The Importance of Price Curve Management In A More Regulated Commodity Trading Environment
In an era of significantly tighter regulation and oversight of commodity markets, forward price curves have taken on a whole new level of importance. Internal and external auditors, as well as regulators, want to be certain that the valuations used to build up financial statements are irrefutable and truly represent fair value based on reliable data. Indeed, several of the regulations now in force also call for increased and better documented risk management processes, including mark-to-market and profit and loss calculations.
Increasingly, funding banks and shareholders also desire increased transparency into risk management for assurances and forward price curves are central to that function. No matter how good the risk management systems are, it is the data that they utilize that is key to good risk management, and market pricing is a key ingredient in that data. Furthermore, the forward curve requirements don’t just impact commodity trading and hedging operations, but also the treasury function.
In a previous paper, Commodity Technology Advisory defined forward curves and looked at their uses and the source of the forward curve data in some detail. In essence, forward curves have three
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Ensuring ETRM / CTRM Implementation Success
An energy / commodity trading and risk management (ETRM / CTRM) system implementation project is the structured process of taking a newly acquired E/CTRM software product from delivery of code to full “in production” use, and in the process, meeting the business needs that precipitated its purchase.
Implementing an E/CTRM system shares many of the complexities involved in implementing any other enterprise-scale IT system. It requires a comprehensive plan, solid leadership (both executive and project management), specialized technical and business expertise, and a commitment from the software vendor to provide the necessary support to make their new client successful.
However, E/CTRM solution implementations are further complicated by the fact that the E/CTRM product operates not only as the system of record (that is, the system that records, maintains, and accounts for transactions), but it also provides capabilities for managing contracts, trades/deals, logistics, position management, risk management, and associated analytics. A comprehensive E/CTRM system is designed to be a singular system that provides energy and commodity trading organizations the depth and breadth of the highly specialized functionality their businesses require. As such, E/CTRM systems are extremely complex and require detailed knowledge of the business combined with a deep understanding of the software capabilities to properly implement. ComTech Advisory’s experience and research suggest that the effort required and the risks involved in implementing and integrating a sophisticated, configurable enterprise-scale E/CTRM solution are of ten poorly understood by the client and may be minimized (though not necessarily intentionally) by the software vendors during the sales process. Underestimating the real costs and project risks can quickly turn what would otherwise be a “bargain” software package into a long-term, costly headache. All things being equal, when it comes to E/CTRM software, the lowest priced solution may not necessarily be the right solution.
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Addressing the Decline – Finding the Silver Lining for Producers
From around 2005 to early 2014, the revolution in North American oil and gas production, spurred by the development of long reach horizontal drilling and massive hydraulic fracturing technologies, attracted billions of dollars in new capital to the space – fueling huge growth in drilling activity, oil and gas production, and in the numbers and size of oil and gas producers operating in the space. However, with the sudden collapse of oil prices (beginning in the third quarter of 2014, which saw the value of crude decline by more than 50% from its high in July of that year), the inflow of capital has shrunk, and with it, the expansive growth in the producer market. While the collapse in the oil markets has had far reaching impacts across the global economy, nowhere are the consequences more greatly felt than in the North American oil and gas fields.
With this low price environment extending for almost a year now, US and Canadian producers have slashed drilling and exploration budgets and are cutting costs to preserve cash in order to ensure their survival. Companies that had principally relied on debt financing to support their drilling activities have been particularly impacted and many are struggling to meet debt payments, forcing liquidation of assets as bankruptcies loom. The upstream market is seeing the beginning of a wave of mergers and acquisitions as the stronger producers, those that funded their activities through generated cash or retained earnings, are now looking for bargains amongst the weaker.
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Sourcebook 2015 – CTRM Software Suppliers and Products
The 2015 Commodity Technology Advisory LLC (ComTech) CTRM Software Sourcebook is designed to be a useful and usable resource to help those seeking information as to the capabilities and coverage of products within the CTRM software category. It is a starting point in the product selection process – a mid-level guide to allow the reader to develop a long list of vendors that have high potential capabilities in terms of functional and commodity coverage meet the specific needs of CTRM market participants. It is NOT intended to be a replacement for a formal selection process – CTRM software is simply too complex to be selected properly without utilizing a programmatic selection process. Our intention in developing the CTRM Sourcebook is to inform the reader of a wide universe of vendors and products, and allow companies seeking a new system to compile a list of vendors that may include some that might not have otherwise been considered, or that they may not have even previously been aware of.
Each Vendor and Product listing is arranged according to the same format for clarity and ease of use. Each listing (sorted alphabetically by vendor name) is comprised of:
- The name of the vendor and contact information
- A graphic showing the distribution of current clients by geography
- A graphic showing client distribution by common industry segment
- ComTech Advisory research highlights regarding the vendor and product,
- A graphical matrix providing an overview of the product's capabilities, by function (vertical axis), by commodity (horizontal axis),
- Company and product information comprised from a variety of sources including vendor’s submitted company and product description,
- Vendor’s office locations,
- Total installed base by licensed customer companies,
- A representative list of users of the product,
- Deployment methods of the highlighted product(s),
- Office locations and contact phone numbers.
The product functionality and commodity coverage charts are easily readable and provide mid-level information about each vendor’s product capabilities.
ComTech’s methodology for constructing the Sourcebook was to distribute a spreadsheet and questionnaire for data collection. The majority of all vendors in the space were invited to submit their information for publication. Those that did wish to participate completed the entire questionnaire, including identifying by commodity and function (or feature) whether their software had 1) capabilities that were in use by a current user, 2) capabilities not currently used by a client or 3) provided no capabilities in each function/commodity combination. These were reviewed and edited by ComTech to ensure all vendors conformed to the same standard, and adjustments were made to some vendor responses to ensure consistency amongst all respondents. The information submitted by the vendors was used, in large part, to complete the vendor/product listing, along with information collected in other ComTech surveys and research. The final listings were compiled by ComTech analysts.
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