Energy trading risk management
Where to for LNG operators?
18 May 2015: With Australia about to become a serious global LNG player, and in an environment of continued commodity price volatility, maturing and managing energy trading risk exposures is becoming increasingly important.
Deloitte Assurance & Advisory partner Heidi Forbes said at the APPEA 2015 conference and exhibition in Melbourne today that Australian LNG has a unique energy risk profile, and that its export had significant implications for the domestic energy sector.
“Since the early 2000s, there has been a progressive maturing in the way energy trading is understood from a market, credit, liquidity and operation risks perspective,” she said.
“Financial markets, and the lessons learnt post-Enron, have informed much of this understanding, but this maturity hasn’t been consistent across different commodity types.
“Even within the same organisation, significant differences in approaches can exist between, for example, liquefied natural gas (LNG), natural gas and electricity.
“So as Australian domestic gas links with global LNG markets, electricity markets are over-supplied and new exchange traded products and voluntary supply hub options open, energy trading risk management is becoming increasingly complex.
Deloitte’s new paper Energy trading risk management: Where to now? looks at why some commodities are more mature from an energy trading risk perspective, and provides a look at what a lift in energy trading risk maturity might look like.
“The risk management maturity profile of different commodities varies for several reasons, including the characteristics of the commodity, underlying financial and physical markets, and the operator’s energy portfolio,” Forbes said.
“In Australia, we are more experienced in electricity trading, but for oil and gas operators, understanding the unique properties of their energy portfolio is key to developing a strategically meaningful risk management response.
“A portfolio view of energy trading risk which is tied to the strategic objectives of the organisation is required For exmaple if shareholders don’t require market risk or price exposure to be hedged, have the cash flow implications of volatility and the resulting capital requirements been quantified and what does this mean from a credit ratings perspective?”
Considerations for oil and gas operators
To continue maturing their energy trading risk management approach, organisations need to:
- Across all commodities, assess the level of maturity from a market, credit, liquidity and operation risk perspective. Are the risks quantified and do they fit within the internal and external risk appetite?
- Remediate unacceptable energy trading risk management gaps, ensuring alignment to strategic objectives and capital structure
- For exposures the organisation is willing to bear, quantify them and understand the enterprise-wide implications
As the energy sector continues to undergo substantial and disruptive change, drawing on external perspectives and maturing approaches to portfolio risk approach will be key to protecting value.
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