Regulatory developments coming down the tracks are set to impact the energy trading market and in particular risk management practices. Michael Carter, Director of Credit Risk at EDF Trading North America, gives his views on these and some of the other pressing aspects of risk management in the energy trading industry.

- How will the Commodities Futures Trading Commission (CFTC) regulatory reforms affect risk management practices in the energy trading industry?

To a large extent it is still unknown as there are still so many details that have to be worked out. I think the CFTC has released a list of 30 areas that they intend to address over the coming year. We don’t know enough details just yet to know how it will affect different companies. For instance they may elect to permit end-user exceptions to differentiate the people who are solely in the business of trading energy derivatives for speculative purposes, versus those who are doing it to hedge a physical position they already have. We just don’t have enough details for people to begin to make grand assumptions about how they’re going to conduct their future business. There is a huge amount of unknown detail hanging out there. This is an 800lb gorilla in the room for a lot of energy companies.

- What is the importance of knowing the fundamentals and going "back to basics" with risk management practices?

There’s a significant convergence within the energy space between the efforts of physical energy companies and financial participants. For instance, you have energy companies who are trading with the banks. Historically they have had different ways of managing their risk. Physical energy companies have typically been more involved in managing their physical business and less involved in managing their financial risk. There was not even a natural gas futures contract until the early 90s. There are many companies in the physical energy space who still aren’t even margining while banks already have all of this in place.  As they are forced to trade more and more with one another, I don’t think you can continue to have this great disparity in how risks are managed between those two massive efforts. There may be a bank, for instance, that will want to trade under an ISDA contract and they’re talking to an oil company that has never had a daily margining requirement and now they’re being forced to. It’s definitely changing the rules of the game and requiring not only the physical companies to learn how to do things like Wall Street does, but it’s requiring Wall Street people to understand some of the nuances of the physical commodity space.

- Can controlling risks in energy trading provide greater market assurance for companies like oil and gas producers, electric providers and gas utilities?

Yes but I think it’s important to remember that those who come to this game looking to manage a latent risk are often simply exchanging one risk for another. Sometimes it’s a more dangerous one. A producer of a product comes to the market with what they need to sell and if they enter into a margining arrangement, they could lock in a profitable deal but be margined into default if prices move and they can’t come up with collateral. That’s sometimes a more dangerous risk to face because it’s unforgiving and it’s over in a few days.  A lot of companies can operate in the red for a while, but ones who can’t meet a margin call literally have only days to fix the problem. If you go in and try to cover a market risk that you face and you sign a contract to agree to provide collateral when prices change, you are exchanging one form of risk for another. That’s a common issue for companies in this market.

- How can risk management give confidence to the insurance companies, banks, and manufacturers that work with energy companies?

One of the issues we have to deal with is the importance in having confidence in your counterparty’s ability to perform. If you have good controls and you believe your counterparty does too, it eases everyone’s concern and lets each party focus on the transaction rather than heightening the tensions and increasing the potential for negative actions. If I’m trading with a counterparty who I believe is weak I’m going to be concerned and I’m going to halt trading at the first sign of trouble rather than giving them the benefit of the doubt - as I may if I thought it was a strong and well controlled company. Entities in the market have a great deal of subjective flexibility when they interact with individual counterparties and sometimes entire classes of counterparties. Simply having a degree of anxiety over your counterparty or particular industry sector can make people take defensive actions more quickly.

- What are the key challenges facing the industry right now?

Uncertainty. What’s the pace of the economic recovery likely to look like? That affects the demand for the product. How is the coal industry going to be affected if there is a change in regulation and public opinion regarding emissions? How is the huge amount of gas that has been discovered in North America going to affect the geopolitical energy balance? Is that going to cause some shifting away from other energy sources? It is very difficult for executives in the energy space to make long term plans.

Another is the unequal application of business practices. That has the opportunity to introduce arbitrage into the trading process. The biggest challenge right now is getting everyone on the same page. Back in the 90s energy companies started trying to adopt Wall Street-style risk management practices.  That’s where the Enrons and the Dynegys of the world started to really introduce something in the energy patch that basically had been in the financial kingdom.  That effort is still underway and is more advanced in commodities like gas and power than it is in oil and coal, for instance, although they are moving in that direction, too.  It is being made more difficult because even more “sophisticated” techniques such as Credit Value Adjustments (CVA) are becoming more common, making the process a moving target.

There are still a dramatic number of physical energy players out there who do not fully embrace the more robust risk management techniques yet. If they’re going to continue to evolve in their business practices, they’re going to have to step up the level of their capabilities and improve the training of their personnel and upgrade their systems and policies.

The marcus evans 3rd Annual Risk Management in Energy Trading Conference will take place on 21-22 October, 2010 in Houston, TX.

For further information on this event contact:

Michele Westergaard
Marketing/PR Coordinator – N.A. Conferences
marcus evans
____________________________________
The NBC Tower, 9th Floor
455 N Cityfront Plaza Drive
Chicago, IL 60611
tel: 312-540-3000 ext.6625
www.marcusevans.com

Houston, TX – July 30August 13, 2010 – marcus evans, a conference producing company, will host the 3^rd Annual Risk Management in Energy Trading Conference, October 21-22, 2010 in Houston, TX. More than 18 leading experts will provide insights on best practices for risk management in energy trading, including managing liquidity risk, optimizing stress testing programs and complying with new CFTC regulatory reforms.

“As energy and financial markets have become more efficient and interwoven, it has become increasingly important for everyone involved with managing the risks associated with energy transactions to learn as much about the topic as possible,” said Michael Carter, Director—Credit Risk, at EDF Trading. “Recent history is littered with stories of those who failed.”

Carter, who has 25 years of experience in the energy industry, will share his knowledge on practical aspects of risk management with this year’s conference attendees. 

With a one-track focus, the 3^rd Annual Risk Management in Energy Trading Conference is a highly intensive, content-driven event that includes case studies, presentations and panel discussions over two full days. This conference targets industry leaders in risk management roles in order to provide an intimate atmosphere for both the delegates and speakers.

Due to the historic passage of the Dodd-Frank Act, this event will provide a comprehensive look at impending regulatory reforms affecting the energy trading industry. Commissioner Jill E. Sommers from the Commodity Futures Trading Commission (CFTC) will deliver the conference’s keynote address to provide a firsthand perspective on pressing regulatory issues. Other regulatory reform speakers include Jim Allison, Regional Risk Manager, Gas and Power NA, at ConocoPhillips, and Lisa Epifani from law firm Van Ness Feldman.

“The energy trading and risk management landscape is continuously evolving,” said Darilyn Jones, SVP Risk Control at Sequent Energy Management, and this year’s conference chairperson. “It is a dynamic landscape where the impact of key drivers is sometimes difficult to predict and constantly changing. Understanding the current market and regulatory environment is very important.”

marcus evans invites risk management professionals to join in this cutting-edge, peer-to-peer conference that examines best practices in the energy trading industry. In addition to two days of conference sessions, attendees will have extensive networking opportunities with their peers.

Says Carter, “I have been fortunate enough to experience a marcus evans conference as both an attendee and as a presenter.  Regardless of which side of the podium I was on, I was pleased with the knowledge I gained from the program and the interaction with other participants.”

For more information on this conference or to get a complete list of speakers, sessions or past attendees, visit http://www.marcusevansch.com/RMET or email Michele Westergaard, Michelew@marcusevansch.com

About marcus evans

marcus evans conferences annually produce over 2,000 high quality events designed to provide key strategic business information, best practice and networking opportunities for senior industry decision-makers. Our global reach is utilized to attract over 30,000 speakers annually, ensuring niche focused subject matter presented directly by practitioners and a diversity of information to assist our clients in adopting best practice in all business disciplines.

Contact

Michele Westergaard

312-540-3000 ext. 6625

Michelew@marcusevansch.com

Natural Capitalism: Creating the Next Industrial Revolution

by Paul Hawken, Amory Lovins, L. Hunter Lovins

Throughout history, until very recently, man has been a small actor in an overwhelmingly large world.  Most of the book explores how this has given rise to our ingrained cultural patterns of wasteful resource utilization, limited focus on capital efficiency, and drive for production volumes, while assuming unbounded access to subsidized natural resources and 'free' ecosystem services.  Shifting perspective to include natural capital on the business balance sheet, and to expand lean manufacturing principles beyond the factory walls is what's required to address the ecology/climate change nexus.  This change in perspective is embodied in a range of sustainable business concepts, including the 'triple bottom line' (profits, people, and planet), and the 'cradle-to-cradle' model for recycling products and integrating industries to eliminate 'waste'.

The basic principles of natural capitalism put forward can be summarized as: (1) focus on natural resource efficiency (2) using closed loop, biomemetic, nontoxic processes (3) to deliver more appropriate end-user services (4) while investing in restoring, sustaining, and expanding natural capital.  Following these principles leads not to constraints on business or lowered expectations, but an enormous range of new business opportunities to profit from improved efficiencies and environmentally beneficial activities.  One of the best expressions of this perspective comes in the discussion on climate change, providing a refreshing contrast to the recent spate of bad news on this front: "Together, the [available business] opportunities can turn climate change into an unnecessary artifact of [our] uneconomically wasteful use of resources."

While the authors deliver an awesome, deeply researched articulation of their vision, showing with many examples why it's important and how it can work within our current capitalistic economies, the book has two key flaws.  First, it falls prey to the syndrome first articulated by Paul Saffo, founder of the Institute for the Future, of confusing a clear vision of the future with a short path.  This combines with an  excessive reliance on sheer volume of examples to make their points, too many of them poorly explained, bristling with non-comparable numbers, and substituting hand-waving for real outcomes.  Deeper exploration of fewer examples might have illustrated the principles better, and have been much easier to read.  Also, 11 years after the original publication, many of the examples are seen to be hastily chosen and and used to support glib and overreaching conclusions that make the authors seem naive.  Examples include the advent hydrogen powered cars ("hypercars"), the potential for shutting down Ruhr Valley coal production in favor of direct social payments to coal workers, or the imminent triumph of the Kyoto Protocols for international carbon trading.  And, while much attention is paid to articulating the perverse incentives, misguided taxes and subsidies, and split responsibilities that impede more efficient system approaches, there's short shrift given to new technology adoption rates, the scale of existing infrastructure investments, or the political complexities of changing incentives and subsidies.

However, if you are interested in understanding the genesis and foundations of the modern sustainability movement, this is a fundamental text.  Despite its flaws, after 11 years the fundamental argument and principles hold up well and are still inspiring.

It is opined that the “desperation for energy and materials” in the Developed world [almost 100% of those nations are in temperate zone, and are of European origin] is wrong inference. This “shortage” theory is borne out of a limited view of the world – that of viewing all human activities within the kaleidoscope of materials and resources based on temperate zone regions of the world. However, if we were to look at the world materials resources [mainly the Renewable Resources(RR) in the form of vegetation, plants and animals] in entirety, we should be able to have the satisfaction that the RR in the Tropics would be able to support almost the entire world population of nearly 7 billion, as well as the same capable of supporting much more populations!

Let us consider just one example of a RR specie – THE COCONUT Tree and its resources, in just one nation - INDIA.It would be observed that the entire coastal regions are the places where coconut grows in plenty. The estimated area would be approximately 210,000 sq km. It is further estimated that India would have not less than 1,500,000,000 coconut trees. An average coconut tree has a productive life of not less than 60 years. Thus, if we were to consider that each tree could be “felled” every sixty years, the number of coconut trees RR in India would be 25,000,000 trees. On the basis of “dry weight” of these basic Tree resources alone @ 500 Kg per tree, India's RR in the form of coconut trees would be a whopping 12,500,000 Tons! Here we have not considered the annually available RR in the form of Coconuts and other vegetation materials that each coconut tree offers. If these annual resources were also to be considered in entirety, the Total RR materials based on Coconut trees all over India would be 75,000,000 T + 12,500,000 T

1. We shall look at a scheme whereby 50% of the 75 million T annually recurring tree resources such as coconuts and other materials are converted into energy. When converted such that both Electricity and Heat are available through CHP methods, the estimated Power would be: 22,800 MW [The balance 50%, being 37.5 million T, are available for other consumer needs!]. NOTE: India's power, as on date, is short by about 30,000 MW. It is noted that conversion of 50% of the Coconut annual RR alone would solve almost all this deficit problem

Coconut tree and its resources form just One of the resource species in a country like India. A few of the other such RR species are: Areca palm, Palmyra palm, Jackfruit tree, Banana tree, Mango trees, Tamarind trees, Shrub trees, and many others (over 500 species); other plant/ vegetation based RR materials are grasses, water hyacinths, and various unused and unclassified weeds (over 5,000 species). It is to be recognized that all of these “original” species would grow without any fertilizers or any special tending!

We estimate that India would have, by way of various unused non-forest Plant/ Tree species alone, RR to an extent of 3,000,000,000 T. Such volumes of vegetation based RR materials have not been thought of as useful RR at all, although common sense should make us look at these as the cheapest and the most optimum resources.

Technically, we may conclude that all of these Resources are " solar energy" based resources and 100% Renewable (Sustainable)

There are 160 tropical nations, in which 135 nations are within the real tropics and the rest are on the tropics fringes. All these regions are as much resource rich as India is [a few may have greater volumes per ha than India (Indonesia, Philippines, Venezuela and Myanmar are examples of such higher resource nations)]. It is strange that almost all of these 160 tropical nations are extremely poor, and starve for Power, water and most other human needs! Stranger still is the fact that almost all of these regions are endowed with huge sunlight, rain/ water and both vegetation and animal species.

Are we really interested in Sustainable development? If the answer is YES! Our attempts should be to look at the huge Tropical Renewable Resources ... (see: http://zerowastezerocarbon.wordpress.com/ and also http://agrobiogenicscleantech.wordpress.com/ )