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Webinar by E&C America Inc.
Energy Procurement:
How risk management
can benefit your
company
Watch the recording of the we...
2
A few words of introduction
Paul Cicio, President of IECA
3
Webinar Format
• Agenda:
– 10:00-10:30 AM: Presentation by
Kobe Cannaerts of E&C America, Inc.
– 10:30-11:00 AM: Q&A Ses...
CONTENT
Energy markets
Risk
management
About E&C
Energy markets
6
The roller coaster…
0
2
4
6
8
10
12
14
16
18
4/01/2000
4/06/2000
4/11/2000
4/04/2001
4/09/2001
4/02/2002
4/07/2002
4/12/...
7
… on a long slide down?
0
2
4
6
8
10
12
14
16
2/01/2008
2/04/2008
2/07/2008
2/10/2008
2/01/2009
2/04/2009
2/07/2009
2/10...
8
…or not at all?
1
2
3
4
5
6
7
03/01/2012
03/03/2012
03/05/2012
03/07/2012
03/09/2012
03/11/2012
03/01/2013
03/03/2013
03...
9
“Winter is Coming”
2.5
3.0
3.5
4.0
4.5
November
December
January
February
March
April
May
June
July
August
September
Oct...
10
Rig Count Decreases by Shale Deposit
86/51%
51/45%
240/47%
492/45% 32/37%
14/36%
83/18%
Total:
666/44%
Total and percen...
11
Gas Production Efficiency Gains
0
10
20
30
40
50
60
70
80
0
200
400
600
800
1000
1200
1400
1600
1800
1/1/2004
7/1/2004
...
12
US LNG Project Status
Phase Name In-service Date Capacity (Bcf/day)
Under construction Sabine Pass train 1-4 2016* 2.34...
13
Exports to Mexico
14
Electricity Generation by Fuel
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
jan/04
apr/04
jul/04...
15
Clean Power Plan Implementation
Final Rule Due
Plans due from
States
EPA Proposes
Clean Power Plan
States submit initia...
16
Clean Power Plan Building Blocks
1647
1005
75
178
45 216
130
0
200
400
600
800
1000
1200
1400
1600
1800
2012 Fossil
Rat...
17
The pitfalls of buying energy
Wishful
thinking
Greed
“This or that reason will
make prices fall again.”
“If the market ...
18
… and how to avoid them
Don’t buy as
it falls tactics
Opportunity
hunting
strategy
Price fixed
Market average
Stop loss...
Risk management
20
Gazing into the mist
Short term Long term
MARKET ANALYTICS
Actively monitor markets for
hedging opportunities
RISK MANA...
21
Steps in setting up a strategy
• Budget risk
• Market risk
• Survival risk
Determine
the
strategic
risk profile
• Avera...
22
Setting up a strategy
Falling cost of energy
= falling price of
product ?
(and to some extent
vice versa)
Is the energy...
23
Approaches to price fixing
Prices
floating on
spot
markets
One shot
forward
fixing of
prices
PRICE MANAGEMENT
Use mixtu...
24
Market risk
strategy
Survival risk
strategy
Budget risk
strategy
1. Buy the dips Be careful with
buying too much
too fa...
25
Incremental price locks technique
Y + 2 timeY + 1Q1 - Y
START OF THE
CONTRACT
Y + 3
START OF NEXT
CONTRACT
START OF NEX...
26
Block model
3,88
3,89
3,78 4,15
3,77 4,3 4,93
0
50
100
150
200
250
300
01/01/14
01/22/14
02/12/14
03/05/14
03/26/14
04/...
27
Load following model
-
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
20.000
01/01/14
01/15/14
01/29/14
02/...
28
30
35
40
45
50
55
1/07/12
1/08/12
1/09/12
1/10/12
1/11/12
1/12/12
1/01/13
1/02/13
1/03/13
1/04/13
1/05/13
1/06/13
1/07/...
29
Opportunity hunting
Compared to what the market was
prepared to pay for a similar product, how
historically good is tod...
30
Example:
Opportunity hunting
Very low Perc 10 Only 10% of all prices are low er than this level
Low Perc 25 Only 25% of...
31
Risk Management
• Market value = what is my price if
I buy everything today?
• Portfolio value = what is my price
if I ...
32
KPI’s & SLA’s
Deadline
compliance
• Deadlines are
set for every
task
• Reductions
on fees when
compliance
drops below
t...
About E&C
34
INDEPENDENTENERGY PROCUREMENT CONSULTANCY
Gas &
electricity
Focus on procurement
strategy, not on consumption
reduction...
35
Integrated international approach
• Since its creation in 2005, E&C has grown
organically, responding to the request of...
36
Our services
Data management ePoint
Portfolio consultancy
Portfolio management
Documentation Visualisation Analysis Com...
Q & A
38
Kobe Cannaerts
Managing Director, E&C America Inc.
d: (347) 443 9962 m: (646) 832 8054
More information?
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E&C America - Webinar May 2015

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Webinar by E&C America Inc.

Energy Procurement: How risk management can benefit your company

Watch the recording of the webinar here: http://youtu.be/QG6WY6ebTlc

Published in: Economy & Finance
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E&C America - Webinar May 2015

  1. 1. Webinar by E&C America Inc. Energy Procurement: How risk management can benefit your company Watch the recording of the webinar here: http://youtu.be/QG6WY6ebTlc
  2. 2. 2 A few words of introduction Paul Cicio, President of IECA
  3. 3. 3 Webinar Format • Agenda: – 10:00-10:30 AM: Presentation by Kobe Cannaerts of E&C America, Inc. – 10:30-11:00 AM: Q&A Session • Have a question? Type it in the chat box and we’ll address it during the Q&A. • Please retain the “raise your hand” option for the Q&A. If we don’t get to your questions, don’t worry, simply type it in the chat box.
  4. 4. CONTENT Energy markets Risk management About E&C
  5. 5. Energy markets
  6. 6. 6 The roller coaster… 0 2 4 6 8 10 12 14 16 18 4/01/2000 4/06/2000 4/11/2000 4/04/2001 4/09/2001 4/02/2002 4/07/2002 4/12/2002 4/05/2003 4/10/2003 4/03/2004 4/08/2004 4/01/2005 4/06/2005 4/11/2005 4/04/2006 4/09/2006 4/02/2007 4/07/2007 4/12/2007 4/05/2008 4/10/2008 4/03/2009 4/08/2009 4/01/2010 4/06/2010 4/11/2010 4/04/2011 4/09/2011 4/02/2012 4/07/2012 4/12/2012 4/05/2013 4/10/2013 4/03/2014 4/08/2014 4/01/2015 NYMEX Henry Hub Natural Gas Futures Electronic (Front Month) 14 years back
  7. 7. 7 … on a long slide down? 0 2 4 6 8 10 12 14 16 2/01/2008 2/04/2008 2/07/2008 2/10/2008 2/01/2009 2/04/2009 2/07/2009 2/10/2009 2/01/2010 2/04/2010 2/07/2010 2/10/2010 2/01/2011 2/04/2011 2/07/2011 2/10/2011 2/01/2012 2/04/2012 2/07/2012 2/10/2012 2/01/2013 2/04/2013 2/07/2013 2/10/2013 2/01/2014 2/04/2014 2/07/2014 2/10/2014 2/01/2015 2/04/2015 NYMEX Henry Hub Natural Gas Futures Electronic (Front Month) 7 years back
  8. 8. 8 …or not at all? 1 2 3 4 5 6 7 03/01/2012 03/03/2012 03/05/2012 03/07/2012 03/09/2012 03/11/2012 03/01/2013 03/03/2013 03/05/2013 03/07/2013 03/09/2013 03/11/2013 03/01/2014 03/03/2014 03/05/2014 03/07/2014 03/09/2014 03/11/2014 03/01/2015 03/03/2015 03/05/2015 Henry Hub Front Month 3.5 years back ?
  9. 9. 9 “Winter is Coming” 2.5 3.0 3.5 4.0 4.5 November December January February March April May June July August September October Rolling 12-Month Strip Historical Trend Comparison 2011-2012 2014-2015
  10. 10. 10 Rig Count Decreases by Shale Deposit 86/51% 51/45% 240/47% 492/45% 32/37% 14/36% 83/18% Total: 666/44% Total and percentage rig count decreases by shale deposit since 1/1/2014
  11. 11. 11 Gas Production Efficiency Gains 0 10 20 30 40 50 60 70 80 0 200 400 600 800 1000 1200 1400 1600 1800 1/1/2004 7/1/2004 1/1/2005 7/1/2005 1/1/2006 7/1/2006 1/1/2007 7/1/2007 1/1/2008 7/1/2008 1/1/2009 7/1/2009 1/1/2010 7/1/2010 1/1/2011 7/1/2011 1/1/2012 7/1/2012 1/1/2013 7/1/2013 1/1/2014 7/1/2014 1/1/2015 Baker Hughes Oil and Gas Split Gas Rig Count EIA STEO Actual Natural Gas Total Dry Production
  12. 12. 12 US LNG Project Status Phase Name In-service Date Capacity (Bcf/day) Under construction Sabine Pass train 1-4 2016* 2.34 Under construction Dominion Cove Point 2017 0.65 Under construction Freeport LNG 2018* 1.73 Under construction Corpus Christi LNG 2018 1.76 Under construction Cameron LNG 2019* 1.56 Subtotal 8.05 Planned Sabine Pass 5-6 ? 1.1 Planned Lake Charles Export 2019 1.99 Planned Jordan Cove LNG ? 0.80 Planned Alaska LNG ? 2.61 Planned Oregon LNG 2019 1.17 Total 15.71 *Estimated in-service dates
  13. 13. 13 Exports to Mexico
  14. 14. 14 Electricity Generation by Fuel 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000 jan/04 apr/04 jul/04 okt/04 jan/05 apr/05 jul/05 okt/05 jan/06 apr/06 jul/06 okt/06 jan/07 apr/07 jul/07 okt/07 jan/08 apr/08 jul/08 okt/08 jan/09 apr/09 jul/09 okt/09 jan/10 apr/10 jul/10 okt/10 jan/11 apr/11 jul/11 okt/11 jan/12 apr/12 jul/12 okt/12 jan/13 apr/13 jul/13 okt/13 jan/14 apr/14 jul/14 okt/14 jan/15 MillionkWh Net Electric Generation from Coal Net Electric Generation from Natural Gas
  15. 15. 15 Clean Power Plan Implementation Final Rule Due Plans due from States EPA Proposes Clean Power Plan States submit initial plans/request extensions Interim Reductions Begin/Stats submit Interim report Full compliance with Emissions Rate Standard 2013-2014 2015 2017-20182016 2020-2022 2030
  16. 16. 16 Clean Power Plan Building Blocks 1647 1005 75 178 45 216 130 0 200 400 600 800 1000 1200 1400 1600 1800 2012 Fossil Rate Heat Rate Redispatch to Preserve Nuclear Expand RE Expand EE 2030 Standard EmissionRate(LbCO2perMWh) EPA's Best System of Emission Reduction (BSER) Determination, US Average EPA started with 2012 fossil rate Application of blocks results in 2030 standard Blocks represent emission rate reduction options Block #1 Block #2 Block #3 Block #4 Range across states from 0 lb/MWh to 665 lb/MWh
  17. 17. 17 The pitfalls of buying energy Wishful thinking Greed “This or that reason will make prices fall again.” “If the market rises further, we are dead.” “Such a good price, we shouldn’t miss it.” “I feel that it’s going to fall again.” Fear Price fixed Market average Panic FIX FIX FIX FIX Wait in a rising market Fix too soon in a falling market Fail to fix (enough) at opportunity moments
  18. 18. 18 … and how to avoid them Don’t buy as it falls tactics Opportunity hunting strategy Price fixed Market average Stop loss strategy FIX FIX FIX FIX FIX FIX FIX
  19. 19. Risk management
  20. 20. 20 Gazing into the mist Short term Long term MARKET ANALYTICS Actively monitor markets for hedging opportunities RISK MANAGEMENT work to shield clients from major price increases MARKET ANALYSIS STRATEGY At which pace will you take a rise or fall in energy prices?
  21. 21. 21 Steps in setting up a strategy • Budget risk • Market risk • Survival risk Determine the strategic risk profile • Averaging • Fixing • Fixing & unfixing • Spot market optimization • Advanced: options, commodity swaps, etc. Determine the tactical hedging tools • Hedging horizon • Choice of contract • Fixing tunnels • Stop loss limits • Protections against operational risks Edit strategy note
  22. 22. 22 Setting up a strategy Falling cost of energy = falling price of product ? (and to some extent vice versa) Is the energy cost a high proportion of the margin ? MARKET RISK STRATEGY • keep close to the market average • determine at what pace the product prices react • adapt the forward hedging strategy to it SURVIVAL STRATEGY • keep close to the market average • ‘Lock in a margin’ when possible YES NO YES BUDGET RISK STRATEGY • aim at stabilizing budgets inside the business’s cycles NO
  23. 23. 23 Approaches to price fixing Prices floating on spot markets One shot forward fixing of prices PRICE MANAGEMENT Use mixtures of forward hedges at different moments and spot pricing Advantages: - A more refined risk managed - Better responsiveness to market opportunities
  24. 24. 24 Market risk strategy Survival risk strategy Budget risk strategy 1. Buy the dips Be careful with buying too much too far into the future When the price level is reasonable compared to income: buy large chunks Buy large chunks for several years into the future 2. Buy at regular intervals More buying moments or average prices More buying moments or average prices Fewer buying moments 3. Buy when the y- o-y budget risks exceeding predefined limits Take limits that are sufficiently high Take limits that are sufficiently high Take limits that are in line with general budgeting requirements Setting up a strategy
  25. 25. 25 Incremental price locks technique Y + 2 timeY + 1Q1 - Y START OF THE CONTRACT Y + 3 START OF NEXT CONTRACT START OF NEXT CONTRACT energy price
  26. 26. 26 Block model 3,88 3,89 3,78 4,15 3,77 4,3 4,93 0 50 100 150 200 250 300 01/01/14 01/22/14 02/12/14 03/05/14 03/26/14 04/16/14 05/07/14 05/28/14 06/18/14 07/09/14 07/30/14 08/20/14 09/10/14 10/01/14 10/22/14 11/12/14 12/03/14 12/24/14 MMBTu 2014 Hedge 1 Hedge 2 Hedge 3 Hedge 4 Expected consumption
  27. 27. 27 Load following model - 2.000 4.000 6.000 8.000 10.000 12.000 14.000 16.000 18.000 20.000 01/01/14 01/15/14 01/29/14 02/12/14 02/26/14 03/12/14 03/26/14 04/09/14 04/23/14 05/07/14 05/21/14 06/04/14 06/18/14 07/02/14 07/16/14 07/30/14 08/13/14 08/27/14 09/10/14 09/24/14 10/08/14 10/22/14 11/05/14 11/19/14 12/03/14 12/17/14 12/31/14 kWh Hedge 1 Hedge 2 Hedge 3 Hedge 4 Expected consumption (kw)
  28. 28. 28 30 35 40 45 50 55 1/07/12 1/08/12 1/09/12 1/10/12 1/11/12 1/12/12 1/01/13 1/02/13 1/03/13 1/04/13 1/05/13 1/06/13 1/07/13 1/08/13 1/09/13 1/10/13 1/11/13 1/12/13 1/01/14 1/02/14 1/03/14 1/04/14 1/05/14 1/06/14 1/07/14 1/08/14 1/09/14 1/10/14 1/11/14 1/12/14 1/01/15 1/02/15 1/03/15 $/MWh Aug/16 contract compared to all forward and spot Aug notations traded in the past 750 days Perc10 zl Perc25 l Perc50 m Perc75 h Perc90 zh aug/16 Opportunity hunting Buy less (or sell) Buy more
  29. 29. 29 Opportunity hunting Compared to what the market was prepared to pay for a similar product, how historically good is today’s price?
  30. 30. 30 Example: Opportunity hunting Very low Perc 10 Only 10% of all prices are low er than this level Low Perc 25 Only 25% of all prices are low er than this level Middle Perc 50 50% of all prices are low er than this level High Perc 75 75% of all prices are low er than this level Very high Perc 90 90% of all prices are low er than this level N+1 N+2 N+3 100% 75% 50% 75% 50% 25% 50% 25% 0% 25% 0% 0% 0% 0% 0% 0% 0% 0%prices > VH (90%) Actual prices VL (10%) > prices L (25%) > prices < VL (10%) M (50%) > prices < L (25%) H (75%) > prices < M (50%) VH (90%) > prices < H (75%) Base (Henry Hub) Percentile March 2015 2,89 1,20% April 2015 2,59 0,00% May 2015 2,49 0,10% June 2015 2,51 0,40% July 2015 2,57 0,70% August 2015 2,60 0,90% September 2015 2,62 1,00% October 2015 2,66 0,10% November 2015 2,79 0,10% December 2015 2,97 0,20% January 2016 3,08 0,80% February 2016 3,07 2,50% March 2016 3,03 2,60% April 2016 2,91 1,90% May 2016 2,92 1,90% June 2016 2,95 2,30% July 2016 2,99 2,80% August 2016 3,01 3,30% September 2016 3,00 3,70% October 2016 3,03 3,30% November 2016 3,11 3,00% December 2016 3,30 2,90% January 2017 3,44 5,20% February 2017 3,42 7,40% 10-25% 25-50% 50-75% 75-90% 90-100%
  31. 31. 31 Risk Management • Market value = what is my price if I buy everything today? • Portfolio value = what is my price if I buy everything today, taking into account what I have bought already? (E.g., the market is at 40 and you have bought 50% at 50, than your portfolio value is 45 and your market value 40) • Risk limit = based on maximum year-on-year budget increase • Maximum portfolio value = portfolio value + a value-at-risk calculation 3,0 3,5 4,0 4,5 5,0 5,5 6,0 12/21/12 01/21/13 02/21/13 03/21/13 04/21/13 05/21/13 06/21/13 07/21/13 08/21/13 09/21/13 10/21/13 11/21/13 12/21/13 01/21/14 02/21/14 03/21/14 04/21/14 05/21/14 06/21/14 07/21/14 08/21/14 $/MMBtu gas 2014 Current portfolio value Current market value Max Portfolio value Risk limit Volume Portfolio Market $/MMBTu MMBTu value value 2014 2.400 4,06 4,32 Portfolio Market $ value value 2014 9.736,73 10.375,42 Budget-at-risk gas
  32. 32. 32 KPI’s & SLA’s Deadline compliance • Deadlines are set for every task • Reductions on fees when compliance drops below thresholds Strategy compliance • Audits of compliance with the strategy on an item-per- item basis • Reductions on fees when compliance drops below thresholds Savings • Calculation of savings on: • Contract negotiations • Portfolio value vs benchmark price • Refunding of invoice mistakes • Reductions on fees when Savings / fees ratio drops below thresholds System uptime • Continuous monitoring of uptime • Reductions on fees when compliance drops below thresholds
  33. 33. About E&C
  34. 34. 34 INDEPENDENTENERGY PROCUREMENT CONSULTANCY Gas & electricity Focus on procurement strategy, not on consumption reduction We are not a supplier, trading house, or brokerage. CLIENT SUPPLIER CONSULTANT What do we do?
  35. 35. 35 Integrated international approach • Since its creation in 2005, E&C has grown organically, responding to the request of our clients.
  36. 36. 36 Our services Data management ePoint Portfolio consultancy Portfolio management Documentation Visualisation Analysis Communication Contracting • Organizing RFP • Define contract choice Risk management • Strategy • Monitoring Price lock advice • Market intelligence • Direct contact Financial controlling • Market intelligence grid fees & taxes • Budget analysis • Bill validation • Consumption monitoring Hedging decisions Quote Validation Trade Execution
  37. 37. Q & A
  38. 38. 38 Kobe Cannaerts Managing Director, E&C America Inc. d: (347) 443 9962 m: (646) 832 8054 More information?

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