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© Accenture 2015. All rights reserved. Accenture Confidential. 1
LNG Trading Risk Management[Market & Volumetric Risks]
Presented By
Xavier Veillard
APAC Director
Trading, Investments & Optimization Strategy Group
May 2015
Trading, Investments & Optimization Strategy
© Accenture 2015. All rights reserved. Accenture Confidential. 2
Our Trading, Investments & Optimization Strategy Group supports LNG trading-focused organizations optimize their portfolio, trading, performance and risk management capabilities
New York | Houston
[North America Focus]
London
[Global Focus]
Abu Dhabi | Dubai
[Middle East Focus]
Singapore
[ASEAN and Asia Pacific Focus]
Asset and corporate investment valuation
Contract / financial structuring
Joint venture / joint business structuring
Assets carve out & segmentation
Investment Valuation
&
Financial Structuring
Market outlook development
− Supply / demand / market forecasting
− Competitor analysis / benchmarking
Value chain integration
Pricing optimisation and analytics
Commercial Optimisation
Trading and Risk Management
Portfolio optimization & structuring
Trading strategy & book forensic analysis
Risk analytics and @ risk
Target trading operating model design
Trading solution design / implementation
Accenture Trading, Investments & Optimization Strategy [TIOS] Group TIOS Scope of Advisory Services
Our TIOS Group is based in primary energy trading centres globally, serving clients on their portfolio trading strategy to enhance value captured from global energy markets
© Accenture 2015. All rights reserved. Accenture Confidential. 3
Content
LNG Trading Risks Overview
Conclusions
© Accenture 2015. All rights reserved. Accenture Confidential. 4
We approach LNG Trading Risks by focusing on market and volumetric risks through a comprehensive approach from risks identification to management and mitigation …
Source: Accenture Analysis
Volumetric Risk
Market Risk
Market Curves Volatility
Portfolio Curve Correlations
Portfolio Net Positions
Spot Market Liquidity
Portfolio Spot / Term Mix
Portfolio Volumetric Optionality
Price Exposure Limits
Hedging & Pricing Structuring
Market Risk Modelling
Uncontracted Cargoes Exposure Limits
Supply Flexibility & SPA Structuring
Volumetric Risk ModellingM
anage R
isksIden
tify
Ris
ksLNG Risks
© Accenture 2015. All rights reserved. Accenture Confidential. 5
Content
LNG Trading Risks Overview
Identifying Key LNG Trading Risks
Managing Key LNG Trading Risks
Conclusions
© Accenture 2015. All rights reserved. Accenture Confidential. 6
The LNG short-term / Spot market has expanded in recent years, highlighting willingness of buyers to increase their portfolio exposure to volumetric risks…
Note: Spot & short-term LNG trades include trades under contracts of a duration of 4 years or lessSources: Accenture Analysis, GIIGNL
Spot MarketLiquidity
Spot & Short-term LNG Trade [MTPA and Cargo Count] and Share of Total LNG Trade [%]
0
30
60
90
120
0
400
800
1,200
1,600
Cargo CountMTPA
201420102009 2011 2012 201320082007
Cargo Count [#]
Volume [MTPA]
19% 18% 16% 19% 25% 25% 27% 29%
% of Total LNG Trade
Increase in spot volumes from excess uncommitted
production
LNG spot & Short-term decrease from global economic slowdown
© Accenture 2015. All rights reserved. Accenture Confidential. 7
… which will result in global players having a higher mix of spot / short-tem supplies in their portfolio to manage flexibility and volumetric uncertainty
Note: *Spot LNG trades include trades under contracts of a duration of approximately 2 years or lessSources: Accenture Analysis, GIIGNL
Portfolio Spot/Term Mix
19%
25%
20%
16%
22%
Taiwan Singapore
15%
26%
IndiaChinaJapan
18%
24%
6%
Korea
12%14%
19%
World
21%23%
Asia-Pacific
18%
2014
2025E
Spot / Term Mix Outlook of LNG Imports for Selected Countries [% Spot/ Short-term* Trade of Total Trade]
In 2014, Mitsubishi, Tohoku Electric, Marubeni and Chubu Electric each
signed a DES contract (1 with ENI, 3 with GDF Suez) to import c.2 MTPA. Contract
length ranges from 7mth – 2yr.
In 2014, KOGAS entered into a 2-yr DES
contracts (Woodside and ENI) to import
c.0.4 MTPA..
© Accenture 2015. All rights reserved. Accenture Confidential. 8
Additionally, LNG contracts through volumetric tolerance, BO / Fuel usage option and call / put embedded contractual options also add to general volumetric risks
Illustrative
Portfolio VolumetricOptionality
LNG Portfolio Structure – Examples of Trade Patterns and Volumetric Optionality
Note: LT: Long-Term; ST: Short-TermSources: Accenture Analysis
Sell/Short Side Buy/Long SidePortfolio Activities
Locked-in LT Contract & short call option
Locked-in LT SPA Contract
Locked-in LT SPA contract
Back-to-back withtolerance option
Locked-in LT FOB SPA Contract
Locked-in LT DES SPA Contract
Portfolio Optimization,Sourcing, Re-routing,Cargo Swaps, Swings
Locked-in LT Contract with long call option
Back-to-back withadditional option
New/Extra CargoesCall option exercised
Locked-in LT Contract & Short put option
Locked-in LT contract with long put option
Back-to-back withcancellation option
Spot Cargoes
Spot Producer Spot BuyerSpot Deals
Tolerance up/down
LT Trade Spot Trade
Option Ownership
Volume Impact
Option Ownership
Volume Impact
Put option exercised
© Accenture 2015. All rights reserved. Accenture Confidential. 9
As portfolios diversify their supply sources and long/short-term mix, exposure to market price curves is expanding with the latter annualized vitality averaging 35%+
Sources: Accenture Analysis, Thomson Reuters
Market Curves Volatility
$0
$6
$12
$18
$24
Apr-2010 Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015
NBP JKM HH LNG 1 (14.5% Brent) LNG 2 (115% HH + $7)
0%
30%
60%
90%
120%
Apr-2010 Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015
Fukushima-driven price increase
Decline in oil prices & Asia Oversupply
UK Cols Snap
Shoulder month demand change &
Pipeline congestions
Global LNG Prices [$USD/mmBtu] Global LNG Annualized Volatility [%]
© Accenture 2015. All rights reserved. Accenture Confidential. 10
-80
-40
0
40
80
Q1 Q2 Q3 Q4 H3 H4 H5 H6 H7 H8 Y5 Y6 Y7
Mill
ion
s m
mB
tu
Financial - NBP
Financial - HH
Financial - Fuel Oil
Financial - JCC & Brent
Physical - NBP
Physical - HH
Physical - Fuel Oil
Physical - JCC & Brent
Net - NBP
Net - JCC & Brent
Net - Fuel Oil
Net - HH
Exposures of the portfolio to multiple price curves through physical and financial positions creates different level of market risks horizons…
Source: Accenture Analysis
Portfolio NetPositions
Illustrative
Lon
g (S
up
plie
s)
Sho
rt (
Sale
s)
Illustrative Gross and Net Physical and Paper Volume Exposure of Portfolio by Market Curve
Part-Year Ahead exposure
B Long-term Exposure C
Y1 Y2 Y3 Y4
Quarter-Ahead Exposure
A
© Accenture 2015. All rights reserved. Accenture Confidential. 11
… and the level of correlations between portfolio market price curves will lead to a resultant exposure which will be different than individual curves exposures
Sources: Accenture Analysis, Thomson Reuters
Portfolio CurvesCorrelations
Absolute Price Curve Correlation Analysis [Trailing Twelve Months]
Brent HSFO HH NBP JKM GBP SGD JPY CNY
Oil Brent 1.00 0.99 0.88 -0.45 0.74 -0.96 -0.94 -0.95 -0.10
HSFO 0.99 1.00 0.85 -0.45 0.74 -0.95 -0.93 -0.95 -0.16
Gas HH 0.88 0.85 1.00 -0.17 0.77 -0.85 -0.86 -0.77 -0.17
NBP -0.45 -0.45 -0.17 1.00 0.00 0.51 0.43 0.59 -0.29
JKM 0.74 0.74 0.77 0.00 1.00 -0.68 -0.76 -0.69 -0.33
Currency GBP -0.96 -0.95 -0.85 0.51 -0.68 1.00 0.96 0.94 0.06
SGD -0.94 -0.93 -0.86 0.43 -0.76 0.96 1.00 0.93 0.25
JPY -0.95 -0.95 -0.77 0.59 -0.69 0.94 0.93 1.00 0.01
CNY -0.10 -0.16 -0.17 -0.29 -0.33 0.06 0.25 0.01 1.00
© Accenture 2015. All rights reserved. Accenture Confidential. 12
Content
LNG Market Outlook Snapshot
Identifying Key LNG Trading Risks
Managing Key LNG Trading Risks
Conclusions
© Accenture 2015. All rights reserved. Accenture Confidential. 13
Shortage or Excess of LNG as a results of portfolio volumetric risks exposure need to be accurately modelled, with the associated risks premium value quantified…
Source: Accenture Analysis
Uncontracted Cargoes Exposure Limits
Illustrative
Volumetric Risks Exposure Modelling and Management
Sell/Short Side Buy/Long Side
Potential Shipment
Increase from Options Sold
Potential Shipment
Decrease from Options Sold
Y+1 Total Committed
Sales Volume
Y+1 Total Contracted
Sales Volume
Y+1 Total Potential Purchase Volume
Y+1 Total Contracted Purchase Volume
Demand Reduction from
Retail Customers due to Weather
Change
Additional Demand from
Industrial Customers
Increase number of cargoes or PNG
alternatives to source from Spot Market
# of CargoesExcess LNG to be
stored, swung, swapped or diverted
c.50
c.3
c.5
c.50 c.50
c.1
c.4
c.47
c.3
c.8
© Accenture 2015. All rights reserved. Accenture Confidential. 14
LNG SPA contractual terms should be leveraged as a mean of managing portfolio volumetric risks, optimizing owned options vs. premium value of option costs
Source: Accenture Analysis
SPA Structuring & Volumetric Risk Modelling
Non-Exhaustive
Key Volumetric Contractual Considerations for LNG SPA
Other TermsVolume Swing / Swap /
Diversions
Location / Incoterm Options
Clause to swing/swap gas volume or LNG cargoes; cargo diversion options with profit sharing agreement
Option to fix FOB/DES term of sale and to nominate destination port vs. fixed loading / unloading port
Volume Commitment
Embedded Call / Put Options
Tolerance and Take or Pay Penalties
Main Volumetric Terms
Tolerance band for X% of base volume with min & max volume commitments, make-up / carry forward term, operational tolerance
ACQ, DCQ for volume commitment, ADP, NDP, TDP and other delivery program for delivery volume scheduling
Call option to secure incremental volume / cargoes at fixed or preferred price formula, right to cancel cargo delivery
Additional Volumetric Terms
ACQ determination, round-up & round-down quantities, minimum & maximum ACQ
Validation ofRisk Mgt. Approach
Assessment of Structuring Costs vs. Premium Costs
Portfolio & Contract Structuring
Assessment of Volumetric Risk Cost vs. Premium Costs
Quantification of Volumetric Risks
Accenture TIOS Volumetric Risk Modelling & Management Approach
© Accenture 2015. All rights reserved. Accenture Confidential. 15
Potential deviation in expected P&L from LNG Sales/Purchases activities and related upstream / downstream activities need to be quantified to maximum margin deviation
Source: Accenture TIOS Analysis
Planned P&L for Business Year
Minimum P&L expected with Risk Exposures
Minimum P&L expected from
Business Plan & Financing Activities
Margin Risk Limit
M+6M+1 M+2M M+4 Forward 12-mth
Total P&L
M+12
Remaining MtM P&L
Market Risk - Fuel Oil
Market Risk - JCC & Brent
Market Risk - HH
Market Risk - NBP
Forward Monthly P&L Projection [$m] P&L at Risk and Risks Limits Illustrative
Expected P&L Uncertainty with +/-
1.65σ [95% Confidence Interval]
95% Confidence Interval P&L @
Risk
Margin to protect through Hedging
& Risks Mgt.
Price ExposureLimits
Maximum margin deviation
© Accenture 2015. All rights reserved. Accenture Confidential. 16
Selecting and structuring the hedging strategy requires a careful quantification of basis risks for the different instruments available to hedge…
Settlement TypeTimingMarket Type
OTC
ExchangeFutures [Prompt to Year ahead]
Forward [Prompt to Year ahead]
Dated Brent Swaps
Henry Hub Gas Futures
JKM Swaps
Brent oil
Forwards
Brent Oil Futures
TTF GasForward
Forward Curve
Volumetric Risks
CreditRisks
Example Contracts
Less Mature
Less Risky
Legend
More Mature
Riskier
Source: Accenture TIOS Analysis
Hedging & Pricing Structure
Potential Hedging Market Instruments for LNG Trading [Excluding Embedded Optionalities] Key Considerations
Physical
Financial
Physical
Financial
Financial with Physical settlement
option
Financial with Physical settlement
option
Cross Hedging
Contract Basis Risks
Spot Market Basis Risks
Maturity Mismatch
Rolling Hedge
1
2
3
4
5
© Accenture 2015. All rights reserved. Accenture Confidential. 17
0
200
400
600
800
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13
P&
L M
argi
n -
$m
+/- 1σ limit Pre-Hedging & Risk Mgmt. +/- 1σ limit Post-Hedging & Risk Mgmt. P&L @ Planned Prices
… And ultimately, the market risks management strategy should support reduce short-term earnings risks, facilitating business and capital financing plans
Source: Accenture TIOS Analysis
Illustrative
(sum of planned physical & hedge positions)
Market RisksModelling
Year Ahead Long-term Ahead
Y1
P&L Outlook and Volatility Band
Applying hedging & to protect P&L from
breaching limit
Required Margin limit
Y2 Y3
© Accenture 2015. All rights reserved. Accenture Confidential. 18
Content
LNG Trading Risks Overview
Conclusions
© Accenture 2015. All rights reserved. Accenture Confidential. 19
Overall, we recommend an integrated approach to LNG volumetric and market risks, ensuring alignment between risks capital provisions and actual risks exposures
Source: Accenture TIOS Solutions
High-level Accenture Approach to LNG Risk Management Execution
Risk Identification
Portfolio Curves & Positions Exposure
Market Fundamentals & Outlook Analysis
Risk Management
Risk MitigationStrategy
Risk Modelling & Simulation
Spot/term mix and portfolio trade structures
Price curves dynamics, volatility and outlook
Historical & planned portfolio positions
Portfolio LNG contract terms & conditions
Portfolio margin at-risk quantification
Portfolio parameters stress-test simulation
Risk monitoring, setting and control
Exposure limit setting and hedging execution
Integrated Position Reporting & Risks Mgt. Model
LNG Performance Mgt. Model
LNG Trading Risks Market Fundamentals Analysis
TIOS Capabilities and Assets for LNG Risk Management
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