OilAndGasFinancialJournalOctober2008_EnergyTradingRiskManagement

+®

A Supplement to

ENERGY TRADING

RISK MANAGEMENT

OCTOBER 2008

CONTENTS

PROFILES

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ETRM technology in the oil and gas industry – Tom Lochbichler, Deloitte & Touche LLP

New ETRM technology aids market participants – Don Stowers, Oil & Gas Financial Journal

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

www.ogfj.com ◆ October 2008 ◆ Energy Trading & Risk Management� 3

4 Energy Trading & Risk Management ◆ October 2008 ◆ www.ogfj.com

Don Stowers, Editor – Oil & Gas Financial Journal

New ETRM technology aids market participants

Energy markets have undergone fundamental and struc-

tural changes the past few years. As a result, market par-

ticipants 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 technol-

ogy, 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 pro-

cess ahead of a technology solution. No tools or systems should

be implemented before the processes they are intended to sup-

port 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 founda-

tional 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 sys-

tems 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 don’t 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 hedg-

ing 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 you’re

there, you’d 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


Energy trading and risk management

technology in the oil and gas industry

Tom Lochbichler, Deloitte & Touche LLP

ETRM systems vs applicationThe 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 con-

strains the choice of possible solutions available to support the

trading business.

There are many aspects to ETRM technology. An ETRM appli-

cation 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.

Most 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 commodi-

ties, whether it’s a natural long position of a producer or the

short position of a refiner. They are vulnerable to price volatili-

ties, as well as the credit worthiness of counterparties. They also

must face the logistic realities of managing diverse physical com-

modities, 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 can’t 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 activi-

ties. 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 com-

panies 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 we’ll

address the challenges of implementing ETRM solutions at large,

established oil trading and marketing organizations.

We’ll start by defining the scope of what is covered by the

term ETRM technology. We’ll 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 infrastruc-

ture 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.

What does an ETRM system do?• Serve as a system of record for all transactions from order

to cash, including purchases, sales, transportation, com-plex structured transactions, financial instruments, inven-tories, 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


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 compa-

nies in recent years to standardize their global trading organiza-

tions 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 stan-

dardizing on a single ETRM application for their energy trading

activities, although many have recently added a second applica-

tion 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 logis-

tics, is far greater.

Organizations whose operations are geographically dis-

persed, 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

single effort.

At the same time, a best

of breed approach, where

each region, or function or

line of business chooses,

or is allowed to keep, their

own system has its own set

of challenges. First, maintenance costs will be much higher than

with a single application, both in terms of maintenance fees paid

to the vendors, and in the erosion of economies of scale because

of the need to support many different applications and technolo-

gies. Finally, this approach will require a very large investment

in systems and data integration, as all of these applications will

require the ability to communicate with one another.

Practically, there should not be a binary decision between two

extremes: either a single system that covers every function, or a

separate system for each function.

Not the entire solutionThere are really two dangers inherent in looking at an ETRM

application as the entire solution.

First, it pre-supposes that the solution lies in technol-ogy alone. This is not the case of course. Technology merely

exists to support a business activity. It enables the business;

automates tasks; creates transparency into risks, exposures, and

P&L; and provides tools that support activities such as forecasting,

pricing, valuation, and complex risk analytics. As such, the busi-

ness process being supported must be well understood prior to

embarking on a project to support it. Many trading organizations

find that their business processes are in a similar state to their

technology infrastructure – varied, inconsistent, non-standard,

and fragmented. It is therefore important to not only understand

Challenges and pitfallsMigrating an existing infrastructure without impacting the busi-

ness – “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 three-

year 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. Inher-

ently, 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 tech-

nologies implemented will be a

stopgap, and will be replaced a

year or two later.

The Big Bang approach can look very attractive on paper.

In theory, it seems to deliver all required functionality within a

certain, acceptable time horizon, and offers economies of scale.

Instead of running multiple small, sometimes overlapping efforts,

the entire benefit is being delivered in one, coordinated, effort.

However, the reality is often very different. The Big Bang

approach often takes longer, costs more, and delivers less than

originally planned. One reason for this is that ETRM systems

implementations are large, complex projects, especially if there

is an existing infrastructure that must be enhanced and partially

replaced.

Such projects are difficult to plan from end to end with a high

degree of accuracy. As the business changes over time, so will

the associated functional requirements, effectively changing the

scope of the project and redefining the success criteria. Also,

implementing an ETRM solution is not something most busi-

nesses and their IT organizations have prior experience in, so

there is a learning process involved. Finally, the promised time-

lines are often unrealistic since they represent what is acceptable

to the business, rather than what is actually achievable.

Single ETRM system vs ‘best of breed’ An organization must take into account the current business and

technical environment when making a decision about future direc-

tion. Starting out with a premise of consolidating all trading activ-

ity to a single system may not be the right approach, especially

“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.” – Tom Lochbichler, Deloitte & Touche LLP

continued on page 20


Chris Strickland, Director, Lacima Group

Lacima riskAnalytics revolutionizes valuation and risk reporting across multiple

commodities and regions

In today’s more volatile, faster moving commodity markets,

sophisticated valuation, sound risk management and accu-

rate risk reporting is more important than ever. As a result,

companies engaged in commodity production and distribu-

tion need to reassess the rigor of their valuation methods, risk

management processes and financial reporting practices. Lacima

Group’s software and advisory services specifically address the

highly challenging areas of pricing, valuation and risk manage-

ment of complex contracts and physical assets (refining, storage

and pipelines) across multiple commodities and regions.

All your risk analytics needs within in a single, consistent frameworkLacima’s riskAnalytics software solution provides a comprehen-

sive 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 physi-

cal 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

Accurately model complex market dynamics of commoditiesDeriving value from multi commodity contracts and physical

assets poses a great challenge for commodity producers and

distributors. The effects of seasonality and tendency for com-

modities 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-

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.

Consolidate cash flow reporting from financial and physical assetsValue 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.

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/rev-

enue/profit outcomes

o sensitivity analysis including delta for hedging

o critical prices at which to make decisions around gas pur-

chase/sale

o optimal daily decision reports


• 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

Reduce supply costs: spread option valuation, indexation & hedgingA 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 index-

ation 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 index-

ation 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

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 contract’s indexation,

and option pay-off matrices

Derive maximum value from LNG contracts and shipmentsLacima Group’s 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 systemsOne 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 sys-

tems, such as for oil, gas, and other energy commodities or geog-

raphies. 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.

About Lacima GroupLacima 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 con-

tracts and physical assets across multiple commodities and regions

in a cost-effective manner. Lacima’s 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 aca-

demia 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: [email protected]

Website: www.lacimagroup.com


Many front and middle-offices at energy trading

organizations have in the past split apart due to

conflicting agendas. The front-office viewed itself

as the firm’s moneymaker, generating the revenue to pay every-

one else’s salaries. The middle-office viewed itself as keeping

the front-office in check, ensuring that today’s big profits don’t

turn into tomorrow’s cataclysmic losses. These competing

functions led to interdepartmental conflagrations and turf wars,

wasting time and energy.

Organizations seeking the most efficient and effective

trading and risk management operations should remove strict

barriers between front and middle-offices and recognize the

competitive advantates that can be gained from a strong

middle-office working harmoniously with the trading group.

Re-examining relationships is a good idea right now, as more

information comes out about the investigations by US com-

modities regulators against energy market players feeding

false supply and demand information to

the market. The investigations, announced

in early September, remind of the market

manipulations engineered by Enron and other

power marketers in the early part of this

decade. The oil and gas industry does not

need a similar debacle.

This article examines the traditional areas of

conflicts between the front and middle-offices

of trading organizations, and offers solutions

for addressing the challenges.

Goals and cooperationThe relationships between front and middle-offices at energy

commodity trading firms aren’t much different from those of

investment banks or money managers. Risk is taken in the front-

office. The middle-office measures and manages the risk. Their

respective goals aren’t mutually exclusive, but neither are they

exactly the same. Cooperation between the two operations is

essential to creating a successful organization.

The six areas of contention and need for solution are:

• Trading limits

• Reporting

• Staffing

• Compensation

• Recruitment

• Corporate roles and responsibilities

Trading limitsTrading limits are perhaps the primary issue of profound dis-

agreement between the risk takers and risk managers. Almost

invariably, front-office traders want limits far higher than those

imposed by the middle-office risk managers. Imagine the

“can’t do anything wrong” mentality some traders develop

when oil goes up day after day. It’s hard to argue against

them. And when particularly strong personalities are involved,

the clashes conflagrate into angry phone calls and email

battles, resulting in tremendous inefficiencies and wasted,

misdirected energy.

Solution: To manage such situations, the Risk Manage-

ment Committee – which should include a cross section of all

the relevant trading and risk management players and meet at

least once per month – should be prepared to step in firmly and

resolve the dispute. Risk management committees should always

be empowered to settle these kinds of disputes.

ReportingReporting is another common area of disagreement. When

firms employ the classic model – in which the middle and front-

offices are completely segregated – the middle-office marks

positions to market independently, at levels that are often

Removing barriers between offices:

an energy commodity risk management necessity

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

“Organizations seeking the most efficient and effective trading and risk management operations should remove strict barriers between front and middle-

offices and recognize the competitive advantages that can be gained from a strong middle-office working

harmoniously with the trading group.”


different from the front-office’s 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 company’s

overall health. Conflict is inevitable.

Solution: Creating a more harmonious mark-to-market pro-

cess 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 pric-

ing curves in illiquid markets. Ideally, risk managers must work

with front-office managers in developing forward curves, to get

the best of both worlds.

StaffingAll too often relatively inexperienced risk managers – even with

unquestioned mathematical acumen – impose strict limits on

seasoned traders and create serious animosity and dysfunction.

Solution: Managers should look for middle-office person-

nel 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.

CompensationIt’s 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, there’s a ten-

dency to downplay the importance of the risk manager.

Solution: While no one would argue for absolute parity,

middle-office personnel should be compensated at levels com-

parable to those in the front-office. It’s easy to measure a trader’s

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 dem-

onstrates 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

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.

RecruitmentThe demand for qualified energy risk managers is off the charts

and executive search firms freely admit that finding qualified can-

didates is one of their most difficult tasks. Nonetheless, compa-

nies must attract candidates with the right skills and educational

background to staff the middle-office.

Solution: Appropriate remuneration signals must be sent to

the marketplace of candidates. Higher prices are likely inevitable

for this scarce resource.

Corporate roles and responsibilitiesThe 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.

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-to-

market, value-at-risk and credit risk limits in a

timely fashion.

The front-office should view the best middle-

office 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 atmo-

sphere and a better working relationship between these vital

areas comprising an energy commodity trading and risk manage-

ment operation.

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

“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.”


Eric Johnson, Vice President Marketing

SolArc, Inc. is a global provider of enterprise commod-

ity management solutions. SolArc’s integrated software

solution offers customers greater insight and control

over complex commodity supply, marketing and trading environ-

ments, delivering increased operational effectiveness and profit-

ability at lower risk.

SolArc was founded in 1991 by three Andersen Consulting

(now Accenture) colleagues to offer consulting services and

customized software solutions to the energy and insurance

industries. In 1994, SolArc revolutionized the liquid hydrocar-

bon trading industry with its flagship RightAngleTM integrated

application suite – a software solution that integrates trading,

scheduling, accounting and risk management. Within four

years, more than 70 percent of the natural gas liquids (NGL)

market was traded using SolArc RightAngle.

Based on the rapid adoption and success of its NGL solu-

tion, SolArc began building its Supply and Trade Management

vision to serve all energy commodities from a single, unified

platform. In 2000, the company launched a newly enhanced

version of SolArc RightAngle. The new suite featured rich func-

tionality and a scalable architecture capable of supporting mul-

tiple energy-commodity classes from a unified platform with the

same depth and granularity as its predecessors. The software

now integrated trading, risk management, pricing,

scheduling, movement actualization, invoicing,

interfaces to financial/ERP systems and more. In

today’s volatile global marketplace, effective com-

modities management requires enhanced visibility

into the entire commodity and risk trading pro-

cess. With its history of success and depth of expertise, SolArc

is the only provider with the physical commodity management

capabilities to support the full trading and supply value chain

and improve operational efficiency.

SolArc is trusted by market-leading corporations around the

world across a wide range of vertical industries, including energy,

transportation, finance, aviation, agriculture and consumer

goods. Coal, crude oil, refined products, fuels, natural gas

liquids, natural gas, and other discrete physical commodities can

all be traded using a single, unified SolArc solution. In addition

to various industries taking advantage of SolArc’s integrated

suite, SolArc offers several applications that meet the individual

company’s unique needs.

For example, RiskCenter handles all of the needs of a risk

manager or a chief risk officer at a corporate level, while giving

traders detailed and timely information about their tactical

activities. Volumetric positions for spot and forward months,

valued and partially valued deals, profit and loss analysis and

P&L shift analysis give traders and commercial floor manag-

ers near-real-time information on where they stand. Rigorous

correlation and variance/covariance tools provide CRO’s with

multiple ways to analyze (and handle) the worst case scenario.

CreditCenter is a credit management solution that integrates

seamlessly to leverage all the high quality transactional data

generated by the system, ensuring that CreditCenter has a full

picture of the activities going on across the enterprise. It gives

customers the flexibility to define new credit instruments and the

rules about how these instruments are applied to exposures. This

empowers each company to customize CreditCenter to meet its

individual needs. CreditCenter also assists credit managers with

scoring of customers, both in automated ways – downloading

financial data from publishing houses – and in manual ways – for

companies perhaps too small to publish direct financial data.

LogisticsCenter assists with the labor-intensive process of

checking every bill of lading or fuel ticket, matching every

invoice quantity to ticket quantity, and matching every billed

price to the original contract. Using LogisticsCenter, incoming

fuel tickets or bill of lading data can be booked into actuals,

matched against the appropriate purchase/sale contract and

priced automatically, within seconds of being received. Also, the

processing required to automatically book transactions, price

them against the appropriate deal, calculate the taxes and other

costs and create the invoices is very complex.

SolArc provides insight and control

All the characteristics that have contributed to SolArc’s dynamic growth since 1991 have continued

to keep us at the forefront of our industry.


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 industry’s 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 ser-

vices, 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

SolArc’s 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 consol-

idates the functions necessary to support the business require-

ments 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.

Technological LeadershipThe SolArc enterprise commodity trade management solution

is recognized as the tested and proven platform that inte-

grates with customer’s existing business systems. SolArc is

certified by the SAP Integration and Certification Center to

integrate with the SAP NetWeaver platform, providing assur-

ance to customers that the two systems can be integrated

quickly and at a reduced cost.

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 his-

tory 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 manage-

ment 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 con-

sumer 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 reputa-

tion 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 profit-

ability 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.

SolArc, Inc.

9701 Richmond Ave., Suite 250

Houston, TX 77042

Telephone: 713-260-5100

Website: www.solarc.com


Recent 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 (market-

ing 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 provider’s

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 partici-

pants 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 expo-

sure and can make this a significantly smoother process. It

therefore makes sense to connect the refinery / stock manage-

ment system to the ETRM and make daily updates to the

current day’s projected consumption of crudes and feedstocks

and production of refined products. Furthermore, automating

the upload of these daily quantities for both the current day’s

forecast and prior day’s 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 compara-

tive analysis of the individual pieces versus their own bench-

marks. Inverting the model to rank crudes and feedstocks

How ETRM systems bestsupport the refinery model

Rana Basu, VP – Center of Expertise


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 cur-

rent 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 sup-

ports 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

Feed Stock

Crudes

Product2

Product3

Intermediates

Product1 INTERNAL PURCH

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

INTERNAL PURCH INTERNAL PURCH

INTERNAL PURCH

REFINING COSTS – CSO/MOS REVENUES

CRUDE PORTFOLIOS REFINERY PORTFOLIOS PRODUCT PORTFOLIOS

MARKET PURCH

MARKET PURCH

EXTERNAL SALE

EXTERNAL SALE

EXTERNAL SALE

Inputs PL – Supply VS Transfer Price

INTERNAL SALE

INTERNAL SALE INTERNAL SALE

INTERNAL SALE

INTERNAL SALE INTERNAL PURCH

DAILY UPLOAD PRODUCTION/CONSUMPTION

Transfer Pricing from trading to Asset portfolio

Outputs PL – Transfer price VS Sales

REFINERY MODEL WITH SUPPLY AND TRADING FUNCTIONS OWNING INVENTORY


Michael Schwartz, CMO

Commodity and Enterprise Risk ManagementTriple Point’s 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 today’s volatile and complex environment:

• Comprehensive enterprise risk management

• Business intelligence

• Integrated physical and financial positions

• Multi-commodity management

• Service-oriented architecture (SOA)

Counterparty Credit RiskCommodity 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

Operational RiskCommodity XL provides straight-

through 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

A Proven and Winning SolutionTriple Point’s Commodity XL delivers a real-time, portfolio-wide

view of position and risk and provides enhanced business intel-

ligence for better and more proactive decision-making.

It streamlines trade processing, maximizes supply chain effi-

ciencies, 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.

Market/Price RiskCommodity 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

Corporate Governance & Regulatory Compliance RiskCommodity 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

Business Intelligence | Integrated Operations | Compliance & Control

The Enterprise Solution: Commodity XL

Multi-Market Commodity and Enterprise Risk Management

TRIPLE POINT’S UNIQUE INTEGRATED RISK PLATFORM IS BASED ON MATURE, MARKET-PROVEN TECHNOLOGY OBTAINED IN ITS ACQUISITION OF ROME AND INSSINC

Triple Point’s Commodity XL is the most comprehensive

— in both breadth and depth — commodity

management solution

These acquisitions uniquely position Triple Point as the industry’s 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.


Commodity XL — A Multi-Commodity PlatformIn 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 Management Dashboard provides real-time graphical analysis for proactive executive decision-making

About Triple Point TechnologyTriple Point’s 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, Verti-

cal, 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.

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: [email protected]

Web: www.tpt.com

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

Commodity XL Differentiators

Triple Point Acquires INSSINC and ROMETriple Point’s 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 ManagementCommodity XL for Credit Risk™ proactively measures, man-ages and mitigates risk arising from counterparty default.

Hedge Accounting (FAS 133) Commodity XL for Hedge Accounting™ manages the require-ments 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 IntelligenceCommodity XL Management Dashboard™ mines vast amounts of trading, risk and supply chain data to provide unique and insightful analysis to key decision-makers.

Advanced Service Oriented Architecture (SOA)Commodity XL is built on Triple Point’s 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 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 pricing has never been more volatile.Markets today move in real time.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 managingyour 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 you’re ready to stop reacting and take charge, it’s time to put SolArc’s market-proven software solution andexpertise to work for you.

To find out more or to contact us for a product demonstration, go to www.solarc.com.

www.solarc.com

Are you just reacting to market changes?

You need more Insight and Control.

Solarc_OGFJsupp_0810 1 9/11/08 1:22:25 PM


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 impor-tant, is only a single element of an overall ETRM tech-nology 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 can’t 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 pric-

ing, forecasting, freight and logistics, inspection, terminal, and

plant management systems, among others.

Facing the challenges: A holistic approachOrganizations can benefit from taking a long-term, program view

of their ETRM infrastructure. A program should be forward look-

ing 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 pro-

gram’s 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 pro-

gram needs to take into account the current state of the technol-

ogy infrastructure and prioritize according to defined pain points.

Organizations should resist the temptation to structure the pro-

gram 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 imple-

mented. 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 docu-

mented 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. Manage-

ment 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 authorTom Lochbichler is a principal with Deloitte & Touche LLP’s En-ergy & 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.

continued from page 6

Commodity pricing has never been more volatile.Markets today move in real time.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 managingyour 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 you’re ready to stop reacting and take charge, it’s time to put SolArc’s market-proven software solution andexpertise to work for you.

To find out more or to contact us for a product demonstration, go to www.solarc.com.

www.solarc.com

Are you just reacting to market changes?

You need more Insight and Control.

Solarc_OGFJsupp_0810 1 9/11/08 1:22:25 PM

Documents

OilAndGasFinancialJournalOctober2008_EnergyTradingRiskManagement