Energy Sector Credit Risk Collaterization

Request a copy of a presentation by Lombard Risk to the risk control committee of the American Petroleum Institute (API).

China's demand for fuel has been credited in political and business circles for maintaining high fuel mineral and basic commodity prices. Chinese corporations have engaged in a worldwide shopping spree for energy assets and now hold energy interest in 44 different countries.

In addition, overall expectations for energy demand indicate a continued rise with OPEC announcing their anticipated growth increase of 1.8% in 2006.

The increased presence of hedge funds participating in the energy markets has been noticeable - here are over 400 Energy Hedge Funds and with expectations that a further 300 new energy hedge funds would enter the markets this year, with a less traditional approach to investing and trading than the established energy companies, their impact on the market remains uncertain. What is certain, is that these new entrants into the market are challenging the traditional approach to credit by energy risk professionals.

Ever since cases like Enron in 2001 and TUX Europe in late 2002, credit risk has become an important point of focus in the energy markets.

An insight to the solution to the issue of credit risk can be gained by making comparisons to the financial market. This industry too was faced with similar concerns on credit exposure whilst wishing to avoid any restriction to trading. Collateral management was engaged to provide the solution. By marking the portfolio to market, collateral is distributed accordingly, and this balances out any net value difference until the next day or agreed reset period.

In this presentation, made to the risk control committee of the American Petroleum Institute (API) in Los Angeles on November 30, 2005, we highlight some of the issues, and examine how Lombard Risk's COLLINE^® Collateral Management system can be employed to manage the collateral process effectively, and to reduce pressure on energy companies in this area of risk mitigation.

Request a copy of a presentation by Lombard Risk to the risk control committee of the American Petroleum Institute (API).