PORTFOLIO OPTIMISATION
– All asset decisions should be evaluated for the value the assets add to the portfolio at a given risk threshold. This can range from enhancing contract terms to proactively re-shaping the asset portfolio mix with new assets or contracts.
While most energy companies generally follow
Should You Be Earning More From Your Physical Assets?
This article represents a milestone in a 10-year journey
the basic market principles to some extent, there is usually too much information to make the most effective decisions without the appropriate tools. Advanced physical portfolio optimisation cannot be managed manually with pen and paper because there is simply too much information to consider. Doing so would likely lead to simplifying assumptions that ignored the complexity involved in optimising the overall portfolio value – and would ultimately lead to sub-optimal decisions. One result of this approach is that some companies become focused on cost savings without mapping the costs to revenue growth, and hence leave potential revenue on the table. Often minimizing cost alone or maximizing just revenue independently does not create the most margins (see Figure 1 for a simple schematic). There are many information and algorithmic tools for managing physical plans and financial portfolios, such as linear programming or stochastic valuation software, that can be extended to manage the information complexity of physical and paper assets and positions and take back that potential revenue. For a business to manage its portfolio along the principles
taken by Sapient Global Markets and some of its key partners to better understand how to ensure that any set of physical assets – energy in this case – is being optimised to yield as much profit as possible.
Oftentimes, traders and schedulers that lack clear visibility
into these values make a host of simplifying assumptions and estimations regarding the physical rights and obligations of the assets and contracts and the best way to manage them in a complex and fast-moving market.
Have you ever wondered how much more money you could be making if your traders could really see and use all of the flexibility your physical assets have to offer in the short-term markets? What if they could really see all of the rights and obligations in your portfolio of contracts and where you stand against them in near-real-time? And what if they had tools that could help them understand the most profitable option available for every molecule or electron given all of the midstream and downstream alternatives available?
Read on for an in-depth discussion about advanced physical
portfolio optimisation. We hope this article sparks some interesting thoughts about how advanced physical portfolio optimisation can have an impact in your own organization.
of advanced physical portfolio optimisation, all the rights and obligations for each contract need to be available with all physical, contractual or policy-based constraints including the following:
• All term contracts for receiving or delivering commodities
• All leases and contracts for changes in commodity, such as blending or
fractionation – or moving the commodity across time or locations.
• All production forecasts and demand forecasts and current / forecasted prices.
Based on the business model, the
optimisation process will utilize these inputs to develop the target or recommended transactions (Figure 2). The best set of transactions will meet both all contractual obligations within the physical and policy constraints and create the maximum value within the risk constraints. Users, such as traders or schedulers, will try to execute the target transactions, but will likely run into execution roadblocks, such as not being able to find a counterparty willing to transact the
revenue curve
target volume, etc. Based on these types of roadblocks, they will get to an executed transaction set that is close – but not identical – to the expected portfolio. In the meantime, market prices may have evolved throughout the day. As a result, markets and new beginning positions will then
Figure 1: Independently Minimizing Costs or Maximizing Revenue Don’t Necessarily Maximize Profits
$
cost curve profit
Total Transaction Complexity Source: Sapient Global Markets March 2013 45
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