Veritas hosted a Petroleum Risk Management Workshop in connection with the S&P Global Platts North American Crude Oil Exports Summit in October. Veritas was the Executive Sponsor of the event and raffled 2 tickets to the World Series! The Platts Crude Oil Summit gathers industry professionals from around the country and covers a wide range of industry topics.

The pre-conference workshop was hosted by Veritas and included two presenters from Veritas and two guest presenters from Rice University and SAS. The workshop was an opportunity to get a unique perspective on a variety of trading and risk management topics from industry leaders in different disciplines. 

The presentations ranged from an introduction to hedging and risk management presented by Kenny Pierce, Director at Veritas to an overview of risk modeling alternatives presented by Albert Hoppings, Global Risk Lead at SAS. Let’s take a summary look at each of the presentations below:

Introduction to Hedging and Risk Management

Presented by: Kenny Pierce, Director, Veritas Total Solutions 

About Kenny: Kenny has over 20 years of experience working in the Energy Trading and Risk Management Space, Traded FX, metal and other commodities, has served as lead functional architect for multiple ETRM system implementations for global organizations. Kenny has a Bachelor of Arts degree in Classics from Princeton University.

Agenda:

• • Why we call it “risk management”
  • Types of risk
  • Trading vs. hedging
  • Various risks, various issues
  • Organizational requirements

Overview: Introduction of Risk Management focused on the fact that there is no way to “eliminate” risk completely. Rather, when you minimize risk in one area, you are actually transferring it to other types of risk. Below are the four ways Veritas categorizes risks:

• • Market Risk: The risk that some price, or characteristic of a price, will change in a way that affects your income statement. Market risk is typically expressed in terms of the “exposure” to price. Exposure for non-quants is the change in the bottom line over the change in market price.
  • Credit & Cash Flow Risk: The risk that your counterparties won’t deliver on their obligations and the risk that a failure to be able to come up with cash at an intermediate stage of the process, will keep you from being able to complete the full process.
  • Fraud & Perverse Incentives Risk: The risk that your personnel will deliberately act in ways that profit themselves at the company’s expense.
  • Operational Risk: This type of risk includes Accounting, Regulatory, Scheduling, Legal, risk of fraud and Political Risk. Basically, anything that can go wrong in the process of meeting obligations. This is typically the largest bucket of risk.

The takeaway is that everyone should at least understand the different types of risks and that those risks can be minimized and/or transferred. Risk management as a whole is a task at the company level, not an individual level; systems and processes should cut across departments and sectors to help to manage all of the different types of risks, in particular, the operational risk that information will be lost “at the handoffs” between individuals or groups.

Current Challenges in Risk Management

Presented by Vince Kaminski, Professor in Practice of Energy Management, Rice University

About Vince: Vince Kaminski has been called “The Father of Risk”. He worked as the Managing Director for Research at Enron until 2002, leading a team of approximately fifty analysts who developed quantitative models to support energy trading. He has an M.S degree in International Economics and a Ph.D. degree in Mathematical Economics from the Main School of Planning and Statistics in Warsaw, and an MBA from Fordham University in New York City. He is also the author of several books on risk management and energy trading; Energy Modelling: Advances in the Management of Uncertainty, Managing Energy Price Risk: The New Challenges and Solutions and Energy Markets.

Agenda:

• • Why Risk Management?
  • Risk Management Tools & Limitations
  • Risk Management Process
  • Empowerment of Risk Managers
  • Future Direction

Overview: Current Challenges in Risk Management was based on the fact that risk management is not a one-time project with a finite horizon. It’s rather a continuous process as markets evolve and regulations are revised. Dr. Kaminski looked at the role risk management plays in an organization, the tools and models used in risk management and the risk management process and how these have evolved over time.

Risk management requires the integration of quantitative models and business processes. The ability to assess risks through formal quantitative models represents a major intellectual revolution of the 20^th century. The presentation covered tools and models, such as VaR, expected shortfall and tail risk using EVT (Extreme Value Theory).

The presentation also contained a review of the potential weaknesses of current risk management frameworks and lists many good reasons why risk management is critical to the survival of any company. The risk management process requires the involvement and cooperation of all corporate units. The scale and global scope of modern financial and energy companies requires measure to reduce the dimensionality of the problem and therefore a lot of information is ignored in the process. The most significant benefits can be derived from reviewing the trading positions across multiple dimensions. The isolation of risk management from everyday business activity makes it difficult to identify rogue traders and violations of trading policies.

Risk Management for Refiners and Chemical Manufacturers

Presented by Mike Burger, Partner & Co-founder, Veritas Total Solutions 

About Mike: Mike Burger has 38 years of industry experience in physical and financial trading of most commodities, risk management and policy, quantitative analysis, and the implementation of leading commercial CTRM systems. He has led projects related to strategy, hedge analysis and risk governance, and development of CTRM system programs to enhance commercial capabilities. Mike is also an experienced manager of large, complex teams and projects. He thoroughly enjoys solving difficult challenges. He earned a chemical engineering degree from the University of Southern California and an MBA from the University of Colorado.

Agenda:

• • Extend our trading and hedging discussion into more complex risk management problems
  • Discuss Risk Benchmarks
  • Apply to refinery risk management (as well as other assets)

Overview: Mike started his presentation with a quote famous quote: Legend has it that when someone remarked to Voltaire “Life is hard,” he retorted “Compared to what?” In risk management, just like in life, you must first decide what risk and performance will be compared to. The Benchmark may be based on alternative investments or hurdle rates, stakeholder expectations or subjective policy. A risk benchmark is a specific position to which the actual exposure and risk are compared (ex. S&P 500 Index).

Mike focused on the refinery risk management problem. Optimizing crude slates and refined products to manufacture involves complex modeling, usually with LP’s or nonlinear optimization that are usually run weekly. Unscheduled maintenance, distressed purchases can make risk management complicated. A term we hear often in the industry is “You can’t manage what you can’t measure.” In the downstream supply chain, there’s value in distinguishing between different activities and risks like crude trading, crude inventory, the refining crack spread, maintenance/forecasting error, finished product inventory and product trading.

Measurement and disaggregation can help measure your risk. This book structure allows separate measurement of P&L, risk and risk-based performance. It can also be used to isolate positions and risk of portions of the supply chain. These supply chains further benefit from “integrated operation” of supply and trading with refinery optimizations. Full optimization requires the integration of all commercial aspects of the supply chain. Stochastic Models and Business Dashboards should contain the following for optimal profitability: Spot & Term Product Contracts, Inventory Positions, Commercial Markets, Futures, Asset Capacity, Crude Supply and Pipeline Nominations.

Overview of Risk Modeling Alternatives

Presented by Albert Hopping, Global Risk Lead, SAS

About Albert: Albert is a quantitative risk expert. He has 18 years of experience in various quantitative and risk roles at Progress Energy and SAS. Albert holds a BS in Physics and Mathematics and a Masters in Financial Mathematics from North Carolina State University. Albert also holds an ERP certification.

Agenda:

• • What is VaR
  • All About That Distribution
  • Approach to Calculation
  • Simulation Complexities

Overview: Overview of Risk Modeling Alternatives covered the various models used to calculate and manage risks. Albert covered models – including the pros and cons of each – including VaR, cVaR, Delta-Gamma VaR, Delta-Normal VaR, Quadratic Model, Historical Simulation and Monte Carlo VaR. Albert also spoke to model selection, parameterization, correlation and scenario analysis.

The main takeaways are that risk management is a necessity and an integral component of good management and proper governance. Quantitative measures needed that balance accuracy with explainability and tractability; and it is a trap to fall for precision over accuracy.

In Summary

The four speakers are very knowledgeable on the topic of Energy Risk Management. Not only do they understand the headline-grabbing trading and commodities risk, commonly referred to as Market Risk, but they also understand that an organization has to monitor the other buckets of risk that can cause companies to cease to exist, primarily Credit and Cash Flow Risk, Fraud & Perverse Incentives Risk, and Operational Risk. It's a unique opportunity to listen to intelligent industry-experienced people to discuss the reality of all buckets of risk, and the absolute importance of monitoring all the buckets on a daily, hourly and by-the-minute basis. Risk Management is a corporate culture that is part of an organization’s daily processes – not a once-a-week or -month or -year report, or the writing of new policies that are filed into a filing cabinet.

For more information on the above presentations and topics, our Trading & Risk Advisory services, questions about Veritas or just to chat, please reach out to us to request information and full presentations by emailing Jeffrey Olle, Business Development Director, at jeff.olle@veritasts.com.