+

ENERGY TRADING
RISK MANAGEMENT

A Supplement to

OCTOBER 2008

CONTENTS
2
New ETRM technology aids market participants
Don Stowers, Oil & Gas Financial Journal

4
8
10
12
14
16

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

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

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

4

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

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

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.

6

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

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

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.

8

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

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

Chris Strickland, Director, Lacima Group

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.

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.

All your risk analytics needs within

in a single, consistent framework

Generate profits from storage assets

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

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-

10

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.

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

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

 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 & 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

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.

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

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

11

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

12

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

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.

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.

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.

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: Appropriate remuneration signals must be sent to

the marketplace of candidates. Higher prices are likely inevitable
for this scarce resource.

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.

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.

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: 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

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

13

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.

14

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

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

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

15

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.

16

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

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

REFINERY MODEL WITH SUPPLY AND TRADING FUNCTIONS OWNING INVENTORY

CRUDE PORTFOLIOS

REFINERY PORTFOLIOS

PRODUCT PORTFOLIOS

INTERNAL SALE
MARKET PURCH

Crudes

INTERNAL PURCH

INTERNAL PURCH

EXTERNAL SALE

INTERNAL SALE

INTERNAL PURCH
MARKET PURCH

Product1

Feed Stock

INTERNAL SALE

INTERNAL SALE

EXTERNAL SALE
INTERNAL PURCH

Product2

Intermediates

INTERNAL PURCH
INTERNAL SALE

EXTERNAL SALE
Product3

DAILY UPLOAD

PRODUCTION/CONSUMPTION
REFINING COSTS CSO/MOS REVENUES

Inputs PL Supply VS Transfer Price

Refinery PL Transfer price s VS Operation

costs and stock / byproduct revenues

Outputs PL Transfer price VS Sales

Transfer Pricing from trading

to Asset portfolio

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

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

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

17

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

A Proven and Winning Solution

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)

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

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

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

Operational Risk

Corporate Governance
& Regulatory
Compliance 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

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

18

Triple Points Commodity XL

is the most comprehensive
in both breadth and
depthcommodity
management solution

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

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

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.

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.

Triple Point Named to Deloitte

Technology Fast 50 for a record-breaking
ten straight years

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

Triple Point Technology

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

19

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

22

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.

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

Are you just reacting to market changes?

You need more Insight and Control.

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 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