In the world of Energy Trading and Risk Management Systems (ETRM), there is no perfect system that meets all market participants’ needs. Each system has its drawbacks and typically falls short on the promises of streamlined processes, improved analysis capabilities and fewer errors. However, ETRM systems play an important role in supporting commodity marketing, settlement, risk management and reporting capabilities by providing a secure, controlled and integrated process and data platform. There are many common ETRM system requirements that connect commodities and the front, mid and back-office functions. The challenges are found in the requirements that are unique to the specific commodity, such as natural gas, crude, NGL’s, power and agriculture. Because each commodity is so different, this article will focus on some of the unique challenges for ETRM systems for the natural gas marketing business.
While not an exhaustive list of challenging requirements, there are three chief influencers on a marketer’s satisfaction with their natural gas ETRM system:
- Netback Price Calculations – Netback calculations are often described as straight-forward, but that’s rarely the case. Each marketer typically calculates their netback prices in spreadsheets, and the flexibility of Microsoft Excel leads them to think ETRM systems should be able to handle them in a similar way. If an ETRM system has netback functionality, it is important to evaluate what is required of contract administration scheduling and accounting to achieve the desired results. ETRM systems typically require a scheduler to path the gas in very specific ways from the wellhead to the market through the gathering and processing systems. Moving gas into and out of storage, pools and multiple legal entities often provides an unexpected netback value. The end result is that, in order for the system to calculate the netback according to the marketer’s methodology, the schedulers spend an exorbitant amount of time pathing gas in the ETRM system. An ETRM system evaluation should include a real-world example of a marketer’s netback methodology, and the vendor should demonstrate how to make it work through the deal entry, scheduling, and settlement processes. The system evaluators should pay attention to how much effort it takes to achieve the desired outcome and determine if that daily effort is worth it.
- Interconnect Volume Management – In organizations where there are different schedulers on the receipt and delivery side of interconnects, the benefit of an integrated ETRM system can quickly turn into a fight over who owns the interconnect volumes. Downstream schedulers will scream, “Who changed the receipt volumes I just updated?” The culprit is the upstream scheduler that is actualizing delivery to the interconnect. The ETRM system, operating with a sound objective, reduces duplicate entry at the interconnect points. However, the downstream scheduler prefers to manage his volumes at that point because additional gas may be coming from other shippers. When evaluating an ETRM system, it is important, first, to understand how the schedulers take ownership of interconnect volumes, and second, to ask the ETRM vendor to demonstrate the flow of gas through an interconnect with a rich example provided by the schedulers.
- Title Transfer – Most marketers have multiple legal entities they support. One legal entity may be the marketing organization and another may be the upstream gathering and processing organization. Additional legal entities may exist due to legacy operations, acquisitions, tax and liability structures and joint ventures. There will likely be multiple organizations that own transportation and storage capacity. Some systems may require additional pathing from one entity to another to reflect title transfer. The reality is the multiple entities exist for legitimate reasons, but create immense challenges for ETRM systems to support.
It is important to understand how an ETRM system handles multiple entities as well as its effect on the ease of use of the system. Typically in software evaluations, basic test cases are provided to the ETRM vendor to demonstrate, but marketer’s legal structures are anything but simple. An evaluation should include real world examples of gas flowing through multiple legal entities, whether they own the gas, the transport, or are a JV that needs clean reporting in the accounting records.
What is the best way to decide if the ETRM system fits your business requirements while simplifying business processes and data sharing? Understanding the complexity of the organization—contracts, settlement calculations, and legal entities—is a good start. Provide the ETRM vendors very specific real world scenarios and watch the process from first of the month, to daily nomination, to scheduled volumes, to monthly tie outs, to actualization. Pay close attention to how volumes flow throughout the process and the level effort to support the information flow that will result in the correct netback and other settlement calculations.
Selecting an ETRM solution that might technically meet your needs, but creates significant work for schedulers and accountants, will result in unhappy users, organizational dysfunction, silos of data and accountability, and broken processes. Ultimately, the business case for implementing an ETRM system will not be achieved.