CompuHedge Risk Management Solutions for the Energy Sector
CompuHedge Ltd. provides various strategic Risk Management solutions for corporations in the areas of currency, interest rates, commodities and energy market risks.
This page focuses on the challenges that Energy Sector corporations face. In particular they have to deal with extremely complex energy risk scenarios. CompuHedge provides a solution that allows for the modelling of these scenarios and thus allowing Senior Management to define and control policy objectives.
Companies that trade in crude oil (or its derivatives) or even merely consume petroleum products are exposed to market risks during the time the oil is being held in storage. These market risks include both the physical market and the futures market. Refineries are doubly vulnerable; they are exposed both to fluctuations in the price of Crude and to fluctuations in the price of its derivatives.
When companies protect themselves by doing hedging activities the difficulty in performing Exposure analysis is even more challenging. The challenges in Refineries is further compounded by the fact that the hedging itself creates new synthetic exposures which also need to be dealt with.
The intricacies of the hedging processes, coupled with the unavailability of appropriate tools, means that exposure analysis involves complex calculations. Examples include:
- Partial hedging of a certain component creates a new marginal exposures.
- Involvement of conversion coefficients.
- Changing portfolio.
- Time differences.
A company lacking the ability to identify exposure and treat it in real time might choose to adopt a "head-in-the-sand" approach. However even if they do try and conscientiously identify their exposure, a lack of the appropriate tools (that cover all the risks) will render them continuously – and negatively – surprised.
In contrast with other types of exposure in the financial markets (e.g. Currencies, Interest Rates, and Metals) – which do not necessarily require individual adjustment for each company – the need for customization for companies in the Energy sector is crucial.
The main strategic goals for companies in the Energy sector are as follows:
- Identification of Risk, including the ability to measure it by running different Risk Scenarios – for different levels of Hedging – which will help the company determine its Hedging and Trading policies.
- Formulation of a measurable policy, including defining maximum acceptable risk.
- Modelling and transaction-monitoring; these are both pre-requisites for Hedge Accounting.
- Ability to manage and control all of the above from a central (online) interface.
Identification and estimation of exposure is particularly difficult in the Oil and Petro-chemical industry. Even if hedging is not performed, the risks are varied and include:
- The differences in timing between buying and selling.
- Exposure to a number of diversified products (and not just to the price of Crude)
- Impact on the company's balance sheet in the event of a decrease in the value of the company stockpile.
- Impact on the company's quarterly results and on the company's value, due to changes in the Refinery Margins.
If hedging is performed, then the company faces another set of risks in addition to the general market risks, including:
- The difference between the future oil contracts to the actual crude oil price.
- Risk of fluctuation of the time curve for the forward contracts.
- Risk which stems directly from the difference between products traded in the physical market and between future contracts used for Hedging.
- Risk which stems directly from the physical location (e.g. West Texas, North Sea, East Asia, Mediterranean sea etc.)
- Risk which stems from changes in the Exchange rate (if the local currency is not in USD)
- Correlations between the various products and the raw materials.
It is very difficult to build an overall picture of the Risk involved, due to the many components (as described above).
The comprehensive solution proposed by CompuHedge
- A consultation process between us and the management team in order to study each company's operations, and to determine the different exposure scenarios.
- A joint discussion with the company auditor accountants in order to set a policy for Hedge Accounting.
- Consultancy to formulate Management Policy for Risk Management Objectives (in terms of periodic financial risk targets).
- Development of a customized tailor made solution embedded in the CompuHedge system in accordance with each company's individual needs, and according to the guidelines that have been agreed in conjunction with our advisory teams. Our solutions are based on financial, mathematics and statistical analysis.