Value Study: Investing in ETRM / CTRM in Turbulent Times

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Value Study: Investing in E/CTRM in Turbulent Times

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Introduction The only constant is change echoes an astute observation by the Greek philosopher, Heraclitus, some 2,500 years ago. Those of us who are engaged in the world of commodities are continually reminded of the accuracy of his observation, particularly recently, as commodity prices collapsed led by crude oil. In fact, our industry is continually impacted by changes in the regulatory environment, supply/demand balance, global economic environment, technology developments, political intervention and more.

Recently, BP noted in its annual Energy Outlook1, “Today’s turbulence is a return to business-as-usual. Continuous change is the norm in our industry. The energy mix changes. The balance of demand shifts. New sources of energy emerge, such as shale gas, tight oil, ultra-deepwater oil or renewables. Economies expand and contract. Energy production and consumption are affected by disruptions, from wars to extreme weather.

New policies are created to address climate change or bolster energy security. “

Change is the very lifeblood of the commodity trading world, creating opportunities for profit for those

who are swift and responsive enough to act. Good traders make money in up or downwards moving markets, provided they are armed with up-tothe-minute data and the analytical tools needed to identify, analyze and manage their trading decisions. However, depending on market direction, other market participants might be caught in a more problematic situation and experience cash flow and/or profitability issues should price movements undermine their naturally long (producers) or short (consumers) positions. Nonetheless, if the company has the right tools at its disposal to track up-to-the-minute changes, and properly and effectively manage its exposure to those changes, then value can be protected and in some situations, profits might be made.

THE ENERGY/COMMODITY TRADING & RISK MANAGEMENT (E/CTRM) SYSTEM IS MISSION CRITICAL SOFTWARE IN ANY BUSINESS ENVIRONMENT As of today, commodity prices have dropped dramatically while the costs of doing business have increased in many areas, such as regulatory compliance. In this environment, it is more difficult to make money and companies are increasingly focused on cost containment. As the market enters into the other side of the so-called ‘commodity super cycle’, most forecasts indicate several years of over-supply and lower commodity prices; a situation exacerbated by a stronger US Dollar. Despite this, companies that produce, consume, or trade commodities still need to manage transactions, risks, cash flows and all of the other complexities that are part and parcel of the commodities world.

At any time, but particularly under the current market circumstances, having the right personnel, pro-

cesses and systems is key to success. An ETRM or CTRM system isn’t a luxury; it is an essential business tool - a “must have” piece of software to help effectively manage the complexities of a rapidly changing business. A capable E/CTRM solution will deliver the requisite analytics and analysis to ensure that the right decisions are made on time to minimize costs or increase profits. While total cost of ownership and the value of accrued business benefits from an E/CTRM software solution are often difficult to measure, the fact is that these systems are truly mission critical to any business in the commodity trading and management industries.

Under today’s market conditions, some may be tempted to cut costs or defer expenditures by delaying new procurement projects or even upgrades to existing E/CTRM software. However, in tougher market conditions, the ability to properly manage transactions, exposures, risks, and regulations accurately and in a timely manner becomes even more imperative.

1 | BP Energy Outlook 2035, February 2015 © Commodity Technology Advisory LLC, 2015, All Rights Reserved.

Value Study: Investing in E/CTRM in Turbulent Times

A ComTech Advisory Whitepaper

E/CTRM BUSINESS BENEFITS The benefits provided by a modern and well-deployed E/CTRM solution are wide and varied, but unfortunately, not often measured. They include the following,

Focus on core competencies – A pre-packaged solution along with expert guidance from the vendor’s expert staff, frees up user staff to stay focused on business processes and delivering value.

OPERATING EFFICIENCY/ COST AVOIDANCE

The availability of a golden copy of data in a single E/CTRM streamlines regulatory compliance, reduces the cost of building data extracts for externally managed compliance processes, and helps ensure full and accurate compliance with mandates.

Automation of complex and routine tasks and business processes eliminates manual processes and reduces costly errors. A reduction in training and support costs can also be achieved by consolidating those processes onto a single platform. Users and their companies benefit from the shared knowledge provided to them as a part of a vendor’s user group.

Today’s leading E/CTRM solutions will also provide the necessary tools and analysis to assist in optimizing physical assets, improving operational efficiencies and improving profitability.

RISK MITIGATION A good commercial solution can help mitigate many forms of risk exposures, including price, credit, legal, regulatory and operational risk all supported by an audit trail of actions.

REGULATORY COMPLIANCE

DATA ANALYTICS Improved and robust analytics result in better decision making.

CUSTOMER RELATIONSHIP MANAGEMENT The comprehensive coverage of physical and financial instruments available in the leading commercially available systems expands the range of products that user companies can offer to their customers, and with quicker time to market. Having consolidated data on one platform with advanced reporting capabilities allows businesses to better understand the profitability of their individual clients.

IMPROVED EMPLOYEE SATISFACTION

CAPITALIZING ON CHANGE

A singular, comprehensive solution can deliver a significantly better user experience as compared to spreadsheets or disparate homegrown solutions, helping to minimize data entry errors and improving productivity.

A vendor supplied and supported solution can provide advanced and newly required functions and features more quickly as compared to outdated or disparate homegrown solutions, ensuring the business has the capability to respond quickly and appropriately to opportunity and mandates.

Plainly, these are just a few of the benefits that might be gained using one of the better commercially available E/CTRM solutions on the market. In the end however, the actual benefits that may be accrued will depend on the capabilities of the commercial solution, the quality of that vendor’s support and the quality of the deployment/implementation.

© Commodity Technology Advisory LLC, 2015, All Rights Reserved.

Value Study: Investing in E/CTRM in Turbulent Times

A ComTech Advisory Whitepaper

OPENLINK – DELIVERING STRONG BUSINESS VALUE Undeniably, OpenLink is, by many measures, the leading vendor in the E/CTRM software space. In particular, OpenLink has the largest installed base of any commercial E/CTRM vendor, including most of the larger, blue-chip commodity players globally.

Consistently, OpenLink is seen by users as providing the best in class E/CTRM software solutions in general, and across a wide range of specific categories.2 The company’s clients do report that they do accrue significant business benefits by having available a high-end analytical platform that can help uncover profit or identify opportunities for cost reduction in a volatile and challenging market.

For example, a European oil producer client had been relying on a patchwork quilt of commercial solutions, spreadsheets and homegrown software prior to their implementation of OpenLink three years ago. In the increasingly complex and stringent regulatory environment to which they were exposed, and based upon the recommendations of their external auditor, the company sought a replacement solution.

CLIENT VALUE STUDY After selecting and implementing OpenLink, the customer realized many significant benefits including: // Achieved greater operational and financial transparency, addressing regulatory requirements and avoiding potential regulatory and audit issues, // Acquired a platform on which the company could add derivative trading on top of the physical business, helping to more effectively manage exposures and forward price risks, as well as accruing some tax benefits,

// Streamlined various business processes based on best practices provided by OpenLink’s consulting staff, // Achieved a “golden copy” of operational and financial data; proving the company a real-time reporting capability that has helped the company adapt to business changes and reduce IT costs, // Positioned the company to add natural gas transactions on a single platform.

In the end though, for this customer, the OpenLink system decision wasn’t about costs as much as about having a comprehensive and robust mission critical system in place to support their business through change.

Another OpenLink oil company customer in North America has seen a number of business benefits including; // Improved business process and communication flow as well as better cooperation within the company, // Reduced reliance on spreadsheets and improved controls across and within various business units, // Improved ability to respond to market changes through a single view of the business, improving accuracy and timeliness of decision making, // Improved operational visibility across the business resulting in improved cooperation and a clear view of processes and responsibilities,

In fact, the company’s key user recommends that other companies continue to invest in technology and systems even in a turbulent market saying, “the industry has always gone through up and down cycles and waiting for an upswing for IT investment could mean that you are implementing at a time that you need improved capabilities or a new system the most.”

Some other specific examples of business benefits that various OpenLink users have experienced include, // Reduction of confirmation time for trades by 75% and a saving in headcount of 30% through improved efficiency,

© Commodity Technology Advisory LLC, 2015, All Rights Reserved.

Value Study: Investing in E/CTRM in Turbulent Times

// Reduction of 5-year total cost of ownership by approximately 30% when comparing the costs of legacy internally developed systems versus OpenLink software, // Optimized physical power generation assets resulting in a saving of millions in fuel costs annually, // Reduced risk of fines and penalties for non-compliance with regulations, and // Identified and eliminated significant errors in homegrown risk analytics that could have cost the business significantly.

A ComTech Advisory Whitepaper

Though often difficult to quantify or even measure, the fact remains that implementing a leading commercial E/CTRM solution such as those from OpenLink, can result in a reduced total cost of ownership, improved operational performance, and real risk mitigation. However, in this market environment, perhaps the most important benefit that accrues is improved ability of user to react, proact and respond to industry change and volatility in a more timely and effective manner, protecting company value and improving profitability.

CONCLUSION As the fundamental conditions of commodity transacting continue to change, visibility across all aspects of the business must improve. While some might be tempted to cut costs or defer expenditures by delaying new procurement projects or even upgrades to existing E/CTRM software, the ability to properly manage transactions, exposures, risks, and regulations on a timely basis becomes even more imperative in turbulent markets. Ensuring that businesses processes are both streamlined and auditable; providing traders with up to the minute trading intelligence; providing management with key performance indicators required for strategic decision making; and equipping risk managers with the analytical tools they need is even more important under such circumstances. A commercially provided E/CTRM solution will assist the business by,

// Providing improved market awareness driven by data and a vigilant eye on macro trends. Strategies must be formulated around those macro trends and managed on market data and the real-time or near real-time analysis delivered by the software, // Improving internal visibility, as profit is made or lost on daily decisions. The E/CTRM provides the more accurate and timely position management, risk management and business intelligence support that is key to ensuring that opportunities are exploited and risks addressed, // Ensuring regulatory compliance at a time when regulators are quick to move, as once on their radar, businesses will be subject to increased scrutiny for a very long time. The E/CTRM solution can help to develop a culture of compliance and improved visibility for regulators helping to avoiding punitive and damaging enforcement actions.

The chances of success in this market now, and into the future, are increasingly dependent on the mission critical trading technologies deployed by the business.

2 | CTRM Vendor Perceptions Report, Commodity Technology Advisory LLC, 2014

Š Commodity Technology Advisory LLC, 2015, All Rights Reserved.

ABOUT OpenLink

Founded in 1992, OpenLink is the global leader in Transaction Lifecycle Management (TLM) software for the commodity, energy and financial services industries. OpenLink’s products address portfolio management, trading, risk management, and operations processing for both financial and physical assets.

Owned by leading private equity investment firm Hellman & Friedman, OpenLink is a global software and services business that has grown both organically and through strategic acquisitions, to achieve revenues in excess of $300 million. The company serves over 500 clients, including 12 of the world’s largest commodity and energy companies, 9 of the largest financial institutions, and 13 of the largest central banks.

OpenLink has 1,200 employees in 12 global offices on five continents, with headquarters outside New York City and field offices in Houston, Manhattan, London, Berlin, Vienna, Toronto, SĂŁo Paulo, Mexico City, Singapore, Dubai and Sydney.

OpenLink has received numerous industry awards and recognition, including citations as the industry leader in Commodity/Energy Trading and Risk Management (C/ETRM) systems, and first-in-class ranking by Energy Risk magazine, with analyst firms Gartner and Chartis citing OpenLink as a leader in Financial platforms.

www.openlink.com info@openlink.com

ABOUT Commodity Technology Advisory LLC Commodity Technology Advisory is the leading analyst organization covering the ETRM and CTRM markets. We provide the invaluable insights into the issues and trends affecting the users and providers of the technologies that are crucial for success in the constantly evolving global commodities markets.

Patrick Reames and Gary Vasey head our team, whose combined 60-plus years in the energy and commodities markets, provides depth of understanding of the market and its issues that is unmatched and unrivaled by any analyst group.

For more information, please visit:

www.comtechadvisory.com ComTech Advisory also hosts the CTRMCenter, your online portal with news and views about commodity markets and technology as well as a comprehensive online directory of software and services providers.

Please visit the CTRMCenter at:

www.ctrmcenter.com 19901 Southwest Freeway Sugar Land TX 77479 +1 281 207 5412 Prague, Czech Republic +420 775 718 112 ComTechAdvisor y.com Email: info@comtechadvisor y.com