Foundations of Energy Risk Management: An Overview of the Energy Sector and Its Physical and Financial Markets

Introduction vii

Garp’s Certificate in Energy Risk Management ix

Garp’s Foundations of Energy Risk Management Course Specification xi

Syllabus and Learning Outcomes xi

User Guide xii

Chapter 1: The Energy Cycle 1

1.1 Introduction 1

1.2 Exploration 3

1.3 Production or Extraction 4

1.4 Processing 6

1.5 Transportation and Storage 7

1.6 Refining 8

1.7 Distribution 8

1.8 Integrated and Specialty Companies 9

Chapter 2: Risks in the Energy Cycle 13

2.1 Overview 13

2.2 Market Risk 15

2.3 Credit Risk 15

2.4 Operational Risks 16

2.5 Liquidity Risk 19

2.6 Political and Regulatory Risk 20

2.7 Price Risk and Credit Risk 21

2.8 Integrated Vs. Specialty Companies 22

2.9 Common Risk Management Tools 23

2.10 Volatility and Energy Risk Management 24

Chapter 3: World Energy Use 27

3.1 Overview 27

3.2 Energy Intensity 30

3.3 Energy Consumption by End-Use Sector 31

Chapter 4: Major Sources of Energy 33

4.1 Overview 33

4.2 World Crude Oil 35

4.2.1 Production 35

4.2.2 Consumption 36

4.2.3 Oil Reserves 38

4.2.4 Factors Influencing World Oil Markets 40

4.2.5 Factors Influencing Crude Oil Prices 40

4.2.6 Refined Crude Oil Products 42

4.3 World Natural Gas 45

4.3.1 Production 45

4.3.2 Consumption 47

4.3.3 Natural Gas Reserves 47

4.3.4 Factors Affecting Gas Markets 50

4.3.5 Factors Affecting Natural Gas Prices 50

4.4 World LNG 51

4.4.1 Recent Developments 52

4.4.2 The LNG Market 52

4.5 Coal 53

4.5.1 Production 54

4.5.2 Reserves 55

4.5.3 Consumption 56

4.5.4 Coal to Liquid Fuels (CTL) 57

4.6 Power / Electricity 57

4.6.1 Power Generation 58

4.6.2 Basic Technical Fundamentals of Power 64

Chapter 5: The Markets for Energy Products 69

5.1 Introduction 69

5.2 The Physical Markets 70

5.2.1 Spot Markets 70

5.2.2 Crude Oil Spot Markets 71

5.2.3 Crude Oil Forward Markets 71

5.2.4 Physical Gas Markets 72

5.3 The Financial Markets 72

5.3.1 Organization of Financial Markets 73

5.3.2 Financial Derivatives 75

5.3.3 Basis Risk 80

5.3.4 Speculation, Arbitrage and Hedging 81

5.4 The Relationship Between the Physical and Financial Prices 85

5.5 Emission Trading 86

5.5.1 Emission Trading Programs 87

5.5.2 Emission Trading in the United States 87

5.5.3 Emission Trading in the European Union 88

5.5.4 Kyoto Protocol 88

Chapter 6: Real Options in the Energy Market 91

Glossary 95

Index 109

Acknowledgments 119