THE MANAGEMENT OF RISK IN ENERGY PROCUREMENT 20 th May 2015
The Energy Agenda THE ENERGY AGENDA Overview of Total Procurement UK Energy Market Fixed & Flexible Contracts Gas & Power Risk Management Resource Service Management Energy Management Summary
TOTAL AS AN ENERGY PARTNER “CIPS have partnered with Total to provide information and resources to educate and support businesses make effective energy supply decisions. CIPS recognises Total as a leading supplier of power and gas to UK business. Total is committed to ensuring transparency across the industry it operates. The partnership with Total forms part of CIPS knowledge strategy which is structured to deliver information, guidance and resources to support CIPS members. CIPS undertakes a careful review of all potential partners to ensure that they meet the high standards and values CIPS expects as a professional body representing the procurement and supply chain profession.” - David Noble, CEO - CIPS 3
• Fifth largest publicly traded international energy company • 100,000 employees operating in more than 130 countries • Exploration and production operations in more than 40 countries • Largest Industrial & Commercial Gas Supplier in the UK c . 50TWh (equivalent to the gas use of more than 3.7 million domestic households*) • Fast growing power supplier with >6TWh I&C portfolio (equivalent to the electricity use of more than 1.8 million domestic households*) • Full energy spectrum focussed entirely on the Industrial and Commercial market (business users) • 500 MW+ of low carbon & renewable generation under contract • Innovative e.g. First ‘Green Gas’ supplier in the UK – Green Gas Trading (GGT) * Based on the annual domestic average consumption for 2014 - 13,500 KWh (gas) and 3,200 KWh (power). 4
MARKETING ACTIVITIES IN EUROPE Marketing Division Coal New Ventures Gas Cepsa Gas Commercializadora Power 35% Total 35% CEPSA 30% Sonatrach Total Energie Gaz CDF Energie Total Energie Gas Total Gas & Power Total Gas & Power Total Gas & Power TEGAZ CDFE TEG Netherlands Belgium Portfolio as of January 1 st 2015 Deliveries Contracted Number Market Entity in 2014 AQ of sites share 40.4 TWh 41.9 TWh 88,351 18% TGP UK 5.3 TWh 6.3 TWh 36,850 3% Total Energie Gaz 25.1 TWh 22.2 TWh 20,431 7% Total Energie Gas 7.8 TWh 13.7 TWh 3,753 3% TGP Belgium 0.1 TWh 0.6 TWh 1,708 <1% TGP Nederland 0.8 TWh 2.2 TWh 615 <1% Cepsa Gas Comercializadora 27.8 TWh 21.8 TWh 261 10% CDFE 0.7 Mt 0.7 Mt 65 37% 5
The Energy Agenda THE ENERGY AGENDA Overview of Total Procurement UK Energy Market Fixed & Flexible Contracts Gas & Power Risk Management Resource Service Management Energy Management Summary
Energy Market Overview UK GAS DRIVERS • A surprise (further) cut in production at the Dutch Groningen gas field lead to a Short Term jump in prompt prices. A 7% cut for 2015 production compared to 2014 had already been announced by the Dutch government. However concerns over seismic activity caused by gas extraction at the field led to further restrictions being put in place until July – reducing supply by approximately 45mcm/d in February. • A lack of gas deal between Russia & Ukraine beyond March 2015 remains a concern. Relations between the two countries have weakened considerably, and as such the situation is fragile. A truce between Ukraine and rebels in the east of the Medium country doesn’t appear to be holding too well, and some gas infrastructure has Term been damaged. Most of the capacity for gas to flow from Russia to Europe goes via Ukraine. • Longer term gas prices have been pulled down by soft global oil prices and by a weak Euro against Sterling . Oil prices have moved to the $60/bbl range up from the lows of $45/bbl in January as concerns over declining rig numbers in the US, and Middle East tensions support prices. Political woes in Greece over debt repayments have pushed the Euro to 7 year lows against Sterling, weakening prices due to the Long term levels of trading between the UK and the continent. 7
2014 Electricity Generation Mix 2014 UK Electricity Generation 2014 Daily Generation 45 GW IC Other, Netherlands, 311,226 40 326,712 Hydro, OCGT, 264 163,453 35 Wind, 30 IC France, 880,517 629,058 25 Coal, 4,025,765 20 15 10 Nuclear, 2,489,184 5 0 CCGT, 3,611,684 Coal CCGT Nuclear IC France Wind Hydro IC Netherlands Other
Commodity Annual Price Volatility 80 Middle East Greek tension, Oil Financial DA markets Crimea Crisis above $120. + concerns spike on cold Deepwater Japanese weather and Ukraine Horizon earthquake supply conflict begins incident. US and tsunami constraints 70 impose 6 month ban, oil hits $70 Cut in supply from largest gas National field in Western Grid warn Europe 60 on winter gas flow 50 Double recession warning Low storage levels 40 requires full gas injection in summer months Start of coldest winter since 1910 30 Continued mild conditions and plenty of gas in store Iran threatens Power, £ / MWh Eurozone pushes down prices to block Suez financial Gas, pence / therm canal during the year. Crisis Oil price slumps starts 20 Nov 09 Mar 10 Jul 10 Nov 10 Mar 11 Jul 11 Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13 Nov 13 Mar 14 Jul 14 Nov 14 Mar 15
Market Risk & Policy Questions to consider..... • What process do you follow to mitigate price risk with respect to energy procurement? • Who owns the decision – Is it part of your corporate governance? • CEO/ MD/ FD? • Energy Manager/ Procurement Manager? • Sales Ledger Manager/ Production Manger? • Third Party? • Which elements are considered for your procurement decisions: • Time horizon? • Forward production/sales forecasts/ expansion/contraction? • Geo-political change? • Budgets - now and future? • Energy is a major cost – can it also be a profit centre or competitor differentiator? • Accuracy of purchase reduces costs – Importance of forecasts? 10
The Energy Agenda THE ENERGY AGENDA Overview of Total Procurement UK Energy Market Fixed & Flexible Contracts Gas & Power Risk Management Resource Service Management Energy Management Summary
Fixed Price Contracts Choosing the right product - What are my options? Fixed Price or Flexible? Fixed Price: • Budget certainty • You might purchase at the bottom of the market! • 1/365 chance • No Capital at Risk (CaR) • With flexible contracts you need a CaR just in case from day 1 the price rises, this is typically 5% to 7%. 12
Types of Fixed Price Products SmartFix Eco-Energy Complete peace of mind Price Manager 100% renewable Never pay more For more information, visit the new website pages on www.totalgp.com where you can also view the new TGP videos! We’re Open for Businesses
Flexible Contract Options What are the Benefits? • Opportunity to make real savings compared to ‘Fixed Price’ contracts • Transparency of all contract charges • Buyer controls timing of purchases but is supported by supplier or TPI • Eggs in separate baskets, avoiding 1 day in 365, or 1,095 for a typical 36m contract! • Longer term budgeting and horizon (>12 months, evergreen?) • Enhances control (exposure) and avoids “price steps” between contracts • Can operate as a fixed price contract • Buy like major supermarkets and other large companies! What else do you need to consider? • Price may only rise from decision day • Capital at Risk needs to be added to budget 14
The Energy Agenda THE ENERGY AGENDA Overview of Total Procurement UK Energy Market Fixed & Flexible Contracts Gas & Power Risk Management Resource Service Management Energy Management Summary
Types of Risk Management How can my supplier help me manage my risk? Offering Risk Managed Products • Requiring an element of flexible procurement • Strategies • Alerts • Triggers • Position Reports • Market Reports
PROGRESSIVE STRATEGY Progressive Strategy Example of Progressive Volume Hedging • Prompt 100% 100 - 75% of – (0 – 6 months; 100% - 75% of total Total Consumption volume) 75% • Short term hedge 75 - 50% of Total Consumption – (6 months; 75% - 50% of total volume) 50% 50 - 33% of Total • Medium term hedge Consumption – (12 months; 50% - 33% of total volume) 33% 33 - 15% of Total Consumption • Long term hedge 15% 3 - 0 Months 6 - 3 Months 12 - 6 Months 24/36 - 12 – (24/36 months; 33% - 15% of total Months volume)
The Cap & Benefit Strategy Cap and Benefit • Establish initial stop cap and floor • If market breaches floor reduce cap and floor, thus reducing market exposure • Continue until point of delivery • Back dating analysis over 9 years shows average annualised savings: • ~ 5% against the average, and • ~ 7% against the opening
CAP AND BENEFIT EXAMPLE Cap and Benefit Example Lock-in volume = 36,000 th/d £178,000 saving against the Strategy Limit. £130,000 saving since starting the strategy . 19
Firm Triggers and Alerts TRIGGERS AND ALERTS Automated system that allows you to place orders directly with the • procurement desk Can be as either a firm “deal” or as a notification service Response provided by either email, telephone or both at your preference Gas or Power contracts Actively scans the 4 major brokers + ICE Added value service at no additional cost
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