point. Triple Point has an unbroken record of suc-

cessful implementations of its solutions. Clients appreciate the

knowledge and enthusiasm that Triple Point professionals bring

to the process. From installation to ongoing support, you can

count on Triple Point to deliver.

Right solution todayThe market environment is one of high commodity prices com-

bined with sharp volatility and it is here to stay for the foresee-

able future. Triple Point’s Commodity XL provides the software

solution to operate and win in these demanding business times.

About the company

Triple Point Technology is the leader in trading, risk manage-

ment, scheduling and logistics solutions for commodity compa-

nies. Triple Point serves customers located on all continents and

its solutions are used by more than 25% of both Global 500 com-

modity trading companies and Global 500 energy companies.

Triple Point’s large investment in research and development,

over 25% of revenue each year, has paid off with numerous

company and product awards including being named “Soft-

ware House of the Year,” voted the “Top Trading and Portfolio

Management” solution, selected for the “Gold Innovation” prize

and being named nine straight times to the “Deloitte Technol-

ogy Fast 50.”

Triple Point Technology, Inc.301 Riverside AvenueWestport, CT 06880

www.tpt.com203-291-7979

Figure 3: Key function

Figure 4


avoid marketing and trading activities having a negative impact

on our credit ratings,” said Meriage.

Gorder, meanwhile, said Valero’s current credit rating with

Standard & Poor’s is, “BBB- with a positive watch.”

Goals and predictionsWhen asked about future estimates within the energy trading

sphere, Fusaro, Global Change Associates, said, “Our estimates

are that energy trading is a $3 trillion business in notional value

with crude oil at $1.5 trillion and natural gas at about $600 bil-

lion.”

In terms of increasing the size of Valero’s energy trading

operations, Gorder said, “We are already trading and will vary

the extent of our activity based on our view of the market.” He

added, “Our goal with regard to trading activity is to protect the

value of our inventory positions.”

Meriage said that Occidental anticipates its marketing and

trading activities will grow naturally alongside the growth in the

company’s oil and gas production activities.

“Our goal is to use increased automation and electronic transac-

tion processing whenever possible to limit the need for increased

personnel, but we also expect limited growth in the number of

employees devoted to marketing and trading,” he said.

In terms of goals for Oxy, Meriage commented, “Our fi rst

goal is to optimize the prices received for all of our marketed

equity production, while minimizing the inherent risks associ-

ated with marketing and trading activities. Our second goal is

to create profi ts from low-risk marketing and trading activities

with a special emphasis on the management of hard assets in the

mid-stream environment (storage, transportation, etc.). Our third

goal is to provide price management, risk management, and

hedging services to our suppliers and customers, both internal

and external.”

For energy marketing and trading to be successful, risk has to

be managed effi ciently. There are a number of established risk

management software houses in the United States and abroad

that have developed commercially available energy trading

and risk management software intended specifi cally for the oil

and gas industry. These companies provide full implementation

and consulting services to their clients, and they are continually

upgrading their products.

Energy trading is a useful tool for many companies in the

petroleum sector. For it to function as intended, strict risk man-

agement procedures need to be implemented. This includes the

very latest in ETRM software. OGFJ


The trading floor at Occidental Petroleum Corp. in Los Angeles. Photo courtesy of Occidental Petroleum Corp.

continued from page 8

Documents

ENERGY TRADING RISK MANAGEMENT - · PDF file4 Energy Trading & Risk Management .com Energy trading ... A CRO is responsible for assessing and planning for potential risks