ERP Practice Exam1 7115

2015

ERPPractice Exam 1AM SessionPhysical—25 Questions

© 2015 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material iin any format without prior written approval of GARP, Global Association of Risk Professionals, Inc.

ERP® Practice Exam 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

ERP Practice Exam 1 Candidate Answer Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

ERP Practice Exam 1 Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

ERP Practice Exam 1 Answer Sheet/Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

ERP Practice Exam 1 Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

TABLE OF CONTENTS

© 2015 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material 1in any format without prior written approval of GARP, Global Association of Risk Professionals, Inc.


IntroductionThe ERP Exam is a practice-oriented examination. Its ques-

tions are derived from a combination of theory, as set forth

in the core readings, and “real-world” work experience.

Candidates are expected to understand energy risk man-

agement concepts and approaches and how they would

apply to an energy risk manager’s day-to-day activities.

The ERP Exam is also a comprehensive examination,

testing an energy risk professional on a number of risk man-

agement concepts and approaches. It is very rare that an

energy risk manager will be faced with an issue that can

immediately be slotted into just one category. In the real

world, an energy risk manager must be able to identify any

number of risk-related issues and be able to deal with them

effectively.

The ERP Practice Exam 1 has been developed to aid

candidates in their preparation for the ERP Exam. This

practice exam is based on a sample of actual questions

from past ERP Exams and is suggestive of the questions

that will be in the 2015 ERP Exam.

The ERP Practice Exam 1 contains 25 multiple choice

questions. The 2015 ERP Exam will consist of a morning

and afternoon session, each containing 70 multiple choice

questions. The practice exam is designed to be shorter to

allow candidates to calibrate their preparedness for the

exam without being overwhelming.

The ERP Practice Exam 1 does not necessarily cover

all topics to be tested in the 2015 ERP Exam. For a com-

plete list of topics and core readings, candidates should

refer to the 2015 ERP Exam Study Guide. Core readings

were selected in consultation with the Energy Oversight

Committee (EOC) to assist candidates in their review of the

subjects covered by the exam. Questions for the ERP Exam

are derived from these core readings in their entirety. As

such, it is strongly suggested that candidates review all core

readings listed in the 2015 ERP Study Guide in-depth prior

to sitting for the exam.

Suggested Use of Practice ExamsTo maximize the effectiveness of the practice exams, candi-

dates are encouraged to follow these recommendations:

1. Plan a date and time to take the practice exam. Set dates appropriately to give sufficient study/review

time for the practice exam prior to the actual exam.

2. Simulate the test environment as closely as possible. • Take the practice exam in a quiet place.

• Have only the practice exam, candidate answer

sheet, calculator, and writing instruments (pencils,

erasers) available.

• Minimize possible distractions from other people,

cell phones, televisions, etc.; put away any study

material before beginning the practice exam.

• Allocate two minutes per question for the practice

exam and set an alarm to alert you when a total of

50 minutes have passed Complete the entire exam but

note the questions answered after the 50-minute mark.

• Follow the ERP calculator policy. Candidates are only

allowed to bring certain types of calculators into the

exam room. The only calculators authorized for use

on the ERP Exam in 2015 are listed below, there will

be no exceptions to this policy. You will not be allowed

into the exam room with a personal calculator other

than the following: Texas Instruments BA II Plus

(including the BA II Plus Professional), Hewlett Packard

12C (including the HP 12C Platinum and the Anniversary

Edition), Hewlett Packard 10B II, Hewlett Packard 10B II+

and Hewlett Packard 20B.

3. After completing The ERP Practice Exam 1 • Calculate your score by comparing your answer

sheet with the practice exam answer key. Only

include questions completed within the first 50

minutes in your score.

• Use the practice exam Answers and Explanations to

better understand the correct and incorrect answers

and to identify topics that require additional review.

Consult referenced core readings to prepare for

the exam.

• Remember: pass/fail status for the actual exam is

based on the distribution of scores from all candi-

dates, so use your scores only to gauge your own

progress and level of preparedness.

Energy RiskProfessional(ERP®) ExamPractice Exam 1

Answer Sheet



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Questions



1. An upstream global oil and gas company is developing a reservoir within the borders of a North African hostcountry under terms of a concessionary agreement. Total realized exploration and development expenses,along with original cost projections, are allocated below:

Actual (USD) Estimated (USD)

Land surveys 1,650,000 1,900,000Geological testing 3,100,000 2,350,000Drilling 8,000,000 9,250,000Equipment 14,000,000 11,000,000Total 26,800,000 24,500,000

Assume that exploration and development efforts fail to produce a commercially viable field after two yearsand management decides to cease operations. What financial impact will this have on the company?

a. Loss of USD 2,300,000 after reimbursement of original exploration cost estimatesb. Loss of USD 18,800,000 after reimbursement of drilling costsc. Loss of USD 22,050,000 after reimbursement of land survey and geological testing costsd. Loss of USD 26,800,000 with no reimbursement

2. What best describes “profit oil” in a contractual arrangement between a global petroleum company and asovereign government to develop a crude oil reserve in a host country?

a. The minimum production volume required to guarantee the commercial viability of the projectb. The production volume required to generate an economic return after operating costs, taxes, and royalties

have been deductedc. The volume of oil produced and sold outside of long-term sales agreementsd. The volume of oil produced and sold after capital costs have been fully amortized

3. A hydroskimming refinery in South America applies the daily Brent crude oil spot price as the benchmark ref-erence price for its crude oil feedstock. Assuming the current Brent spot price is USD 88.29, the refinerywould most likely purchase which of the following crudes?

a. Canadian Oil Sands (bitumen) at USD 71.06/bblb. Mexico Mayan Heavy at USD 85.40/bblc. West Texas Sour at USD 87.30/bbld. Nigerian Bonny Light at USD 94.60/bbl

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6 © 2015 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material in any format without prior written approval of GARP, Global Association of Risk Professionals, Inc.


4. The construction of crude oil or natural gas pipelines is typically financed using what mechanism?

a. Government funding with mandatory appropriations for energy infrastructure developmentb. Private capital from companies that seek a return on capital from transmission chargesc. Exclusive bilateral partnerships between producers and marketersd. Broad-based consortiums that include a mix of public and private funding

5. The risk management team at a refinery implements a strategy to hedge market risk using crack spreads. Theteam prices a 3:2:1 crack spread at USD 21.80/bbl based on the following NYMEX futures data. Based on thisinformation, what is the September RBOB futures contract price?

• September WTI futures price: USD 89.90/bbl • September Ultra Low Sulfur Diesel (ULSD) futures price: USD 3.13/gal

a. USD 1.96/galb. USD 2.42/galc. USD 3.21/gald. USD 3.85/gal

6. What best describes the application of price differential formulas in contractual agreements in the crude oil market?

a. To mitigate basis risk on the delivery of crude oil exportsb. To account for transportation costs in crude oil shipmentsc. To adjust refined product spreads based on crude oil input pricesd. To price a specific crude oil stream against a global benchmark

7. A contract is written for physical delivery FOB on 500,000 barrels of Bonny Light Crude Oil to a designatedstorage facility. What does FOB imply about this transaction?

a. The purchase price includes all transport fees; the buyer is responsible for scheduling a tanker to make final delivery of the crude to the storage facility

b. The purchase price includes all transport fees; the seller is responsible for scheduling a tanker to make final delivery of the crude to the storage facility

c. The purchase price excludes all transport fees; the buyer is responsible for scheduling a tanker to make final delivery of the crude oil to the storage facility and paying all delivery charges

d. The purchase price excludes all transport fees; the seller is responsible for scheduling a tanker to make final delivery of the crude to the storage facility and will bill the buyer separately for all delivery charges



8. A joint public/private partnership is structured for development of a newly-discovered natural gas field andLNG export terminal in a politically-stable South Asian nation. What pricing methodology will ensure thecountry receives an accurate market price for its LNG exports?

a. Link LNG exports to fixed-for-floating swaps that allow for future price adjustments.b. Link LNG exports to an index based on a basket of Asian crude oils.c. Link LNG exports to average long-term bilateral natural gas contracts in the region.d. Link LNG export prices to the NYMEX Henry Hub contract.

9. A refinery has chartered a cargo of crude oil for delivery from a Nigerian producer to a port outsideRotterdam under the following contract specifications:

• Bonny Light price: USD 110.20/bbl• Worldscale base rate: USD 23.00/MT• Vessel size: 55,000 DWT• Charter rate for this route: WS114• Voyage time: 12 days

What is the largest risk exposure to the refinery in the transaction?

a. Basis riskb. Price riskc. Supply riskd. Volumetric risk

10. How will the discovery of “sour” gas from a test well impact the future development of a new natural gas field?

a. The gas has a low heating value and will need to be blended with other gases to meet standard Btu levels for shipment by pipeline

b. The gas contains high sulfur levels and will need to be treated prior to shipment by pipelinec. The gas contains excess water vapor and requires hydroskimming treatment to achieve an acceptable Btu

level for consumptiond. The gas is geologically immature with no commercial value



11. Rank the following coal samples from four different reserves in order of highest to lowest quality, using thespecifications summarized in the table below.

Coal Sulfur Ash Moisture Volatile Matter Fixed Carbon Reserve Content Content Content Content ContentSeneca 0.8 10.1 11.4 34.2 44.3Black Thunder 0.5 5.0 27.0 32.0 34.5Bowie 1.0 9.0 9.0 36.5 60.0Cordero 0.2 5.7 30.3 32.0 20.0

a. Black Thunder, Cordero, Bowie, Senecab. Bowie, Seneca, Black Thunder, Cordero c. Cordero, Black Thunder, Seneca, Bowied. Seneca, Bowie, Cordero, Black Thunder

12. A US based commodity trader has purchased physical coal for delivery under a contract with a quantity varianceadjustment clause. The quantity of coal actually shipped is 3% below the volume specified in the contract. Atwhat price will the shortfall be settled?

a. The shortfall will be settled at the contract priceb. The shortfall will be settled at the current market pricec. Two percent of the shortfall will be settled at the contract price and the remaining one percent at the

current market priced. Two percent of the shortfall will be settled at the contract price with no additional compensation required

for the remaining one percent

13. Why are aquifers considered a sub-optimal choice for natural gas storage when compared to other types ofunderground facilities?

a. Incremental expense required to re-process “wet” aquifer gas after extractionb. Environmental concern about groundwater contaminationc. Increased risk of a gas leak from the containment facilityd. High cushion gas storage requirement



14. Operating models based on forecasted spark spread economics are often used to optimize power generationdecisions. What best describes a typical flaw made by users of these models?

a. Failure to adequately account for intraday volatility in fuel pricesb. Inability to account for sudden changes in market fundamentalsc. Overestimation of plant start-up and shut-down costsd. Unrealistic assumptions about a plant’s ability to quickly cycle on and off

15. An LNG distributor provides customers a weekly LNG price quote based on the closing NYMEX Henry Hubfutures settlement each Monday. The weekly price quote includes a cap and floor equivalent to +/- 25% of theaverage NYMEX Henry Hub price for the previous month.

The November average closing price and weekly pricing data for December are shown below:

November average closing price: USD 3.81/MMBtu

NYMEX Henry Hub Monday closing price for December__________________________________________________

Week 1: USD 4.04/MMBtuWeek 2: USD 4.13/MMBtuWeek 3: USD 4.56/MMBtuWeek 4: USD 4.81/MMBtu

Assuming the distributor sells 80,000 MMBtu of gas per day, seven days per week, what will be the total salesrevenue for the four weeks of December?

a. USD 1,399,200b. USD 1,403,200c. USD 9,794,400d. USD 9,822,400

16. An ISO will typically compensate generators serving as operating reserves with:

a. A fee paid for time spent as an operating reserve, in addition to payment for any electricity dispatchedb. A fee paid for time spent as an operating reserve without any additional compensation for any power

dispatchedc. The time spent as an operating reserve paid at the market clearing price, plus an option to sell any excess

power on the spot marketd. The time spent as an operating reserve paid at the market clearing price, but no additional compensation

for any power dispatched



17. The spark spread (in USD/kWh) for a combined cycle natural gas turbine plant using the following assumptions, is:

• Average plant heat rate: 8,100 Btu/kWh• Current price of natural gas: USD 4.70/MMBtu• Current price of electricity: USD 46.00/MWh

a. 0.01250 b. 0.00793 c. -0.00793 d. -0.01250

18. The highest bids in a real-time power auction will typically be submitted by operators at which type of powergeneration facility?

a. Baseload nuclearb. Mid-merit coal-firedc. Onshore wind farmd. Oil-fired combustion turbine

19. A local utility company has arranged to purchase one hour of load from the grid in the day-ahead marketunder the following terms:

• 200 MW @ USD 54/MWh

What net settlement payment (in USD) is required from the RTO under a contract for differences (CfD),assuming the spot market price for electricity is USD 75/MWh and the utility’s actual load is 275 MW for thecontracted hour?

a. 1,575b. 4,050c. 4,840d. 5,625



20. Fixed feed-in-tariffs provide what economic benefit to wind and solar producers?

a. A one-time subsidy payment when the grid interconnection has been completedb. A fixed price per kWh of power produced and delivered to the gridc. A spread above the market clearing electricity price which varies based on the capital efficiency of each

producer d. A tax credit for each marginal kWh of power produced and delivered to the grid above a pre-determined

minimum

Questions 21 - 22 use the information below:

O-Power has developed a proprietary tidal stream turbine designed to generate electric power by harvestingkinetic energy from the ocean. Using a project finance arrangement, O-Power creates a project company calledDynaWave to develop a large-scale installation for commercial application. O-Power agrees to contribute 25% ofthe initial equity capital required as project sponsor with a partner, ABC Financial, contributing the remaining75%. (Assume each partner has fulfilled its capital commitment and development of the prototype is underway.)

21. Which party will bear the economic liability if the DynaWave project fails?

a. As the majority equity holder, ABC Financial is responsible for 100% of DynaWave’s realized economic lossesb. O-Power and ABC Financial are liable for 25% and 75% respectively of DynaWave’s total realized economic lossesc. As project sponsor, O-Power is responsible for 100% of DynaWave’s realized economic lossesd. DynaWave is responsible for 100% of its realized economic losses

22. The ongoing working capital requirements for the DynaWave project will most likely be funded through a:

a. Fixed-rate loan with quarterly amortization b. Partially amortizing facility with a bullet due at maturity c. Revolving facility with flexible drawdown d. Syndicated loan offered as a 144A private placement

23. Cussler Energy is a curtailment service provider offering demand response (DR) services to Canadian industri-al customers in the Independent Electricity System Operator (IESO) market. How will Cussler most likelyengage with the IESO to provide DR services?

a. By bidding on a separate exchange established for IESO demand response participantsb. By signing a bilateral contract directly with IESO at a negotiated pricec. By bidding as a baseload power supplier in IESO’s day-ahead auctiond. By bidding as a generator in IESO’s capacity market



24. A Load Serving Entity (LSE) in the PJM market contracts to purchase power in the day-ahead market to meetits estimated load/demand requirements. Calculate the LSE’s total cost of power using the following day-ahead and real- time market data:

• Projected day-ahead demand: 100 MW• Day-ahead price: USD 35.00/MWh• Actual real-time demand: 105 MW• Real-time price: USD 37.50/MWh

a. USD 3,512.50b. USD 3,675.00c. USD 3,687.50d. USD 3,937.50

25. Two ERCOT market generators, Brunswick Power Cooperative (BPC) and Acme Power LLC (APL), strike thefollowing deal for electricity on June 23:

• Buyer: BPC• Seller: APL• Contract size: 30 MW per hour• Contract period: RTC (Round the Clock) • Contract price: USD 25/MWh

On the settlement date, one of APL’s generators is shut down for unscheduled maintenance, limiting theamount of power it can deliver to BPC to 20 MW per hour. ERCOT provides balancing power at a cost of USD30/MWh for on-peak (16 Hours) and USD 20/MWh for off-peak (8 Hours).

Ignoring APL’s marginal cost of generation, calculate its net cashflow from the transaction.

a. APL pays USD 18,000b. APL pays USD 11,600c. APL receives USD 11,600d. APL receives USD 18,000

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Answers



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Explanations



1. An upstream global oil and gas company is developing a reservoir within the borders of a North African hostcountry under terms of a concessionary agreement. Total realized exploration and development expenses,along with original cost projections, are allocated below:

Actual (USD) Estimated (USD)

Land surveys 1,650,000 1,900,000Geological testing 3,100,000 2,350,000Drilling 8,000,000 9,250,000Equipment 14,000,000 11,000,000Total 26,800,000 24,500,000

Assume that exploration and development efforts fail to produce a commercially viable field after two yearsand management decides to cease operations. What financial impact will this have on the company?

a. Loss of USD 2,300,000 after reimbursement of original exploration cost estimatesb. Loss of USD 18,800,000 after reimbursement of drilling costsc. Loss of USD 22,050,000 after reimbursement of land survey and geological testing costsd. Loss of USD 26,800,000 with no reimbursement

Answer: d

Explanation: The correct answer is d. Under a concessionary system, the E&P company assumes all the risksassociated with exploring for and developing oil and gas reserves. If their effort fails to find a viable reserve,the E&P company must bear all of the costs; the host country does not bear any responsibility for these costs.

Reference: Charlotte Wright & Rebecca Gallun. Fundamentals of Oil & Gas Accounting, Chapter 15, page 679.

2. What best describes “profit oil” in a contractual arrangement between a global petroleum company and asovereign government to develop a crude oil reserve in a host country?

a. The minimum production volume required to guarantee the commercial viability of the projectb. The production volume required to generate an economic return after operating costs, taxes, and royalties

have been deductedc. The volume of oil produced and sold outside of long-term sales agreementsd. The volume of oil produced and sold after capital costs have been fully amortized

Answer: b

Explanation: The correct answer is b. Profit oil is the gross revenue from oil after costs such as operatingexpenses, royalties and taxes have been paid; it is the oil from which a project will realize a profit.

Reading reference: Wright and Gallun, Chapter 15, page 685.



3. A hydroskimming refinery in South America applies the daily Brent crude oil spot price as the benchmark ref-erence price for its crude oil feedstock. Assuming the current Brent spot price is USD 88.29, the refinerywould most likely purchase which of the following crudes?

a. Canadian Oil Sands (bitumen) at USD 71.06/bblb. Mexico Mayan Heavy at USD 85.40/bblc. West Texas Sour at USD 87.30/bbld. Nigerian Bonny Light at USD 94.60/bbl

Answer: d

Explanation: The correct answer is d. The refinery is described as a hydroskimming facility making it a “simple”refinery. Therefore, it will yield the most gasoline by refining a light, sweet crude, which is choice d, eventhough Bonny Light is being offered at a premium to Brent (which it typically is). West Texas Sour is a mediumweight oil that will require additional processing to remove the sulfur impurities, while the yield from the heavyMayan crude will seriously reduce the amount of gasoline produced, both of which will negate the discountoffered for these crudes. It is unlikely the refinery would even be able to process the raw Canadian bitumen.

Reading reference: Andrew Inkpen and Michael Moffett. The Global Oil and Gas Industry: Management,Strategy and Finance, Chapter 12.

4. The construction of crude oil or natural gas pipelines is typically financed using what mechanism?

a. Government funding with mandatory appropriations for energy infrastructure developmentb. Private capital from companies that seek a return on capital from transmission chargesc. Exclusive bilateral partnerships between producers and marketersd. Broad-based consortiums that include a mix of public and private funding

Answer: d

Explanation: The correct answer is d. According to Inkpen and Moffett, the very sizeable capital cost ofpipeline construction is typically shared by a consortium of organizations, including governments and devel-opment banks.

Reading reference: Andrew Inkpen and Michael Moffett. The Global Oil and Gas Industry: Management,Strategy and Finance, Chapter 11, page 402.



5. The risk management team at a refinery implements a strategy to hedge market risk using crack spreads. Theteam prices a 3:2:1 crack spread at USD 21.80/bbl based on the following NYMEX futures data. Based on thisinformation, what is the September RBOB futures contract price?

• September WTI futures price: USD 89.90/bbl • September Ultra Low Sulfur Diesel (ULSD) futures price: USD 3.13/gal

a. USD 1.96/galb. USD 2.42/galc. USD 3.21/gald. USD 3.85/gal

Answer: b

Explanation: The correct answer is b. A 3:2:1 crack spread is three barrels of crude oil to two barrels of gaso-line and one barrel of heating oil. Here the per barrel crack spread of USD 21.80 is given. Multiplying this bythree equals USD 65.40. The cost of crude oil is also multiplied by 3 (for the 3 barrels used to calculate thespread): 89.90 x 3 = 269.70, when the refining margin (65.40) is added, the result is 335.10.

The price of the ULSD is given as 3.13/gal, multiplying this by 42 (gallons in a barrel) gives an amount of USD131.46. Subtracting this from USD 335.10 gives a result of USD 203.64, the cost of two barrels of gasoline.Dividing this by 42 (number of gallons in a barrel) and the 2 (the factor for gasoline in a crack spread) gives aper gallon cost of USD 2.42/gal.

Reading reference: Andrew Inkpen and Michael Moffett. The Global Oil and Gas Industry: Management,Strategy and Finance, Chapter 12, page 459.

6. What best describes the application of price differential formulas in contractual agreements in the crude oil market?

a. To mitigate basis risk on the delivery of crude oil exportsb. To account for transportation costs in crude oil shipmentsc. To adjust refined product spreads based on crude oil input pricesd. To price a specific crude oil stream against a global benchmark

Answer: d

Explanation: The correct answer is d. A differential formula is used to price a specific crude oil stream againsta recognized benchmark like the Brent or WTI contracts. The differential allows for the crude oil to be pricedat a premium or discount to the existing benchmark based on the specifications of the crude oil (gravity, sul-phur content, etc.) measured against the specifications of the benchmark crude.

Reading reference: Vincent Kaminski. Energy Markets. Chapter 17.



7. A contract is written for physical delivery FOB on 500,000 barrels of Bonny Light Crude Oil to a designatedstorage facility. What does FOB imply about this transaction?

a. The purchase price includes all transport fees; the buyer is responsible for scheduling a tanker to make final delivery of the crude to the storage facility

b. The purchase price includes all transport fees; the seller is responsible for scheduling a tanker to make final delivery of the crude to the storage facility

c. The purchase price excludes all transport fees; the buyer is responsible for scheduling a tanker to make final delivery of the crude oil to the storage facility and paying all delivery charges

d. The purchase price excludes all transport fees; the seller is responsible for scheduling a tanker to make final delivery of the crude to the storage facility and will bill the buyer separately for all delivery charges

Answer: c

Explanation: The correct answer is c. The term FOB stands for Free On Board, meaning the cargo is deliveredto a specified shipment point, it is then the buyer’s responsibility to pay for shipment to the cargo’s final des-tination, along with any insurance costs, tariffs, fees, etc., so you will be responsible to make the arrangementsto have the crude delivered to your refinery.

Reading reference: Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management,Strategy and Finance, Chapter 9, page 421

8. A joint public/private partnership is structured for development of a newly-discovered natural gas field andLNG export terminal in a politically-stable South Asian nation. What pricing methodology will ensure thecountry receives an accurate market price for its LNG exports?

a. Link LNG exports to fixed-for-floating swaps that allow for future price adjustments.b. Link LNG exports to an index based on a basket of Asian crude oils.c. Link LNG exports to average long-term bilateral natural gas contracts in the region.d. Link LNG export prices to the NYMEX Henry Hub contract.

Answer: b

Explanation: To improve the ability to hedge and to more accurately reflect market prices, gas contracts have in the past been indexed to a basket of oil prices, making b the correct answer. The other answers areincorrect: answer a is not the proper application of a Fixed-for-Floating swap; long bilateral contracts wouldnot be an accurate source for pricing information; and Henry Hub serves the US domestic market so it toowould not be an accurate measure of market forces at play in the Pacific.

Reading reference: Vivek Chandra, Fundamentals of Natural Gas: An International Perspective, Chapter 4,page 117.



9. A refinery has chartered a cargo of crude oil for delivery from a Nigerian producer to a port outsideRotterdam under the following contract specifications:

• Bonny Light price: USD 110.20/bbl• Worldscale base rate: USD 23.00/MT• Vessel size: 55,000 DWT• Charter rate for this route: WS114• Voyage time: 12 days

What is the largest risk exposure to the refinery in the transaction?

a. Basis riskb. Price riskc. Supply riskd. Volumetric risk

Answer: b

Explanation: The correct answer is b The refinery should be most concerned with price risk – that there willbe a change in the value of the crude oil during the 12 days of the voyage, since the value of the oil will affectthe refinery’s margin through the crack spread. The other answers are incorrect: since there is not a localsource for oil at the refinery, basis risk is not an issue; sine the oil is to be consumed, market risk is not anissue and any discrepancies between the contracted and actual volumes can be settled at the market pricethrough a contract mechanism.

Reading reference: Vincent Kaminski, Energy Markets, Chapter 4

10. How will the discovery of “sour” gas from a test well impact the future development of a new natural gas field?

a. The gas has a low heating value and will need to be blended with other gases to meet standard Btu levels for shipment by pipeline

b. The gas contains high sulfur levels and will need to be treated prior to shipment by pipelinec. The gas contains excess water vapor and requires hydroskimming treatment to achieve an acceptable Btu

level for consumptiond. The gas is geologically immature with no commercial value

Answer: b

Explanation: The correct answer is b. Gas with high levels of sulfur are considered “sour.” Because sulfur is corrosive,sour gases are typically treated to remove the excess sulfur before the gas is shipped or consumed.

Reading reference: Vivek Chandra. Fundamentals of Natural Gas: An International Perspective, Chapter 1, page 6.



11. Rank the following coal samples from four different reserves in order of highest to lowest quality, using thespecifications summarized in the table below.

Coal Sulfur Ash Moisture Volatile Matter Fixed Carbon Reserve Content Content Content Content ContentSeneca 0.8 10.1 11.4 34.2 44.3Black Thunder 0.5 5.0 27.0 32.0 34.5Bowie 1.0 9.0 9.0 36.5 60.0Cordero 0.2 5.7 30.3 32.0 20.0

a. Black Thunder, Cordero, Bowie, Senecab. Bowie, Seneca, Black Thunder, Cordero c. Cordero, Black Thunder, Seneca, Bowied. Seneca, Bowie, Cordero, Black Thunder

Answer: b

Explanation: Answer “b” lists the coal types in the correct order. The higher the fixed carbon content, thehigher the calorific/heating value of the coal type. Moisture reduces the calorific value of coal, and in thisexample, moisture content is arranged in inverse proportion to the carbon content.

Reading reference: Vincent Kaminski, Energy Markets, Chapter 26, pages 942-944.

12. A US based commodity trader has purchased physical coal for delivery under a contract with a quantity varianceadjustment clause. The quantity of coal actually shipped is 3% below the volume specified in the contract. Atwhat price will the shortfall be settled?

a. The shortfall will be settled at the contract priceb. The shortfall will be settled at the current market pricec. Two percent of the shortfall will be settled at the contract price and the remaining one percent at the

current market priced. Two percent of the shortfall will be settled at the contract price with no additional compensation required

for the remaining one percent

Answer: c

Explanation: The correct answer is c. The quantity variance adjustment clause, which specifies a deadband of+/- 2%. Any volumes outside this band are priced at the current market price.

Reading reference: Vince Kaminski, Energy Markets, Chapter 26, page 955.



13. Why are aquifers considered a sub-optimal choice for natural gas storage when compared to other types ofunderground facilities?

a. Incremental expense required to re-process “wet” aquifer gas after extractionb. Environmental concern about groundwater contaminationc. Increased risk of a gas leak from the containment facilityd. High cushion gas storage requirement

Answer: d

Explanation: The correct answer is d, one reason aquifers are seldom used for underground storage isbecause much of the gas pumped into an aquifer, as much as 80%, ultimately cannot be extracted due tomaintain a high level of cushion gas; other underground storage methods require far less “cushion gas.” Theother answers are incorrect; “working gas” is the amount of gas available for withdrawal from an undergroundstorage complex.

Reading reference: Vivek Chandra, Fundamentals of Natural Gas: An International Perspective, Chapter 2

14. Operating models based on forecasted spark spread economics are often used to optimize power generationdecisions. What best describes a typical flaw made by users of these models?

a. Failure to adequately account for intraday volatility in fuel pricesb. Inability to account for sudden changes in market fundamentalsc. Overestimation of plant start-up and shut-down costsd. Unrealistic assumptions about a plant’s ability to quickly cycle on and off

Answer: d

Explanation: The correct answer is d. One challenge in modeling the spark spread for dispatch decisions isthat such models often make unrealistic assumptions about a plant’s ability to turn on and off; it is veryunlikely that a plant could or would be switched off for an hour then run for an hour as indicated by the fore-cast above.

Reading reference: Vincent Kaminski, Energy Markets, chapter 22, page 813.



15. An LNG distributor provides customers a weekly LNG price quote based on the closing NYMEX Henry Hubfutures settlement each Monday. The weekly price quote includes a cap and floor equivalent to +/- 25% of theaverage NYMEX Henry Hub price for the previous month.

The November average closing price and weekly pricing data for December are shown below:

November average closing price: USD 3.81/MMBtu

NYMEX Henry Hub Monday closing price for December__________________________________________________

Week 1: USD 4.04/MMBtuWeek 2: USD 4.13/MMBtuWeek 3: USD 4.56/MMBtuWeek 4: USD 4.81/MMBtu

Assuming the distributor sells 80,000 MMBtu of gas per day, seven days per week, what will be the total salesrevenue for the four weeks of December?

a. USD 1,399,200b. USD 1,403,200c. USD 9,794,400d. USD 9,822,400

Answer: c

Explanation: The correct answer is c. For the calculation, the weekly price must be multiplied by 7, for thedays of the week, and then by a factor of 80,000 for the MMBtu per day amount. Week 2 will finish above thecap established by the pricing scheme — USD 3.81 plus 25% = USD 4.76 — therefore this figure must be usedfor this week, rather than the NYMEX closing price of USD 4.81. Therefore, the total for the four weeks is USD9,794,400.

Reading reference: Vivek Chandra, Fundamentals of Natural Gas: An International Perspective, Chapter 4,pages 113-114.



16. An ISO will typically compensate generators serving as operating reserves with:

a. A fee paid for time spent as an operating reserve, in addition to payment for any electricity dispatchedb. A fee paid for time spent as an operating reserve without any additional compensation for any power

dispatchedc. The time spent as an operating reserve paid at the market clearing price, plus an option to sell any excess

power on the spot marketd. The time spent as an operating reserve paid at the market clearing price, but no additional compensation

for any power dispatched

Answer: a

Explanation: The correct answer is a; as an operating reserve the generator agrees to have its dispatch con-trolled by the ISO. The generator will receive payment for serving in OR and will be paid for any electricitythey dispatch to the SO. If the generator does not dispatch any electricity, it will be paid a make-whole “sidepayment” as long as it agrees to follow the dispatch rules set by the generator. The other answers are incor-rect: since it is in operating reserve, the generator cannot sell power on the spot market, which is why servingas an OR is said to entail an opportunity cost to the generator, since they do not have this opportunity to sellpower on the open market.

Reading reference: Steven Stoft, Power System Economics: Designing Markets for Electricity, Chapter 3.6, p. 260.

17. The spark spread (in USD/kWh) for a combined cycle natural gas turbine plant using the following assumptions, is:

• Average plant heat rate: 8,100 Btu/kWh• Current price of natural gas: USD 4.70/MMBtu• Current price of electricity: USD 46.00/MWh

a. 0.01250 b. 0.00793 c. -0.00793 d. -0.01250

Answer: b

Explanation: Answer b is correct, the calculation for determining the spark spread in this scenario is as follows:

Spark Spread = Output Price – Input PriceOutput Price = USD 46/MWh x 1MWh/1,000 kWh = USD 0.046/kWhInput Price = 8,100 Btu/kWh x USD 4.7/1,000,000 Btu = USD 0.03807/kWhTherefore, the Spark Spread = 0.00793

Reading reference (new): Vincent Kaminski, Energy Markets, Chapter 22, Analytical Tools.



18. The highest bids in a real-time power auction will typically be submitted by operators at which type of powergeneration facility?

a. Baseload nuclearb. Mid-merit coal-firedc. Onshore wind farmd. Oil-fired combustion turbine

Answer: d

Explanation: The correct answer is d; an oil-fired combustion turbine would typically follow the most aggressive bidding strategy in the auction because it has the highest marginal cost. Market prices are set by the least efficient unit required to satisfy anticipated load, so the least efficient plants might operate only a few hundred hours a year. Therefore, these plants need to maximize their profits during the times when they are activated. Because of the intermittent nature of wind, it is difficult for wind operators to bid into thereal-time market.

Reading reference: Vincent Kaminski, Energy Markets, Chapter 22, pp. 683-684

19. A local utility company has arranged to purchase one hour of load from the grid in the day-ahead marketunder the following terms:

• 200 MW @ USD 54/MWh

What net settlement payment (in USD) is required from the RTO under a contract for differences (CfD),assuming the spot market price for electricity is USD 75/MWh and the utility’s actual load is 275 MW for thecontracted hour?

a. 1,575b. 4,050c. 4,840d. 5,625

Answer: d

Explanation: The correct answer is d. Under a CfD market agreement, the amount beyond the contracted vol-ume is settled at the spot market price; in this case 75 MWh (275MW-200MW) at USD 75/MWh, or USD5,625. The other 200 MW are paid for at the rate of USD 54/MWh as specified in the nominated contract andare not part of the CfD settlement.

a. (75-54)*75b. (75*54)c. [(54+75)/2]*75

Reading reference: Steven Stoft, Power System Economics: Designing Markets for Electricity, Chapter 3.2



20. Fixed feed-in-tariffs provide what economic benefit to wind and solar producers?

a. A one-time subsidy payment when the grid interconnection has been completedb. A fixed price per kWh of power produced and delivered to the gridc. A spread above the market clearing electricity price which varies based on the capital efficiency of each

producer d. A tax credit for each marginal kWh of power produced and delivered to the grid above a pre-determined

minimum

Answer: b

Explanation: The correct answer is b. A feed-in tariff offers a fixed price per unit of renewable energy which isproduced and delivered to the grid.

Reading reference: Jeffery Altman, Ross Board, Felix ab Egg, Andreas Granata, and Hans Poser.“Development and Integration of Renewable Energy: Lessons Learned from Germany” (FAA FinancialAdvisory AG), p. 13.

Questions 21 - 22 use the information below:

O-Power has developed a proprietary tidal stream turbine designed to generate electric power by harvestingkinetic energy from the ocean. Using a project finance arrangement, O-Power creates a project company calledDynaWave to develop a large-scale installation for commercial application. O-Power agrees to contribute 25% ofthe initial equity capital required as project sponsor with a partner, ABC Financial, contributing the remaining75%. (Assume each partner has fulfilled its capital commitment and development of the prototype is underway.)

21. Which party will bear the economic liability if the DynaWave project fails?

a. As the majority equity holder, ABC Financial is responsible for 100% of DynaWave’s realized economic lossesb. O-Power and ABC Financial are liable for 25% and 75% respectively of DynaWave’s total realized economic lossesc. As project sponsor, O-Power is responsible for 100% of DynaWave’s realized economic lossesd. DynaWave is responsible for 100% of its realized economic losses

Answer: d

Explanation: The correct answer is d. In a project finance arrangement, the main purpose of creating a projectcompany is to contain economic liability, insulating equity investors from downside risk. Therefore the projectcompany, DynaWave, will have the primary liability in the bankruptcy. The equity investors, O-Power and TidalKing, have no further liability with regard to the project.

Reading reference: Chris Groobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer forRenewable Energy and Clean Tech Projects, page 4.



22. The ongoing working capital requirements for the DynaWave project will most likely be funded through a:

a. Fixed-rate loan with quarterly amortization b. Partially amortizing facility with a bullet due at maturity c. Revolving facility with flexible drawdown d. Syndicated loan offered as a 144A private placement

Answer: c

Explanation: Working capital loans typically have smaller loan amounts than term or construction loans andare usually revolving in nature, so amounts which are paid back can be reborrowed. They are used to payeveryday expenses such as the purchase of inventory and the amount of a working capital loan is typicallylimited to a percentage of the firm’s cash and inventory on hand less any outstanding letters of credit.

Reading reference: Chris Groobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer forRenewable Energy and Clean Tech Projects, page 9.

23. Cussler Energy is a curtailment service provider offering demand response (DR) services to Canadian industri-al customers in the Independent Electricity System Operator (IESO) market. How will Cussler most likelyengage with the IESO to provide DR services?

a. By bidding on a separate exchange established for IESO demand response participantsb. By signing a bilateral contract directly with IESO at a negotiated pricec. By bidding as a baseload power supplier in IESO’s day-ahead auctiond. By bidding as a generator in IESO’s capacity market

Answer: d

Explanation: The correct answer is d. Demand response is bid to IESO through the capacity market. Thedemand response provider will bid DR resources similar to any other generator and the transaction will becleared through the market.

Reading reference: Bo Shen, Girish Ghatikhar, Chun Chun Ni, and Junqiao Dudley. Addressing Energy DemandThrough Demand Response. (Berkeley National Laboratory, June 2012). P. 9.



24. A Load Serving Entity (LSE) in the PJM market contracts to purchase power in the day-ahead market to meetits estimated load/demand requirements. Calculate the LSE’s total cost of power using the following day-ahead and real- time market data:

• Projected day-ahead demand: 100 MW• Day-ahead price: USD 35.00/MWh• Actual real-time demand: 105 MW• Real-time price: USD 37.50/MWh

a. USD 3,512.50b. USD 3,675.00c. USD 3,687.50d. USD 3,937.50

Answer: c

Explanation: The correct answer is c. Since the real-time demand was higher than the forecasted load pur-chased from the day-ahead market, additional volume must be acquired from the real-time market. This set-tlement can be calculated using the following formula: USD 35 x 100 MW + (105-100) MW x USD 37.50 = USD3,687.50

Reading reference: Power System Economics: Designing Markets for Electricity, Steven Stoft, Chapters 3-2, 3-3, 3-6.



25. Two ERCOT market generators, Brunswick Power Cooperative (BPC) and Acme Power LLC (APL), strike thefollowing deal for electricity on June 23:

• Buyer: BPC• Seller: APL• Contract size: 30 MW per hour• Contract period: RTC (Round the Clock) • Contract price: USD 25/MWh

On the settlement date, one of APL’s generators is shut down for unscheduled maintenance, limiting theamount of power it can deliver to BPC to 20 MW per hour. ERCOT provides balancing power at a cost of USD30/MWh for on-peak (16 Hours) and USD 20/MWh for off-peak (8 Hours).

Ignoring APL’s marginal cost of generation, calculate its net cashflow from the transaction.

a. APL pays USD 18,000b. APL pays USD 11,600c. APL receives USD 11,600d. APL receives USD 18,000

Answer: c

Explanation: The correct answer is c. Because APL could only deliver 20 MW of power per hour rather than 30MW ERCOT provided the mission volume of 10 MW per hour at the real time market price indicated above. Thecost can be calculated as: 16 Hours * 10 * 30 = USD 4,800 plus 8 Hours * 10 * 20 = USD 2,000 for a total of(4,800 + 2,000 = USD 6,400). In summary, APL’s net profit for the transaction will be: (18,000 – 6,400 = USD11,600) for supplying 20 MW of power (Contracted volume of 30 MW, minus the ERCOT RT cost for 10 MW).

Reading reference: Fundamentals of Power System Economics, By Daniel Kirschen and Goran Strbac, Chapter3.6 (3.6.1.1 Example 3.4), Page 388.

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