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+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
www.ogfj .com � Energy Trading & Risk Management 3
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.
6 Energy Trading & Risk Management � www.ogfj .com
“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
8 Energy Trading & Risk Management � www.ogfj .com
“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
10 Energy Trading & Risk Management � www.ogfj .com
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
10 Energy Trading & Risk Management � www.ogfj .com
By Lisa Chiranky, Director, Global Marketing – Allegro
www.ogfj .com � Energy Trading & Risk Management 11
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.
www.ogfj .com � Energy Trading & Risk Management 11
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.
12 Energy Trading & Risk Management � www.ogfj .com
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.
www.ogfj .com � Energy Trading & Risk Management 13
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)
14 Energy Trading & Risk Management � www.ogfj .com
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
www.ogfj .com � Energy Trading & Risk Management 15
,
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
16 Energy Trading & Risk Management � www.ogfj .com
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
www.ogfj .com � Energy Trading & Risk Management 17
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.
18 Energy Trading & Risk Management � www.ogfj .com
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
www.ogfj .com � Energy Trading & Risk Management 19
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
20 Energy Trading & Risk Management � www.ogfj .com
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
www.ogfj .com � Energy Trading & Risk Management 21
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
22 Energy Trading & Risk Management � www.ogfj .com
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
www.ogfj .com � Energy Trading & Risk Management 23
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
24 Energy Trading & Risk Management � www.ogfj .com
The trading floor at Occidental Petroleum Corp. in Los Angeles. Photo courtesy of Occidental Petroleum Corp.
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