ENERGY TRADING RISK MANAGEMENT

A Supplement to

OCTOBER 2008

CONTENTS 2
New ETRM technology aids market participants Don Stowers, Oil & Gas Financial Journal ETRM technology in the oil and gas industry Tom Lochbichler, Deloitte & Touche LLP

PROFILES

Lacima riskAnalytics revolutionizes valuation and risk reporting across multiple commodities and regions Chris Strickland, Lacima Group

Removing barriers between offices: an energy commodity risk management necessity Louis Caron, RiskAdvisory (A Division of SAS)

SolArc provides insight and control Eric Johnson, SolArc

How ETRM systems best support the refinery model Rana Basu, Trade Capture Inc.

The Enterprise Solution: Commodity XL Michael Schwartz, Triple Point Technology

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Don Stowers, Editor Oil & Gas Financial Journal

New ETRM technology aids market participants

nergy markets have undergone fundamental and structural changes the past few years. As a result, market participants have had to adapt both their trading strategies and the way they look at risk management, which has also caused a review of the software systems that support these activities. In this supplement to Oil & Gas Financial Journal, we hope to provide some insight into the latest trends in the energy trading and risk management (ETRM) sector. Tom Lochbichler of Deloitte & Touche LLP, an expert on ETRM systems and applications, takes a look at the current state of ETRM technology, discusses the challenges faced by trading and marketing organizations in implementing this technology, and explains how to approach these projects in a strategic and measured manner designed to maximize benefits for the user. Lochbichler says that a successful program puts business process ahead of a technology solution. No tools or systems should be implemented before the processes they are intended to support are understood, and if need be, redesigned or improved. How the organization plans to report on its data needs to be clearly understood as well, and must be included as a foundational element of the new solution, he adds. In addition, OGFJ has asked several of the leading ETRM system providers to provide information about their software solutions and support services. Their best-of-breed ETRM systems offer benefits and functionality that is a giant leap forward

from the spreadsheets formerly common in the industry and still used by some. As Lochbichler says, most oil and gas companies dont like to consider themselves energy traders. However, nearly all are exposed to price volatility. Energy is among the most volatile of all commodities, as has been demonstrated in the past year. Many oil and gas producers and marketers employ hedging strategies to lock in prices at profitable levels. Futures contracts and swaps can be effective tools in managing price and basis risk, creating price caps, price floors, and no-cost collars to manage price risk. Energy trading is more robust than ever. The burgeoning over-the-counter (OTC) market is estimated at 20 times the size of the NYMEX. Market participants, especially the physical traders, have little choice but to be in the trenches. When youre there, youd best know what you are doing. Advanced ETRM systems, tools, and models can help energy companies and other organizations profitably trade, manage risk, move, and store crude oil, refined products, natural gas, and other commodities. The best of these systems are indispensable to helping manage the complex, ever-changing requirements of physical and financial markets. We hope this report provides you with useful information as to what these systems do and how they can help your organization. OGFJ

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Energy trading and risk management technology in the oil and gas industry

Tom Lochbichler, Deloitte & Touche LLP

ost oil and gas companies do not like to consider themselves energy traders. In their view, energy trading is more closely associated with investment banks and merchant energy companies. However, nearly all oil and gas companies are exposed to conditions or are engaged in activities that contribute to a risk profile that is very similar to that of an energy trading concern. Oil and gas companies have exposure to energy commodities, whether its a natural long position of a producer or the short position of a refiner. They are vulnerable to price volatilities, as well as the credit worthiness of counterparties. They also must face the logistic realities of managing diverse physical commodities, the movement of which often represents significant financial exposure that is only partially recognized. Even large, vertically integrated companies that often view themselves as naturally hedged with little to moderate overall exposure many times cant see how well their natural hedge really works. They simply do not have the information necessary to do so. Therefore, most companies have a need for a technology infrastructure to support trading or marketing-related activities. This infrastructure exists in most organizations, though sometimes it may not be immediately recognizable as trading technology and may be comprised simply of spreadsheets and hard-copy files. Regardless of the level of infrastructure present, many oil companies face the common challenge of upgrading and improving their energy trading and risk management (ETRM) technologies in order to more efficiently support the business. In this article well address the challenges of implementing ETRM solutions at large, established oil trading and marketing organizations. Well start by defining the scope of what is covered by the term ETRM technology. Well then discuss the challenges and choices inherent in large ETRM technology projects, in particular those faced by companies that already have established trading and marketing organizations, as well as an existing infrastructure to support these activities. Finally, we will discuss how to approach these projects in a strategic and measured manner designed to maximize benefits and chances of success.

ETRM systems vs application

The term ETRM System is often considered to be synonymous with the term ETRM Application and usually implies a single ETRM application. This is a narrow view and unnecessarily constrains the choice of possible solutions available to support the trading business. There are many aspects to ETRM technology. An ETRM application is a key aspect, of course, but there are other methods and technologies that need to be considered as part of the overall solution such as the following: Data integration Data management Ancillary systems (such as freight, forecasting, logistics) Reporting

In developing an ETRM infrastructure that effectively enables and supports the business, one needs to look beyond just a single application and consider the overall architecture that will support trading activities. The benefits of getting an ETRM infrastructure right are significant. The tasks of implementing this infrastructure can be one of the most daunting challenges an organization will face.

What does an ETRM system do?

Serve as a system of record for all transactions from order to cash, including purchases, sales, transportation, complex structured transactions, financial instruments, inventories, prices, schedules, and transportation and related fees, as well as invoices and settlement statements Provide a controls environment Improve accuracy of data entry Provide an audit trail Reduce the amount of reconciliation done by the business Automate manual processes, such as confirmations and settlement Support risk management and measurement

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Challenges and pitfalls

when dealing with large-scale, geographically spread-out trading organizations that already have existing infrastructure in place. There have been a number of attempts by large oil companies in recent years to standardize their global trading organizations on a single ETRM application. A recent ETRM IT benchmark survey conducted by Deloitte showed that in the oil industry, such efforts have often failed to deliver on their initial promise. In contrast, investment banks have been more successful in standardizing on a single ETRM application for their energy trading activities, although many have recently added a second application to their trading architecture. One needs to be careful though, when trying to draw too many parallels between investment banks and oil companies. While they may trade similar products, the scale and complexity managed by oil companies, in particular around physical logistics, is far greater. Organizations whose operations are geographically dispersed, with different systems supporting functions in different regions, or organizations that have different functions or lines of business supported by different systems, may find it very difficult to move the entire business to a single platform in a The benefits of getting an ETRM infrastructure right are significant. The tasks single effort. At the same time, a best of implementing this infrastructure can be of breed approach, where one of the most daunting challenges an each region, or function or organization will face. line of business chooses, or is allowed to keep, their Tom Lochbichler, Deloitte & Touche LLP own system has its own set The Big Bang approach can look very attractive on paper. of challenges. First, maintenance costs will be much higher than In theory, it seems to deliver all required functionality within a with a single application, both in terms of maintenance fees paid certain, acceptable time horizon, and offers economies of scale. to the vendors, and in the erosion of economies of scale because Instead of running multiple small, sometimes overlapping efforts, of the need to support many different applications and technolothe entire benefit is being delivered in one, coordinated, effort. gies. Finally, this approach will require a very large investment However, the reality is often very different. The Big Bang in systems and data integration, as all of these applications will approach often takes longer, costs more, and delivers less than require the ability to communicate with one another. originally planned. One reason for this is that ETRM systems Practically, there should not be a binary decision between two implementations are large, complex projects, especially if there extremes: either a single system that covers every function, or a is an existing infrastructure that must be enhanced and partially separate system for each function. replaced. Such projects are difficult to plan from end to end with a high Not the entire solution degree of accuracy. As the business changes over time, so will There are really two dangers inherent in looking at an ETRM the associated functional requirements, effectively changing the application as the entire solution. scope of the project and redefining the success criteria. Also, First, it pre-supposes that the solution lies in technolimplementing an ETRM solution is not something most busiogy alone. This is not the case of course. Technology merely nesses and their IT organizations have prior experience in, so exists to support a business activity. It enables the business; there is a learning process involved. Finally, the promised timeautomates tasks; creates transparency into risks, exposures, and lines are often unrealistic since they represent what is acceptable P&L; and provides tools that support activities such as forecasting, to the business, rather than what is actually achievable. pricing, valuation, and complex risk analytics. As such, the business process being supported must be well understood prior to Single ETRM system vs best of breed embarking on a project to support it. Many trading organizations An organization must take into account the current business and find that their business processes are in a similar state to their technical environment when making a decision about future directechnology infrastructure varied, inconsistent, non-standard, tion. Starting out with a premise of consolidating all trading activand fragmented. It is therefore important to not only understand ity to a single system may not be the right approach, especially continued on page 20 Migrating an existing infrastructure without impacting the business Big Bang vs. Incremental Evolution approach Many companies attempt to implement technology solutions in large, complex projects that are intended to deliver a result at the end of defined timeframe, usually in the 18-month to threeyear range (Big Bang). An alternative approach is to deliver incremental functionality over smaller periods of time, slowly evolving the technology infrastructure over a set period of years (Incremental Evolution). Both approaches have their challenges. The Incremental Evolution approach can be a hard sell. Inherently, it requires a prioritization of requirements by the business, which will be heavily influenced by technological constraints and not just business desires. Often, key stakeholders may have to wait one to two years before their requirements are addressed. It also requires an acceptance of planned obsolescence, the idea that some of the tools and technologies implemented will be a stopgap, and will be replaced a year or two later.

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Lacima riskAnalytics revolutionizes valuation and risk reporting across multiple commodities and regions

Chris Strickland, Director, Lacima Group ficult to measure and interpret. Barely handled by general energy trading and risk management systems, Lacima riskAnalytics has been specifically designed to address just these issues.

n todays more volatile, faster moving commodity markets, sophisticated valuation, sound risk management and accurate risk reporting is more important than ever. As a result, companies engaged in commodity production and distribution need to reassess the rigor of their valuation methods, risk management processes and financial reporting practices. Lacima Groups software and advisory services specifically address the highly challenging areas of pricing, valuation and risk management of complex contracts and physical assets (refining, storage and pipelines) across multiple commodities and regions.

Consolidate cash flow reporting from financial and physical assets

Value at-risk reporting needs to be performed across all trading, physical assets, and hedging books. With Lacima riskAnalytics you can consolidate risk metrics for financial contracts and physical assets within a single view to meet global financial reporting standards.

All your risk analytics needs within in a single, consistent framework

Lacimas riskAnalytics software solution provides a comprehensive range of risk metrics for companies to value both standard and complex contracts, such as hedging derivatives and long term gas supply agreements, with the ability to value and optimize oil and gas storage physical assets, within in a single consistent risk framework. Key benefits include the ability to: o achieve a consolidated view of risk metrics across multiple commodities and regions o achieve greater accuracy in valuations of contracts and physical assets with advanced single factor and multi factor models o incorporate the complexities of refining and storage physical assets into at risk calculations o achieve full integration with existing deal capture, settlements and reporting systems avoiding the need for costly replacements o achieve auditability to comply with international regulatory requirements for risk reporting

Generate profits from storage assets

Whether contemplating the purchase or sale of a storage asset, upgrading a facility, or needing to make optimal operational decisions, with Lacima riskAnalytics, you can value storage contract and physical asset portfolios with greater accuracy, and achieve a holistic view of reporting on optimal strategies analyze storage contract portfolio information in detail incorporate a wide range of parameters into calculations including: o maximum injection/withdrawal rates o ratchets (inventory-dependent injection/withdrawal rates) o fixed injection and withdrawal costs o proportional costs o initial and final capacity constraints o required reserves o intermediate capacity constraints o storage start and end dates o total storage capacity and current capacity level obtain a comprehensive range of outputs/results to facilitate decision-making including: o distributions of gas injection & withdrawal levels o scenario analysis yielding injection/withdrawal/cost/revenue/profit outcomes o sensitivity analysis including delta for hedging o critical prices at which to make decisions around gas purchase/sale o optimal daily decision reports

Accurately model complex market dynamics of commodities

Deriving value from multi commodity contracts and physical assets poses a great challenge for commodity producers and distributors. The effects of seasonality and tendency for commodities to display price spikes; differences in construction of regional markets; embedded optionality in contracts, especially those linked to physical assets; and incorporating the flexibility of physical assets into valuations and risk reports, prove very dif-

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 perform wide ranging risk metrics such as earnings at risk or profit at risk across the storage portfolio

Value the flexibility of oil and gas swing contract portfolios

Swing contracts have been used for many years to manage inherent uncertainty of commodity supply and demand. The deregulation of energy markets places even more importance on being able to accurately value the optionality contained in these contracts. Constraints on the quantity of commodity that can be taken make swing contracts particularly difficult to value and risk manage. With Lacima riskAnalytics you can: value oil and gas swing contract portfolios with greater accuracy, and achieve a holistic view of reporting on optimal strategies analyze swing contract portfolio information in detail visualize distributions of cash flows and swing volumes incorporate a wide range of constraints into calculations including: o variable contract quantities and price o minimum bill o carry forward, make up, and clawback o early termination / depletion o indexation to oil, other commodities, & baskets o rolling multi-year constraints o excess gas, interruptions, maintenance o nomination lead time perform wide ranging risk metrics such as earnings at risk or profit at risk across a portfolio of swing contracts

o estimate seasonal volatilities and correlations between fuel types (an essential pre-requisite to accurate valuation) o produce multi-commodity scenarios that are used to calculate option payoffs o define new formulae directly for each contracts indexation, and option pay-off matrices

Derive maximum value from LNG contracts and shipments

Lacima Groups expertise in energy-based valuations and modeling provide the basis for our involvement in the LNG industry. As the evolution of LNG pricing over the years has created distinct pricing regions, companies must optimize a number of interrelated factors under various price processes to identify maximum (potential) value. Lacima provides a range of services to the LNG industry, from basic valuations of long-term sales and purchase agreements, through to dynamic hedge programs and quantitative support for strategic planning of capital investments and acquisitions.

Integration with ETRM and other systems

One of the key benefits to users of Lacima riskAnalytics is that it has been designed and built to seamlessly integrate with any of the market ETRM systems. It can aggregate data from different systems, such as for oil, gas, and other energy commodities or geographies. Therefore, companies can benefit from a single system to manage their entire risk analytics requirements without having to go through the costly process of replacing underlying systems.

Reduce supply costs: spread option valuation, indexation & hedging

A number of gas companies enter into long-term gas purchase contracts to secure reliable supplies for their customers and end-users. The price of the gas delivered under these contracts is usually indexed to the price of oil, oil derivative products or to other fuels like coal. The indexation mechanism for gas pricing often involves a complex averaging methodology, where the price of gas today is the weighted average of fuel prices taken at specific dates in the past. Furthermore, some gas contracts allow the buyer to purchase the gas at the aforementioned index price, or the price at a particular market location. Gas contracts offering this choice therefore have an additional option-related value. Many of these instruments are one-of-a-kind with unique, proprietary indexation formulae. In order to exploit this optionality, buyers and sellers need sophisticated pricing models to estimate this value and lock into it, as errors in valuation can be very costly. To value these options, Lacima has developed complex indexation functionality that involves risk factors, curves, constants, and a range of mathematical operators, as well as rigorous models for oil, gas, and fuel forward prices, which captures such effects as seasonal volatilities of the gas market, and correlations between different fuel types. Lacima riskAnalytics provides all you need to unlock the value in complex gas purchase contracts and options with the ability to: o analyze historical data

About Lacima Group

Lacima Group is a specialist provider of multi commodity pricing, valuation and risk management software and advisory services. Based on its internationally acclaimed research in energy risk modeling, Lacima offers an integrated risk management applica -tion to address valuation, market and credit risk or the flexibility of stand-alone solutions for swing and storage. These solutions help commodity producers, retailers, distributors, end-users and financial institutions to value and manage risk associated with complex contracts and physical assets across multiple commodities and regions in a cost-effective manner. Lacimas directors Dr Les Clewlow and Dr Chris Strickland (authors of best sellers Energy Derivatives: Pricing and Risk Management and Implementing Derivatives Models), have over thirty years combined experience in commerce and academia within the energy and financial service industries.

Lacima Group 800 West Sam Houston Parkway N, Building 12, 3rd Floor Houston, Texas 77024 USA Contact: Dr. Ron Sobey Telephone: +1 (832) 4313018 Email: ron.sobey@lacimagroup.com Website: www.lacimagroup.com

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Removing barriers between offices: an energy commodity risk management necessity

Louis Caron, Global Energy Risk Specialist, RiskAdvisory (A Division of SAS)

any front and middle-offices at energy trading Reporting organizations have in the past split apart due to Staffing conflicting agendas. The front-office viewed itself Compensation as the firms moneymaker, generating the revenue to pay every Recruitment one elses salaries. The middle-office viewed itself as keeping Corporate roles and responsibilities the front-office in check, ensuring that todays big profits dont turn into tomorrows cataclysmic losses. These competing Trading limits functions led to interdepartmental conflagrations and turf wars, Trading limits are perhaps the primary issue of profound diswasting time and energy. agreement between the risk takers and risk managers. Almost Organizations seeking the most efficient and effective invariably, front-office traders want limits far higher than those trading and risk management operations should remove strict imposed by the middle-office risk managers. Imagine the barriers between front and middle-offices and recognize the cant do anything wrong mentality some traders develop competitive advantates that can be gained from a strong when oil goes up day after day. Its hard to argue against middle-office working harmoniously with the trading group. them. And when particularly strong personalities are involved, Re-examining relationships is a good idea right now, as more the clashes conflagrate into angry phone calls and email information comes out about the investigations by US combattles, resulting in tremendous inefficiencies and wasted, modities regulators against energy market players feeding misdirected energy. false supply and demand information to the market. The investigations, announced Organizations seeking the most efficient and effective in early September, remind of the market trading and risk management operations should manipulations engineered by Enron and other remove strict barriers between front and middlepower marketers in the early part of this decade. The oil and gas industry does not offices and recognize the competitive advantages that need a similar debacle. can be gained from a strong middle-office working This article examines the traditional areas of harmoniously with the trading group. conflicts between the front and middle-offices of trading organizations, and offers solutions for addressing the challenges. Solution: To manage such situations, the Risk Management Committee which should include a cross section of all Goals and cooperation the relevant trading and risk management players and meet at The relationships between front and middle-offices at energy least once per month should be prepared to step in firmly and commodity trading firms arent much different from those of resolve the dispute. Risk management committees should always investment banks or money managers. Risk is taken in the frontbe empowered to settle these kinds of disputes. office. The middle-office measures and manages the risk. Their respective goals arent mutually exclusive, but neither are they Reporting exactly the same. Cooperation between the two operations is Reporting is another common area of disagreement. When essential to creating a successful organization. firms employ the classic model in which the middle and frontThe six areas of contention and need for solution are: offices are completely segregated the middle-office marks Trading limits positions to market independently, at levels that are often

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different from the front-offices perception of where the market is. Almost invariably, the middle-office marks to market at more conservative levels than the front-office would. From the traders perspectives, senior management sees vastly different risk numbers from what traders perceive as reality, while the middle-office views itself as the safeguard for the companys overall health. Conflict is inevitable.

companies pay greater attention to roles and responsibilities of the two groups, as discussed below, there is more justification for taking this approach to salaries and bonuses.

Recruitment
The demand for qualified energy risk managers is off the charts and executive search firms freely admit that finding qualified candidates is one of their most difficult tasks. Nonetheless, companies must attract candidates with the right skills and educational background to staff the middle-office.

Solution: Creating a more harmonious mark-to-market process will solve many misunderstandings between the two groups. The front- office often has superior information on which it is making its decisions, especially when establishing forward pricing curves in illiquid markets. Ideally, risk managers must work with front-office managers in developing forward curves, to get the best of both worlds.

Solution: Appropriate remuneration signals must be sent to the marketplace of candidates. Higher prices are likely inevitable for this scarce resource.

Staffing
All too often relatively inexperienced risk managers even with unquestioned mathematical acumen impose strict limits on seasoned traders and create serious animosity and dysfunction.

Corporate roles and responsibilities

The stormy relationships between front and middle-office personnel are one-way streets. Each organization is equally responsible and should seek to understand their roles and responsibilities.

All of these activities can lead to a more cooperative atmosphere and a better working relationship between these vital areas comprising an energy commodity trading and risk management operation.
Solution: Managers should look for middle-office personnel with front-office experience. Risk managers who have taken positions themselves and have dealt with trading limits and controls from the other side are better attuned to the effects of risk controls on traders psychologies than are, say, entry-level quantitative specialists fresh from business school.

Compensation
Its no secret that front-office personnel are usually more highly compensated than those in the middle-office. With the higher salary comes a certain amount of swagger and, in some cases, a heightened or even exaggerated sense of importance. When someone in the front-office not only makes huge bonuses but also has a bigger base salary than a risk manager, theres a tendency to downplay the importance of the risk manager.

Solution: Middle-office managers must recognize their role as service providers for the front-office, providing accurate information on the potential impact of transactions on mark-tomarket, value-at-risk and credit risk limits in a timely fashion. The front-office should view the best middleoffice managers as an additional resource with respect to the comprehension of risk and value in complex transactions. The two should work together to justify the expansion of permitted products and transactions. All of these activities can lead to a more cooperative atmosphere and a better working relationship between these vital areas comprising an energy commodity trading and risk management operation.

Solution: While no one would argue for absolute parity, middle-office personnel should be compensated at levels comparable to those in the front-office. Its easy to measure a traders performance, but risk managers who help traders by making strategy recommendations, handling reporting functions and so on sometimes, get short shrift. Leveling the playing field demonstrates to risk managers and traders alike the value the firm places on the risk management function. Consider making base salaries higher for middle-office personnel. At the same time ensure that bonuses remain greater for front-office personnel. If

RiskAdvisory, a Division of SAS Mr. Louis J. Caron Global Energy Risk Specialist Telephone: 403.802.4459 Cell: 403.608.5880 website: www.riskadvisory.com

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SolArc provides insight and control

Eric Johnson, Vice President Marketing

olArc, Inc. is a global provider of enterprise commodto various industries taking advantage of SolArcs integrated ity management solutions. SolArcs integrated software suite, SolArc offers several applications that meet the individual solution offers customers greater insight and control companys unique needs. over complex commodity supply, marketing and trading environFor example, RiskCenter handles all of the needs of a risk ments, delivering increased operational effectiveness and profitmanager or a chief risk officer at a corporate level, while giving ability at lower risk. traders detailed and timely information about their tactical SolArc was founded in 1991 by three Andersen Consulting activities. Volumetric positions for spot and forward months, (now Accenture) colleagues to offer consulting services and valued and partially valued deals, profit and loss analysis and customized software solutions to the energy and insurance P&L shift analysis give traders and commercial floor managindustries. In 1994, SolArc revolutionized the liquid hydrocarers near-real-time information on where they stand. Rigorous bon trading industry with its flagship RightAngleTM integrated correlation and variance/covariance tools provide CROs with application suite a software solution that integrates trading, multiple ways to analyze (and handle) the worst case scenario. scheduling, accounting and risk management. Within four CreditCenter is a credit management solution that integrates years, more than 70 percent of the natural gas liquids (NGL) seamlessly to leverage all the high quality transactional data market was traded using SolArc RightAngle. generated by the system, ensuring that CreditCenter has a full Based on the rapid adoption and success of its NGL solupicture of the activities going on across the enterprise. It gives tion, SolArc began building its Supply and Trade Management customers the flexibility to define new credit instruments and the vision to serve all energy commodities from a single, unified rules about how these instruments are applied to exposures. This platform. In 2000, the company launched a newly enhanced empowers each company to customize CreditCenter to meet its version of SolArc RightAngle. The new suite featured rich funcindividual needs. CreditCenter also assists credit managers with tionality and a scalable architecture capable of supporting mulscoring of customers, both in automated ways downloading tiple energy-commodity classes from a unified platform with the financial data from publishing houses and in manual ways for same depth and granularity as its predecessors. The software companies perhaps too small to publish direct financial data. now integrated trading, risk management, pricing, scheduling, movement actualization, invoicing, All the characteristics that have contributed to interfaces to financial/ERP systems and more. In SolArcs dynamic growth since 1991 have continued todays volatile global marketplace, effective comto keep us at the forefront of our industry. modities management requires enhanced visibility into the entire commodity and risk trading process. With its history of success and depth of expertise, SolArc LogisticsCenter assists with the labor-intensive process of is the only provider with the physical commodity management checking every bill of lading or fuel ticket, matching every capabilities to support the full trading and supply value chain invoice quantity to ticket quantity, and matching every billed and improve operational efficiency. price to the original contract. Using LogisticsCenter, incoming SolArc is trusted by market-leading corporations around the fuel tickets or bill of lading data can be booked into actuals, world across a wide range of vertical industries, including energy, matched against the appropriate purchase/sale contract and transportation, finance, aviation, agriculture and consumer priced automatically, within seconds of being received. Also, the goods. Coal, crude oil, refined products, fuels, natural gas processing required to automatically book transactions, price liquids, natural gas, and other discrete physical commodities can them against the appropriate deal, calculate the taxes and other all be traded using a single, unified SolArc solution. In addition costs and create the invoices is very complex.

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Many SolArc customers purchase crude oil at multiple leases and use commercial software and/or legacy royalty systems to manage lease movements and pricing. LeaseCenter helps these customers efficiently provide lease-level information to the Society of Risk Analysis for inclusion in their trade management processes. LeaseCenter maximizes the control, flexibility and transparency over lease operations. It can track and manage complex lease arrangements across the supply chain, update data for multiple leases, forecast lease volumes and auto-match run tickets. The SolArc solution for natural gas is the industrys most dependable, proven commodity management and basic risk application for the natural gas industry. Developed based on years of industry experience, technology expertise, and proven capabilities, the SolArc solution for natural gas supports all roles in the natural gas value chain, including producer, producer services, gatherer, processor, gas marketer and shipper, storage and pipeline operator, local distribution company, and end user. By combining our strengths in providing full commercial management of natural gas from the wellhead to burner tip with SolArcs cutting-edge trading, physical product handling and risk management capabilities, we can offer customers a world-class solution across their entire natural gas value chain. SolArc consolidates the functions necessary to support the business requirements for each of the identified perspectives. In fact, the solution has been developed from a design perspective that reflects how the individual within that part of the value chain needs to work, making it easy to learn and intuitive for professionals to utilize in their day-to-day business.

SolArc is a Microsoft Gold Certified Partner which recognizes companies that demonstrate consistent, high-quality delivery of solutions built on Microsoft technology. SolArc continues its history of innovation and technological leadership by releasing new solutions on the Microsoft .NET development platform. SolArc is the only vendor of commodity supply, trading and risk management solutions that is developing and releasing solutions on the latest version of .NET. SolArc is committed to customer success and we remain the leader because our customers know they can trust us to provide the insight and control necessary to better manage supply, trading and risk management operations across the enterprise. Since 1991, SolArc has become a trusted solution provider for an international clientele of more than 60 leading corporations across a range of vertical industries, including energy, aviation and transportation, banking and finance, agriculture and consumer goods. After more than 17 years of successfully implementing commodity and risk trading software solutions for high profile customers in a variety of industries, SolArc has built a reputation for success unsurpassed in the industry. When a customer chooses SolArc, they can count on a successful implementation and greater enterprise visibility and control for enhanced profitability and operational effectiveness. SolArc is headquartered in Houston and has offices in Dallas, Tulsa, London and Singapore. For more information, please visit www.solarc.com.

Technological Leadership
The SolArc enterprise commodity trade management solution is recognized as the tested and proven platform that integrates with customers existing business systems. SolArc is certified by the SAP Integration and Certification Center to integrate with the SAP NetWeaver platform, providing assurance to customers that the two systems can be integrated quickly and at a reduced cost. SolArc, Inc. 9701 Richmond Ave., Suite 250 Houston, TX 77042 Telephone: 713-260-5100 Website: www.solarc.com

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How ETRM systems best support the refinery model

Rana Basu, VP Center of Expertise

ecent market volatility has created a growing demand for ETRM systems to assume a more sophisticated role in managing the oil asset at the refinery level. To do this, the operational and performance indicators of the inputs (crude and feedstock supply), the refinery operation costs and leverage opportunities, and the outputs (marketing and trading of refined products) need to be captured and managed effectively. Doing this takes an accurate attribution of the P&L changes at all three stages of operation: Crude portfolios, where the P&L reflects supply versus transfer pricing to refinery Refinery portfolios, with the P&L reflecting transfer prices versus operation costs and stock / byproduct revenues Product portfolios, having the P&L shaped by transfer prices from refinery versus sales. P&L results in all three portfolios are the product factors such as changes in the underlying commodity prices and yield mix, and the costs broken out into actionable groups like transportation, credit costs, processing costs, and fees. The ETRM providers challenge is to maintain the flexibility for modeling with the control needed for the actual transactions, and slicing the P&L in meaningful ways to accurately support decisions for trading / marketing, risk management, refining and accounting participants through the complete lifecycle of the asset transaction. Optimizing the asset through juggling the possible yields (within engineering constraints) against the changing face of the market is as much an art as it is a science. Having the ETRM provide position details on market position and daily inventory position helps both the optimization of market opportunity and the effective hedging of the balance exposure and can make this a significantly smoother process. It therefore makes sense to connect the refinery / stock management system to the ETRM and make daily updates to the current days projected consumption of crudes and feedstocks and production of refined products. Furthermore, automating the upload of these daily quantities for both the current days forecast and prior days actuals significantly reduces the errors in final positions that lead to bad decisions.

Transferring the inputs at cost and adding in the cost of operations and transport to deduct from the final sales price does provide an accurate overall P&L picture. However, this model does not support analysis for performance tracking and improvement. Breaking out the performance into three groups inputs, refinery operations, and outputs allows comparative analysis of the individual pieces versus their own benchmarks. Inverting the model to rank crudes and feedstocks

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REFINERY MODEL WITH SUPPLY AND TRADING FUNCTIONS OWNING INVENTORY

CRUDE PORTFOLIOS REFINERY PORTFOLIOS PRODUCT PORTFOLIOS

INTERNAL SALE MARKET PURCH Crudes INTERNAL PURCH INTERNAL SALE INTERNAL PURCH

Product1

EXTERNAL SALE

INTERNAL PURCH MARKET PURCH Feed Stock INTERNAL SALE

INTERNAL SALE INTERNAL PURCH Product2

EXTERNAL SALE

Intermediates

INTERNAL PURCH INTERNAL SALE Product3 EXTERNAL SALE

DAILY UPLOAD

PRODUCTION/CONSUMPTION
REFINING COSTS CSO/MOS REVENUES

Inputs PL Supply VS Transfer Price

Transfer Pricing from trading to Asset portfolio

Renery PL Transfer price s VS Operation costs and stock / byproduct revenues

Outputs PL Transfer price VS Sales

by the spread to their yields by asset scenario gives greater visibility to both the trading groups and the operations versus the crack spread and highlights favorable scenarios given current market conditions. If the ETRM can take the next step of allowing flexibility in modeling the crack spread to more accurately represent current or possible market scenarios in the use of the asset, the information supports faster reaction to changes in market conditions An ETRM system that reflects the real costs and realistically manipulates the yields and inventory levels supports better decisions. TradeCapture is a leading global provider of commodity trading and transaction management software systems. It is headquartered in Houston, TX and has sales, development and support centres strategically located around the world

including Hyderabad, India, Rome, Italy and London, England. www.tradecapture.com

TradeCapture, Inc. 2500 CityWest Boulevard Suite 745 Houston, TX 77042 Telephone: 1.713-339-5600 website: www.tradecapture.com

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The Enterprise Solution: Commodity XL

Multi-Market Commodity and Enterprise Risk Management
Business Intelligence | Integrated Operations | Compliance & Control
Michael Schwartz, CMO

Commodity and Enterprise Risk Management

Triple Points flagship product, Commodity XL, is the leading multi-market commodity and enterprise risk management solution for trading, marketing, logistics, scheduling, risk management and accounting in todays volatile and complex environment: Comprehensive enterprise risk management Business intelligence Integrated physical and financial positions Multi-commodity management Service-oriented architecture (SOA)

A Proven and Winning Solution

Triple Points Commodity XL delivers a real-time, portfolio-wide view of position and risk and provides enhanced business intelligence for better and more proactive decision-making. It streamlines trade processing, maximizes supply chain efficiencies, measures and manages market and credit risk, evaluates performance and ensures regulatory and accounting compliance. Commodity XL is an award-winning solution that supports multiple commodities including power, oil, gas, coal, base and precious metals, agricultural products, biofuels and freight.

TRIPLE POINTS UNIQUE INTEGRATED RISK PLATFORM IS BASED ON MATURE, MARKET-PROVEN TECHNOLOGY OBTAINED IN ITS ACQUISITION OF ROME AND INSSINC
These acquisitions uniquely position Triple Point as the industrys only provider of a fully integrated, enterprise risk management and compliance solution capable of managing the 4 key areas of financial exposure on a common platform: counterparty credit risk, operational risk, market/price risk and corporate governance and regulatory compliance risk.

Counterparty Credit Risk

Commodity XL for Credit Risk proactively measures, manages and mitigates the risks arising from counterparty default and provides an accurate depiction of credit exposure in both current market conditions and stressed scenarios. Liquidity Management Credit Analytics Credit Scoring Collateral Management

Market/Price Risk
Commodity XL provides the tools critical for effective trading and hedging of commodities in volatile markets and offers processes to ensure leadership-issued limits and controls are enforced. Multiple Commodity Exposure MTM FX Support VaR/Stress Test

Operational Risk
Commodity XL provides straightthrough processing (STP) and integrates front office controls, exchange trade execution, deal and confirmation and supply chain scheduling. Front Office Control Exchange Integration Integrated Invoicing and Settlement Integrated Supply Chains/Logistics

Corporate Governance & Regulatory Compliance Risk

Commodity XL for Hedge Accounting and Fair Value Disclosure obtains and maintains beneficial hedge accounting treatment and performs derivative instrument fair value level assignments. FAS 133, IAS 39 FAS 157, IFRS 7 Sarbanes-Oxley Disclosure

Triple Points Commodity XL is the most comprehensive in both breadth and depthcommodity management solution

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Triple Point Technology now possesses the widest reach and most comprehensive solution of any vendor in the market. Patrick Reames, Vice President Trading And Risk Management, Utilipoint International Commodity XL A Multi-Commodity Platform
In a highly inter-related global energy mix, Commodity XL enables clients to: Hedge inputs and outputs Aggregate risk across multiple commodities Handle complex trade types and derivative instruments Combine physical and financial management

Commodity XL Differentiators
Triple Point Acquires INSSINC and ROME Triple Points recent acquisition of INSSINC, the leading provider of treasury management and regulatory compliance solutions, and ROME Corporation, the industry leader in credit risk management solutions, positions it to uniquely offer a true enterprise risk management and compliance solution. Counterparty Credit Risk Management Commodity XL for Credit Risk proactively measures, manages and mitigates risk arising from counterparty default. Hedge Accounting (FAS 133) Commodity XL for Hedge Accounting manages the requirements under hedge accounting regulations including the detailed testing, documentation and reporting necessary to qualify for hedge accounting status. Fair Value Disclosure (FAS 157) Commodity XL for Fair Value Disclosure provides the tools to define, measure and manage fair value levels and meet disclosure requirements for FAS 157 compliance. Business Intelligence Commodity XL Management Dashboard mines vast amounts of trading, risk and supply chain data to provide unique and insightful analysis to key decision-makers.

View multiple commodity positions in real-time and monitor ancillary costs of commodity movements.

Commodity XL Management Dashboard provides real-time graphical analysis for proactive executive decision-making About Triple Point Technology
Triple Points award-winning solutions are used by more than 25 percent of both Global 500 commodity trading and energy companies including Westar Energy, TVA, NYISO, ERCOT, Vertical, ConocoPhillips, UBS, Integrys, PETRONAS and Agroetanol. Founded in 1993 and headquartered in Westport, Connecticut, USA, Triple Point serves clients in Asia, Africa, Australia, Europe, North America and South America from its eight development and support centers strategically located around the world.

Advanced Service Oriented Architecture (SOA) Commodity XL is built on Triple Points n-tiered, Java EE compliant, highly flexible and scalable technology architecture and quickly integrates with any operating system, application server, middleware or database.

Triple Point Named to Deloitte Technology Fast 50 for a record-breaking ten straight years

Triple Point Technology 301 Riverside Avenue Westport, CT 06880 Telephone: +1.203.291.7979 Email: info@tpt.com Web: www.tpt.com

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continued from page 6

the current business environment, but to also redesign broken processes and strive to standardize processes where possible. IT can be used effectively to automate standard processes and make them more efficient and scalable. It is less practical to automate non-standard processes because it increases the complexity and cost of the solution and raises execution risk (the risk of having a failed or only partially successful project). Yet many systems projects set out, by not considering this, to implement systems to enable broken processes and automate non-standard processes.

Second, an ETRM application, though vitally important, is only a single element of an overall ETRM technology solution. There are other major elements that need
to be considered as part of the solution architecture, such as data architecture, reporting, and supporting systems. The data architecture should chart out the global flow of data through the organization, and should provide a plan of how this flow will be supported by the ETRM infrastructure, including taking into consideration integration technologies. This flow should include all information relevant to the trading business, and not just that contained within the ETRM application. Reporting is another key element of an ETRM infrastructure and is often not considered until the end of the implementation project, once the overall solution is in place. However, failing to consider how the organization needs to look at its information during the solution design and implementation phase can lead to a black hole of information. Data is entered and functions are performed in the system, but the results cant be reported out in the way that is useful to the organization. Additionally, there are a number of supporting systems that need to be considered, or, if already a part of the infrastructure, integrated into the new solution. These include systems for pricing, forecasting, freight and logistics, inspection, terminal, and plant management systems, among others.

Facing the challenges: A holistic approach

Organizations can benefit from taking a long-term, program view of their ETRM infrastructure. A program should be forward looking and clearly define benefits and functionality that is planned to be delivered, but also needs to be flexible enough to deal with changes in scope over its lifetime. A program may have a three- or five-year defined time horizon, but it needs to deliver in incremental packets, via defined projects and initiatives with a short time-horizon. The majority of the programs component projects should have durations of around three to six months, with fewer, larger initiatives of longer durations. These are, of course, general guidelines only. In the end, projects need to be structured in a way that makes sense given the current environment, needs, and priorities of the organization. In the case of an ETRM infrastructure implementation, the program needs to take into account the current state of the technology infrastructure and prioritize according to defined pain points. Organizations should resist the temptation to structure the program around a single ETRM application at the onset, attempting

to replace the entire existing infrastructure in one big effort. While the final result may well be a single ETRM application at some defined point in the future, the program should be structured to deliver a series of intermediate stepping-stones of self-contained functionality prior to that point. Legacy application should be phased out over a period of time in a way that makes sense to the organization, whether it is by region, line of business, or function. This means that parts of the new solution will be integrated into the existing environment over time, as they become implemented. The organization will need to become comfortable with the idea of planned obsolescence, as this approach will lead to the implementing some stopgap solutions with the intent of replacing them within a year or two. Although a difficult sell in many organizations, this approach represents a disciplined and pragmatic approach to ETRM systems implementation. It helps mitigate implementation risk by delivering in smaller, more easily scoped and delivered projects that deliver incremental value to the organization. A successful program also puts business process ahead of a technology solution. For this reason, a successful program will start with business process documentation and redesign, and drive to a standardized set of processes where possible. No tools or systems should be implemented before the processes they are intended to support are understood and, if necessary, redesigned or improved. The program also needs to consider reporting in the initial business process redesign. How the organization plans to report on its data needs to be clearly understood and has to be included as a foundational element of the new solution. For instance, the way the organization plans to report market risk, position, credit, P&L, financials, and regulatory information should be clearly documented a the outset. The structures that will be used to organize this information, such as book structure, strategy, and region have to be understood and documented. The reporting thread runs from front to back through the entire program and forms the basis of how information is presented to the organization. None of the above steps, of course, guarantees success. However, they are all demonstrated methods that, if properly employed, can decrease delivery risk of large ETRM systems projects and enhance both the chances and benefits of success. While implementing a front-to-back ETRM infrastructure is filled with many challenges, the benefits of doing it right will have a transformational impact on the organization. Management will have better visibility into the business with better information sooner, and a more efficient organization, measured through increased volumes of business per employee, as well as lower per-transaction costs. OGFJ

About the author

Tom Lochbichler is a principal with Deloitte & Touche LLPs Energy & Resources practice. He is primarily focused in the energy trading industry, assisting his clients to develop and implement transformational strategies around business process, operations and information technology.

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Are you just reacting to market changes?

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You need a powerful, real-time commodity supply, trading and risk management system that helps you understand not only your current positions, but also gives you visibility into where you may be in the future. Only one solution provider offers you the Insight and Control you need to respond to rapidly changing market conditions.Only one provider gives you the ability to maximize your profitability while better managing your risk: SolArc. Since 1991, SolArc has been the global leader in delivering Commodity Trading and Risk Management solutions to the Crude Oil,Petroleum and Natural Gas industries. If youre ready to stop reacting and take charge,its time to put SolArcs market-proven software solution and expertise to work for you. To find out more or to contact us for a product demonstration, go to www.solarc.com.

www.solarc.com