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

Chris Strickland, Director, Lacima Group

In today’s 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 Group’s 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.

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

Lacima’s 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:

• achieve a consolidated view of risk metrics across multiple commodities and regions
• achieve greater accuracy in valuations of contracts and physical assets with advanced single factor and multi factor models
• incorporate the complexities of refining and storage physical assets into at risk calculations
• achieve full integration with existing deal capture, settlements and reporting systems – avoiding the need for costly replacements
• 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 difficult 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 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.

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:
  • maximum injection/withdrawal rates
  • ratchets (inventory-dependent injection/withdrawal rates)
  • fixed injection and withdrawal costs
  • proportional costs
  • initial and final capacity constraints
  • required reserves
  • intermediate capacity constraints
  • storage start and end dates
  • total storage capacity and current capacity level
• obtain a comprehensive range of outputs/results to facilitate decision-making including:
  • distributions of gas injection & withdrawal levels
  • scenario analysis yielding injection/withdrawal/cost/revenue/profit outcomes
  • sensitivity analysis including delta for hedging
  • critical prices at which to make decisions around gas purchase/sale
  • 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:
  • variable contract quantities and price
  • minimum bill
  • carry forward, make up, and clawback
  • early termination / depletion
  • indexation to oil, other commodities, & baskets
  • rolling multi-year constraints
  • excess gas, interruptions, maintenance
  • 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:

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

Derive maximum value from LNG contracts and shipments

Lacima 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 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. 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 academia within the energy and financial service industries.