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