Physical Portfolio Optimisation: Improving margins in a tight market
As commodity companies face tighter profitability, they need to look beyond reducing costs through efficiency and automation alone. They need to look for opportunities that create incremental revenue based on their current and future assets. In this article, Rashed Haq, Aditya Gandhi & Sid Bahl discuss key considerations and recommended approaches for harnessing information to improve margins through advanced physical portfolio optimisation.
OVER THE LAST decade much has changed in the commodities industry. Market conditions are changing at an unprecedented pace. For example, the volatility of commodity prices has increased significantly due to major shifts in supply and demand patterns. Shale gas discoveries have caused a steep decline in basis trading margins of gas trading companies. Power asset managers are rethinking their fuel mix strategy to leverage low natural gas prices to improve margins. Refineries struggling to maintain margins are being forced to explore options to change refinery configurations. The industry has also seen the emergence of a number of independent players, such as downstream companies, intermediaries and energy merchants, resulting in stronger competition and increased complexity of transactions being executed with more complex pricing structures and contract terms. In addition, governments around the world are looking at tighter regulations, even though there is still ambiguity around these requirements.
Being able to grow earnings and improve
overall margins will be the biggest challenge that firms will face in the coming decade
In addition to the challenges above, many
organizations continue to be hampered in their revenue and margin growth by their organisational structure – which typically focuses on cost reduction through efficiency. The following issues may prevent organizations from achieving the best utilization of all their assets, contracts and positions, making it difficult to consistently meet earnings expectations:
• Heterogeneous organisational structures composed of multiple commercial groups,
regionalized production or processing plant management and distributed decision-making teams.
• Commercial teams that are primarily speculative with a limited role in assisting
regional asset operations with fuel supply imbalances, e.g. leveraging store vs. sell options on production surpluses or buy vs. produce options to fulfil demand.
44 March 2013
• Silo-based physical asset management organizations with localized sales and
marketing channels, not fully leveraging market price intelligence gathered by commercial groups.
• Production that may primarily support contractual demand obligations, in turn
driving demand for fuel procurement leading to possible erosion of profit in support of non- profitable obligations.
These challenges have put additional pressure on companies already struggling to find innovative ways to sustain current profitability and fuel growth. For energy companies facing some or all of these challenges, cost reduction and efficiency alone will not be enough to take a leadership position in the marketplace. Being able to grow earnings and improve overall margins will be the biggest challenge that firms will face in the coming decade.
A Systematic Approach to Business Management For many firms, advanced physical portfolio
optimisation can provide ways to grow earnings and improve overall margins. Energy companies, including producers, suppliers or merchant traders of gas, power, oil or chemicals, that are looking to improve revenues should manage their businesses using a systematic market-based approach that treats all assets in the business – physical assets, term contracts, transport or storage leases and positions – as an integrated portfolio. The key concept in advanced physical portfolio optimisation is that the value of a business should be denominated by the value of the portfolio as a whole as well as by how the portfolio is managed: – All transaction decisions should be managed in a manner that allows all contractual obligations to be met while adding the most value to the portfolio as a whole for a given level of risk tolerance. These decisions should be based on considering the optionality within the rights and obligations built into each contract or asset and the current level of utilization of these.
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