GLOBAL ASSOCIATION OF RISK PROFESSIONALS

The Future of Energy Risk Management: Making the Case for Standardized Education and Certification

Glenn LabhartPresident, Labhart Risk Advisors Inc. and Chair of GARP’s Energy Oversight Committee (EOC)

January 2010

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About Global Association of Risk Professionals

• GARP is the world leader in financial risk certification, education and training– Not-for-profit association founded in 1996– Over 100,000 members representing 167 countries– All certification programs developed by practitioner oversight committees– Offices in Jersey City, NJ, London, with presence in Beijing, China– Independent, non-partisan, committed to the Risk profession, and ready to

speak up for the best in risk management practices.

• Financial Risk Manager (FRM©) certification– Launched in 1997 with 108 candidates in 6 test sites– In 2009, over 23,000 candidates in 85 test sites

• 70% growth in 2009– Supported by largest financial institutions across the globe

• Over 500 companies registered 5 or more candidates in 2009

Professional Designations

Country Programs

Certificate ProgramsCreating a Culture of Risk Awareness TM

Basic to intermediate

Advanced:  Completion earns  certificate

• 100 Multiple Choice questions each section

• 8 hour examination (2 – 4 hour sessions)

•Successful completion of both sections earns FRM designation

• 180 Multiple Choice Questions

• 8 Hour Examination (2 - 4 hour sessions)

• Administered the same day, time, and location as FRM

Indonesia: 52,000+ have taken program to date

Saudi Arabia: November 09’ introduction

China: 7,500+ have taken program to date

Azerbaijan: July 09’ 1st phase of long-term program

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GARP’s Professional Designation and Certification Programs

Energy Risk Professional (ERP) Program

• New initiative launched in June 2009• Program objective

– To measure from a practitioner perspective a person’s ability to provide professional risk management advice relating to the physical and financial energy marketplaces based on globally accepted industry standards and practices

• Increasing global interdependence and complexity of energy products– Demand for risk professionals with a comprehensive understanding of

both the physical and financial energy marketplaces

• Practitioner-oriented, dynamic syllabus• Accessible - global, affordable• Supported by API

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Energy Oversight Committee• Recognized experts in diverse areas of energy physical and financial markets• Design, develop and review all program material

Ken Abbott MD, Morgan StanleyRichard Apostolik President and CEO, GARPMark Galicia Commercial Manager, British PetroleumGordon E. Goodman Trading Control Officer, Occidental Petroleum Corp.Mark Jenner Director, Credit Risk, BG GroupJeff Jewell CRO, DTE EnergyGlenn Labhart Partner, Labhart Risk Advisors, Inc. (Committee Chair)Spyros Maragos Manager, Quantitative Analysis, ChevronMark D. May Mgr, Regional Risk Supply & Trading, ConocoPhilipsAlessandro Mauro Director of Risk Management, Litasco SAJeff Parke Sr. Director, Risk Management, Koch Industries, Inc.Jonathan C. Stein CRO, Vice President, Hess CorporationAndrew Sunderman MD, JP MorganGlen Swindle MD, Energy Trade & Marketing, Credit SuisseJohn Wengler CRO, Entergy Services, Inc.Jim Brown MD, Morgan Stanley

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ERP Program• Program Coverage

– Physical Energy Markets• Exploration and Production (Petroleum and

Natural Gas)• Crude Oil, Refined Petroleum Products,

Natural Gas, Liquefied Natural Gas, Coal, Electricity, Alternative Energy

– Financial Trading Instruments– Valuation and Structuring of Energy Transactions– Risk Management in Financial Trading– Financial Disclosure, Accounting, and Compliance

• Designation Requirements– Pass exam

• 8-hour, 180 multiple choice questions offered annually in May and November

– 2 years relevant work experience• Not required to sit for exam

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Physical Markets• Define “short-term trading arrangements”• Discuss why electricity is structurally different from other commodities• List and discuss the “four pillars” of market design• Compare and contrast the three trading models: wheeling, decentralized, and integrated• Define the following terms:

– merit order– contraint– locational prices– imbalances– congestion– contract path– ancillary services (list the services)

• Calculate the price congestion if point A has a location price different than point B

Financial Markets

• Discuss the difference between production cost models and hybrid pricing models for forecasting power prices• Define the characteristics and goals of hybrid pricing models• Discuss the parameters associated with an electric price jump-diffusion model• Discuss difference between reduced-form hybrid and fundamental hybrid models• Calculate the bid curve and determine the market clearing price• Calculate the cost of generation of electricity and explain why the bid curve may be different• Construct a generation stack for electricity bid pricing• Calculate generating unit costs for fuel and emission (NOx and SO2 ) parameters• List and discuss the process for modeling power prices• Discuss the justification of the hybrid model

Sample ERP Learning Objectives Addressing Electricity

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ERP Program Information

• 2009 Program (first ERP exam – October 2009)– 225 candidates from 37 countries, 190 different companies

• Energy Companies: Hess, Occidental, Dominion Resources, DTE Energy, Koch Industries, Shell

• Financial Companies: Citigroup, Goldman Sachs, Barclays, Standard Chartered, Deutsche Bank, Credit Suisse, World Bank

• Other: KPMG, Deloitte and Touche, Enrst & Young, McKinsey, Thomson Reuters, Oracle, Singapore Mercantile Exchange

– Top countries by number of candidates1. USA 4. Singapore2. Canada 5. Switzerland3. Hong Kong 6. UK

– 63.9% Pass Rate

• 2010 Program– Currently 251 candidates – registration opened December 1, 2009– Early Registration Ends January 31st

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UnderlyingRisks

CreditMarket

Operational

UnderlyingRisks

CreditMarket

Operational

UnderlyingRisks

CreditMarket

Operational

UnderlyingRisks

CreditMarket

Operational

Production Transportation/Storage

Refining/Processing Distribution

Disclosure: tax, regulatory, financial statements (accounting)

Universal Companies (Macro models, e.g., Shell, Exxon Mobil, BP

Specialty Companies e.g.,

PG&E ,Scottish Power

SpecialtyCompanies, e.g.,

Valero

Specialty Companies, e.g.Transwestern,

Stoldt

SpecialtyCompanies, e.g.

Anadarko

Supply Demand

Trading

Supply Demand

Trading

Supply Demand

Trading

Supply Demand

Trading

Approach to Energy Risk Management

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For more information

• Next Exam: Saturday, May 22, 2010

• More information: www.garp.com/ERPexam

• Questions: erp@garp.com

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Creating a culture of risk awareness.TM

Global Association ofRisk Professionals

111 Town Square Place Suite 1215Jersey City, New Jersey 07310 USA+ 1 201.719.7210

Minster House, 1st Floor42 Mincing LaneLondon EC3R 7AEUK+ 44 (0) 20 7397 9631

www.garp.org

© 2009 Global Association of Risk Professionals. All rights reserved.