Logica CMG on Energy and Utilities:

Realizing profit strategies by understanding global risk management

Many energy companies have to manage complex assets, uncertain demand levels and delivery challenges across state or even national borders. As the options for managing risk exposure along the energy value chain increase, energy-trading organizations are establishing increasingly intricate trading operations to deal with these demands.

However, the difficulty of understanding market, operational, credit and volumetric risk for multiple instruments, commodities and geographies is often underestimated because of the conceptual challenge and lack of consistent and accurate data. Without a consolidated view of global risks, these companies struggle to manage trading strategies, optimize use of risk capital and provide the required level of transparency to investors and regulators regarding the risks they manage.

Manage information, not IT applications
Risk management is one of the most important issues facing most energy companies. At a simple level, the problem is all about the management of trading and risk data. For traders, risk managers, chief executives and other stakeholders to understand the risk/reward profile of the organization, they need a global risk solution that allows for analysis, management and reporting at various consolidations. This "big picture" should not be constrained by existing business-unit or data "silos." Organizations should be able to understand risk at any level while also providing flexibility to cope with new markets, instruments and physical assets.

Risk consolidations
The areas for which energy companies must examine and aggregate risk are:

• Corporate aggregation. Understanding such elements as group risk, profit and loss summaries, credit concentration reports, global limits and capital utilization allow daily macromanagement of the risk/reward strategy.
• Geographic aggregation. Examining risk by country or zone, including elements like profit and loss summaries, limit utilization, diversification benefit and back-testing reports, allow macro/micromanagement of the risk/reward strategy.
• Business unit – commodity aggregation. Looking at detailed risk reports down to individual instrument and trade level allows real-time micromanagement of the risk/reward strategy.

In addition to the requirements for a global consolidation framework, companies also need a flexible and customizable analytic environment that allows complex modeling of physical assets, inclusion of unique pricing algorithms and computation of all risk measurements, scenarios and "what-if" simulations for current and potential future exposures.

An effective solution depends on the development of a corporate data model that permits the collection and management of an organization's data on a global basis. Poor data modeling is often cited as the reason for the failure of risk management projects. LogicaCMG has been developing data models for more than 20 years and has proven methodologies to ensure success.

Enterprise risk engines give companies the flexibility to model any asset, demand obligation, commodity or instrument type and incorporate it within a powerful analysis and reporting framework. They provide a consistent view of risk across the enterprise and give companies the ability to decouple risk management requirements from operational trading requirements so that neither business group is limited in terms of functionality. LogicaCMG has evaluated the suitability of enterprise risk engines for global energy risk management and has selected SAS, the leader in business intelligence and analytics, as a key alliance partner. SAS Risk Management allows users to perform companywide risk management operations.

The availability of high-quality data is fundamental to the successful implementation of any global risk engine. SAS Risk Management, with its integral component of risk data warehousing, provides a platform for data managed by the architecture to be consolidated, validated, cleansed and optimized for use by the risk engine. Data about trade details, volatilities, plant fuel consumption or temperature patterns can reside in many locations within a global energy company. Optimizing the management of this data can bring significant benefits with respect to risk management and a reduction in operational overheads.

Utilizing these technological building blocks allows energy companies to build powerful and flexible global risk solutions independent of local trade capture systems. Enhancing understanding of the structure of risk across the enterprise and how it relates to the corporate strategy can provide a key differentiator from competitors, allowing risk to be exploited for advantage.

A joint solution
Working together, SAS and LogicaCMG have applied SAS Risk Dimensions to global energy markets. The companies have developed a model implementation that proves SAS risk technology in an energy context and enables LogicaCMG to rapidly deploy a working solution that integrates, aggregates, analyzes and presents risk information for risk reporting and interactive investigation.

The joint global risk management offering from SAS and LogicaCMG provides a consistent approach to risk processes together with a technical platform for consolidating exposure data. Energy companies gain the flexibility to model any asset, demand obligation, commodity or instrument type and incorporate any combination of factors within a powerful analysis and risk reporting framework. The result is a consistent view of risk across the enterprise.

LogicaCMG can help energy companies gain maximum advantage from SAS solutions by combining strong energy market knowledge, TRM expertise and proven methodologies to deliver mission-critical IT projects on time and within budget.