Trading, Investments & Optimization Strategy Trading Risk Management [Market & Volumetric Risks] Presented By Xavier Veillard APAC Director Trading, Investments & Optimization Strategy

© Accenture 2015. All rights reserved. Accenture Confidential. 1

LNG Trading Risk Management[Market & Volumetric Risks]

Presented By

Xavier Veillard

APAC Director

Trading, Investments & Optimization Strategy Group

May 2015

Trading, Investments & Optimization Strategy


Our Trading, Investments & Optimization Strategy Group supports LNG trading-focused organizations optimize their portfolio, trading, performance and risk management capabilities

New York | Houston

[North America Focus]

London

[Global Focus]

Abu Dhabi | Dubai

[Middle East Focus]

Singapore

[ASEAN and Asia Pacific Focus]

Asset and corporate investment valuation

Contract / financial structuring

Joint venture / joint business structuring

Assets carve out & segmentation

Investment Valuation

&

Financial Structuring

Market outlook development

− Supply / demand / market forecasting

− Competitor analysis / benchmarking

Value chain integration

Pricing optimisation and analytics

Commercial Optimisation

Trading and Risk Management

Portfolio optimization & structuring

Trading strategy & book forensic analysis

Risk analytics and @ risk

Target trading operating model design

Trading solution design / implementation

Accenture Trading, Investments & Optimization Strategy [TIOS] Group TIOS Scope of Advisory Services

Our TIOS Group is based in primary energy trading centres globally, serving clients on their portfolio trading strategy to enhance value captured from global energy markets


Content

LNG Trading Risks Overview

Conclusions


We approach LNG Trading Risks by focusing on market and volumetric risks through a comprehensive approach from risks identification to management and mitigation …

Source: Accenture Analysis

Volumetric Risk

Market Risk

Market Curves Volatility

Portfolio Curve Correlations

Portfolio Net Positions

Spot Market Liquidity

Portfolio Spot / Term Mix

Portfolio Volumetric Optionality

Price Exposure Limits

Hedging & Pricing Structuring

Market Risk Modelling

Uncontracted Cargoes Exposure Limits

Supply Flexibility & SPA Structuring

Volumetric Risk ModellingM

anage R

isksIden

tify

Ris

ksLNG Risks


Content


Identifying Key LNG Trading Risks

Managing Key LNG Trading Risks

Conclusions


The LNG short-term / Spot market has expanded in recent years, highlighting willingness of buyers to increase their portfolio exposure to volumetric risks…

Note: Spot & short-term LNG trades include trades under contracts of a duration of 4 years or lessSources: Accenture Analysis, GIIGNL

Spot MarketLiquidity

Spot & Short-term LNG Trade [MTPA and Cargo Count] and Share of Total LNG Trade [%]

0

30

60

90

120

0

400

800

1,200

1,600

Cargo CountMTPA

201420102009 2011 2012 201320082007

Cargo Count [#]

Volume [MTPA]

19% 18% 16% 19% 25% 25% 27% 29%

% of Total LNG Trade

Increase in spot volumes from excess uncommitted

production

LNG spot & Short-term decrease from global economic slowdown


… which will result in global players having a higher mix of spot / short-tem supplies in their portfolio to manage flexibility and volumetric uncertainty

Note: *Spot LNG trades include trades under contracts of a duration of approximately 2 years or lessSources: Accenture Analysis, GIIGNL

Portfolio Spot/Term Mix

19%

25%

20%

16%

22%

Taiwan Singapore

15%

26%

IndiaChinaJapan

18%

24%

6%

Korea

12%14%

19%

World

21%23%

Asia-Pacific

18%

2014

2025E

Spot / Term Mix Outlook of LNG Imports for Selected Countries [% Spot/ Short-term* Trade of Total Trade]

In 2014, Mitsubishi, Tohoku Electric, Marubeni and Chubu Electric each

signed a DES contract (1 with ENI, 3 with GDF Suez) to import c.2 MTPA. Contract

length ranges from 7mth – 2yr.

In 2014, KOGAS entered into a 2-yr DES

contracts (Woodside and ENI) to import

c.0.4 MTPA..


Additionally, LNG contracts through volumetric tolerance, BO / Fuel usage option and call / put embedded contractual options also add to general volumetric risks

Illustrative

Portfolio VolumetricOptionality

LNG Portfolio Structure – Examples of Trade Patterns and Volumetric Optionality

Note: LT: Long-Term; ST: Short-TermSources: Accenture Analysis

Sell/Short Side Buy/Long SidePortfolio Activities

Locked-in LT Contract & short call option

Locked-in LT SPA Contract

Locked-in LT SPA contract

Back-to-back withtolerance option

Locked-in LT FOB SPA Contract

Locked-in LT DES SPA Contract

Portfolio Optimization,Sourcing, Re-routing,Cargo Swaps, Swings

Locked-in LT Contract with long call option

Back-to-back withadditional option

New/Extra CargoesCall option exercised

Locked-in LT Contract & Short put option

Locked-in LT contract with long put option

Back-to-back withcancellation option

Spot Cargoes

Spot Producer Spot BuyerSpot Deals

Tolerance up/down

LT Trade Spot Trade

Option Ownership

Volume Impact

Option Ownership

Volume Impact

Put option exercised


As portfolios diversify their supply sources and long/short-term mix, exposure to market price curves is expanding with the latter annualized vitality averaging 35%+

Sources: Accenture Analysis, Thomson Reuters

Market Curves Volatility

$0

$6

$12

$18

$24

Apr-2010 Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015

NBP JKM HH LNG 1 (14.5% Brent) LNG 2 (115% HH + $7)

0%

30%

60%

90%

120%

Apr-2010 Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015

Fukushima-driven price increase

Decline in oil prices & Asia Oversupply

UK Cols Snap

Shoulder month demand change &

Pipeline congestions

Global LNG Prices [$USD/mmBtu] Global LNG Annualized Volatility [%]


-80

-40

0

40

80

Q1 Q2 Q3 Q4 H3 H4 H5 H6 H7 H8 Y5 Y6 Y7

Mill

ion

s m

mB

tu

Financial - NBP

Financial - HH

Financial - Fuel Oil

Financial - JCC & Brent

Physical - NBP

Physical - HH

Physical - Fuel Oil

Physical - JCC & Brent

Net - NBP

Net - JCC & Brent

Net - Fuel Oil

Net - HH

Exposures of the portfolio to multiple price curves through physical and financial positions creates different level of market risks horizons…


Portfolio NetPositions

Illustrative

Lon

g (S

up

plie

s)

Sho

rt (

Sale

s)

Illustrative Gross and Net Physical and Paper Volume Exposure of Portfolio by Market Curve

Part-Year Ahead exposure

B Long-term Exposure C

Y1 Y2 Y3 Y4

Quarter-Ahead Exposure

A


… and the level of correlations between portfolio market price curves will lead to a resultant exposure which will be different than individual curves exposures

Sources: Accenture Analysis, Thomson Reuters

Portfolio CurvesCorrelations

Absolute Price Curve Correlation Analysis [Trailing Twelve Months]

Brent HSFO HH NBP JKM GBP SGD JPY CNY

Oil Brent 1.00 0.99 0.88 -0.45 0.74 -0.96 -0.94 -0.95 -0.10

HSFO 0.99 1.00 0.85 -0.45 0.74 -0.95 -0.93 -0.95 -0.16

Gas HH 0.88 0.85 1.00 -0.17 0.77 -0.85 -0.86 -0.77 -0.17

NBP -0.45 -0.45 -0.17 1.00 0.00 0.51 0.43 0.59 -0.29

JKM 0.74 0.74 0.77 0.00 1.00 -0.68 -0.76 -0.69 -0.33

Currency GBP -0.96 -0.95 -0.85 0.51 -0.68 1.00 0.96 0.94 0.06

SGD -0.94 -0.93 -0.86 0.43 -0.76 0.96 1.00 0.93 0.25

JPY -0.95 -0.95 -0.77 0.59 -0.69 0.94 0.93 1.00 0.01

CNY -0.10 -0.16 -0.17 -0.29 -0.33 0.06 0.25 0.01 1.00


Content

LNG Market Outlook Snapshot

Identifying Key LNG Trading Risks

Managing Key LNG Trading Risks

Conclusions


Shortage or Excess of LNG as a results of portfolio volumetric risks exposure need to be accurately modelled, with the associated risks premium value quantified…


Uncontracted Cargoes Exposure Limits

Illustrative

Volumetric Risks Exposure Modelling and Management

Sell/Short Side Buy/Long Side

Potential Shipment

Increase from Options Sold

Potential Shipment

Decrease from Options Sold

Y+1 Total Committed

Sales Volume

Y+1 Total Contracted

Sales Volume

Y+1 Total Potential Purchase Volume

Y+1 Total Contracted Purchase Volume

Demand Reduction from

Retail Customers due to Weather

Change

Additional Demand from

Industrial Customers

Increase number of cargoes or PNG

alternatives to source from Spot Market

# of CargoesExcess LNG to be

stored, swung, swapped or diverted

c.50

c.3

c.5

c.50 c.50

c.1

c.4

c.47

c.3

c.8


LNG SPA contractual terms should be leveraged as a mean of managing portfolio volumetric risks, optimizing owned options vs. premium value of option costs


SPA Structuring & Volumetric Risk Modelling

Non-Exhaustive

Key Volumetric Contractual Considerations for LNG SPA

Other TermsVolume Swing / Swap /

Diversions

Location / Incoterm Options

Clause to swing/swap gas volume or LNG cargoes; cargo diversion options with profit sharing agreement

Option to fix FOB/DES term of sale and to nominate destination port vs. fixed loading / unloading port

Volume Commitment

Embedded Call / Put Options

Tolerance and Take or Pay Penalties

Main Volumetric Terms

Tolerance band for X% of base volume with min & max volume commitments, make-up / carry forward term, operational tolerance

ACQ, DCQ for volume commitment, ADP, NDP, TDP and other delivery program for delivery volume scheduling

Call option to secure incremental volume / cargoes at fixed or preferred price formula, right to cancel cargo delivery

Additional Volumetric Terms

ACQ determination, round-up & round-down quantities, minimum & maximum ACQ

Validation ofRisk Mgt. Approach

Assessment of Structuring Costs vs. Premium Costs

Portfolio & Contract Structuring

Assessment of Volumetric Risk Cost vs. Premium Costs

Quantification of Volumetric Risks

Accenture TIOS Volumetric Risk Modelling & Management Approach


Potential deviation in expected P&L from LNG Sales/Purchases activities and related upstream / downstream activities need to be quantified to maximum margin deviation

Source: Accenture TIOS Analysis

Planned P&L for Business Year

Minimum P&L expected with Risk Exposures

Minimum P&L expected from

Business Plan & Financing Activities

Margin Risk Limit

M+6M+1 M+2M M+4 Forward 12-mth

Total P&L

M+12

Remaining MtM P&L

Market Risk - Fuel Oil

Market Risk - JCC & Brent

Market Risk - HH

Market Risk - NBP

Forward Monthly P&L Projection [$m] P&L at Risk and Risks Limits Illustrative

Expected P&L Uncertainty with +/-

1.65σ [95% Confidence Interval]

95% Confidence Interval P&L @

Risk

Margin to protect through Hedging

& Risks Mgt.

Price ExposureLimits

Maximum margin deviation


Selecting and structuring the hedging strategy requires a careful quantification of basis risks for the different instruments available to hedge…

Settlement TypeTimingMarket Type

OTC

ExchangeFutures [Prompt to Year ahead]

Forward [Prompt to Year ahead]

Dated Brent Swaps

Henry Hub Gas Futures

JKM Swaps

Brent oil

Forwards

Brent Oil Futures

TTF GasForward

Forward Curve

Volumetric Risks

CreditRisks

Example Contracts

Less Mature

Less Risky

Legend

More Mature

Riskier


Hedging & Pricing Structure

Potential Hedging Market Instruments for LNG Trading [Excluding Embedded Optionalities] Key Considerations

Physical

Financial

Physical

Financial

Financial with Physical settlement

option

Financial with Physical settlement

option

Cross Hedging

Contract Basis Risks

Spot Market Basis Risks

Maturity Mismatch

Rolling Hedge

1

2

3

4

5


0

200

400

600

800

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13

P&

L M

argi

n -

$m

+/- 1σ limit Pre-Hedging & Risk Mgmt. +/- 1σ limit Post-Hedging & Risk Mgmt. P&L @ Planned Prices

… And ultimately, the market risks management strategy should support reduce short-term earnings risks, facilitating business and capital financing plans


Illustrative

(sum of planned physical & hedge positions)

Market RisksModelling

Year Ahead Long-term Ahead

Y1

P&L Outlook and Volatility Band

Applying hedging & to protect P&L from

breaching limit

Required Margin limit

Y2 Y3


Content


Conclusions


Overall, we recommend an integrated approach to LNG volumetric and market risks, ensuring alignment between risks capital provisions and actual risks exposures

Source: Accenture TIOS Solutions

High-level Accenture Approach to LNG Risk Management Execution

Risk Identification

Portfolio Curves & Positions Exposure

Market Fundamentals & Outlook Analysis

Risk Management

Risk MitigationStrategy

Risk Modelling & Simulation

Spot/term mix and portfolio trade structures

Price curves dynamics, volatility and outlook

Historical & planned portfolio positions

Portfolio LNG contract terms & conditions

Portfolio margin at-risk quantification

Portfolio parameters stress-test simulation

Risk monitoring, setting and control

Exposure limit setting and hedging execution

Integrated Position Reporting & Risks Mgt. Model

LNG Performance Mgt. Model

LNG Trading Risks Market Fundamentals Analysis

TIOS Capabilities and Assets for LNG Risk Management

© Accenture 2015. All rights reserved. Accenture Confidential. 20© Accenture 2015. All rights reserved. Accenture Confidential.

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Trading, Investments & Optimization Strategy Trading Risk Management [Market & Volumetric Risks] Presented By Xavier Veillard APAC Director Trading, Investments & Optimization Strategy