Information and papers on energy price risk management

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Sino-US Seminar on Energy Risk Price Management

On the evening of April 27th, 2007, the Consulate General of the People's Republic of China in Houston was brightly lit. On the eve of the first Sino-US seminar on energy market development and risk management, the Consulate General held a reception to welcome energy management experts and scholars from China, Britain, Singapore and other countries and regions, as well as Houston, new york, Dallas, Atlanta, Buttermore and Washington, D.C. ..

The Sino-US seminar on energy market development and risk management was held against the background of the acceleration of economic globalization, the increasingly open energy market in China and the increasingly mature risk management in the US energy market. The purpose of the meeting is to learn from the experience and lessons of American energy market development and risk management, to provide reference for the supervision of China's open energy market from the theoretical and practical levels, and to help China energy enterprises and energy users make macro-strategic decisions and micro-market risk management. This seminar was co-sponsored by American Experts Association, American Chinese Petroleum Association, Shanghai International Finance Research Center, Franklin School of Management, and the editorial department of International Petroleum Economy. It was strongly supported by 12 Chinese and American co-organizers and the Consulate General of China in Houston.

At the reception, Consul General Fannie Mae delivered a speech in Chinese and English. He spoke highly of the great preparations made by the conference organizers for the seminar and expressed his heartfelt thanks. He pointed out that China's accession to the World Trade Organization has brought great development opportunities for Sino-US cooperation in the energy field. As the capital of energy, Houston is the best choice to hold a seminar on energy market development and risk management. This seminar will build a bridge for the exchange of energy circles between China and the United States. He wished the seminar a complete success.

Dr. CoCo Lee, chairman of the seminar, and Dr. Yang Xiaozhuo, president and co-chairman of the China Association of Experts Studying in the United States, made speeches on the background and purpose of the seminar respectively. Dr. Yang Xiaozhuo and the co-chair of the seminar introduced some guests of the seminar, including Dr. Xu from Shanghai Institute of International Finance, Dr. Chu Junhai from Shanghai Futures Exchange, Dr. Bao Yihe, an academician of the National Academy of Engineering, and Professor Vintcent from Rice University. Dr. kaminsky; Ms. Sharon Fortmeyer-Selan, Senior Vice President of SunGard Company; Dr. Li Shirong, Deputy Director of Chongqing Foreign Trade and Economic Committee, China; Ms. Zhu, President of Platts; And William, executive director of Morgan Lewis Energy Resources Group? William F. Heideman, Director of Global and US Regulatory Policy of Deloitte Services' Energy and Resources Department and former member of the US Federal Energy Regulatory Commission? Mr. Blanco Terzic and Ms. Yang, editor-in-chief of the monthly International Petroleum Economy of the Petroleum Economics Professional Committee of China Petroleum Institute.

Dr. Hai from Shanghai Futures Exchange delivered a speech on behalf of China guests on the development of China's energy futures market. He pointed out that with the rapid development of China's economy and the increase of oil imports, China's energy market is more and more closely linked with the world market, which makes energy price risk management more and more important. China has gradually developed the oil futures market since the listing of fuel oil futures in August 2005. In the field of energy risk price management, China can learn a lot from its American counterparts. Du Aini, director of the Houston Business Service Center of the US Department of Commerce? Priest priestley delivered a speech on behalf of American guests, expressing confidence in the future of US-China energy cooperation.

China-US Energy Day in Houston

At 8: 30 am on April 28th, the seminar was grandly held at Marriott International Hotel in Houston. The colorful banner of "2007 Sino-US Energy Market Development and Risk Management Seminar" hangs above the podium of the seminar. The emblem of 2007, the national flags of China and the United States and the jagged growth curve imply that the seminar, as a bridge for energy exchange between China and the United States in 2007, shows the participants' desire to promote the healthy development of the energy market between China and the United States through dialogue.

Ms. Yang, editor-in-chief of International Petroleum Economy, and the Secretary-General of the seminar announced the opening of the seminar. At the call of Secretary-General Jiang Jianjun, American delegates unanimously "welcomed" China guests in Chinese; The representative of China replied "Welcome" in English. Although the content of the seminar was full of serious academic flavor, 250 delegates felt the atmosphere of warmth, sincerity, tacit understanding, friendship and cooperation from the humorous opening remarks of the host and the interaction of the participants.

First of all, Dr. Yang Xiaozhuo, the founder of the seminar, delivered an opening speech on behalf of the China Association of Experts Studying in the United States and the organizing committee of the seminar. He pointed out that at the end of 2006, China fulfilled its commitment to join the WTO and opened the wholesale market of petroleum products. As a major energy producer and consumer in the world, China's increasing oil imports and increasingly open energy market have brought huge business opportunities to international energy companies and financial institutions. Chinese and American energy companies, futures trading companies, investment banks and research institutions attending this seminar will exchange views on various aspects of energy market development and risk management, including energy policies and regulations, energy trade, energy project financing, alternative energy and sustainable development. Everyone has reason to believe that since this meeting, China and the United States will maintain closer ties and cooperation in this field.

US Congressman Nick? Lampson said "Hello!" in Texas dialect. Greetings began his welcome speech. He said: "I am proud to serve the 1 10 Congress and serve as the chairman of the Energy and Environment Branch of the Science and Technology Committee of the Congress. This Subcommittee has jurisdiction over most of the research and development of the American energy industry. It is very important for the United States to have a good policy to encourage innovation in this industry. As we have seen, we can promote the development of novel, exciting and dynamic energy technologies, and at the same time, use our understanding of environmental impacts to apply these new technologies to energy production. " He pointed out that the liberalization of trade and investment in the China market is very beneficial to both the United States and China. In the energy industry, this means reducing import tariffs on certain capital goods, and eventually opening up certain areas to foreign competitors, such as the retail market of refined oil products. He believes that this meeting will take an important step in the Sino-US energy partnership. Both China and the United States will benefit from this meeting and understand the policies necessary to expand the international energy market.

In his speech, Consul General Fang Daidai extended warm greetings to the participants from China and the United States on behalf of the people of China and the Consulate General of China in Houston, and expressed warm congratulations on the convening of the seminar. He pointed out that the China government has established and implemented the energy security concept of "mutually beneficial cooperation, diversified development and coordinated guarantee", and encouraged the whole society to improve energy efficiency, attach importance to environmental protection, and put energy conservation at the top of its energy policy. At the same time, we will make joint efforts with all countries in the world to maintain global energy stability, security and sustainable development. As the world's largest coal and energy consumers, China and the United States have extensive common interests in the fields of traditional energy, new energy and renewable energy, as well as improving energy efficiency, reducing dependence on foreign oil and reducing tail gas emissions. As the energy capital of the world, Houston has integrated technology and talents in energy trading and risk management. There are natural advantages in holding this seminar here. The seminar provided an excellent opportunity and platform for all participants to discuss issues of common concern, exchange ideas and experiences, enhance mutual understanding and explore further cooperation. He hoped that the seminar would build a bridge between the US government, the China government, energy companies, financial institutions and experts, so that all parties could further cooperate in the field of energy management and achieve fruitful results.

Houston City Councillor Peter? Brown greeted the participants with a Chinese "welcome" and won bursts of applause. On behalf of the mayor of Houston, he sent blessings to the seminar and announced that April 28, 2007 was Houston's "China-US Energy Day", and Bill? The announcement of "China-US Energy Day" signed by Mayor White was handed over to Chairman Yang Xiaozhuo.

The seminar also received congratulatory messages or letters from Governor rick perry of Texas, Consul General Hua Jinzhou of the Consulate General of China in Houston, Ministry of Economy and Technology of the Overseas Chinese Affairs Commission of the State Council, Department of International Cooperation of the Ministry of Science and Technology of China, President of the European and American Alumni Association and Vice Chairman of the National People's Congress Han Qide.

The seminar lasted for two days and set up four topics, namely macro energy risk, micro energy risk, energy market construction, risk management and case analysis. * * * 36 representatives made exchange statements. Among them, the Professional Committee of Petroleum Economics of China Petroleum Institute provided five exchange reports under the organization of the editorial department of International Petroleum Economy.

The seminar took energy policies and regulations as the breakthrough point, and five experts and scholars made reports on this topic. William, who served in the Federal Energy Regulatory Commission? Mr. Heideman introduced some information about American energy law, including the main purpose of energy policy, the evolution of energy policy, and the important energy laws and regulations of Congress. He also made a case study on the development of natural gas and electricity in the United States in the 20th century and the jurisdiction of the Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC).

In terms of energy risk price management and energy market construction, 16 and 10 experts and scholars made reports respectively. Executives and round table hosts from investment banks, American energy companies, China energy companies, government departments and consulting companies analyzed and discussed the multi-billion-dollar trading losses of three famous energy trading companies from the aspects of enterprise strategy, risk management concept, government supervision, incentive mechanism of enterprise executives and actual risk management technology, which provided participants with a profound risk management case analysis.

This seminar not only has the theme report of the main venue, but also reports and questions from the sub-venues, as well as round-table discussions. Diversified meeting forms promote communication among participants.

Expert opinion collection

The main contents of this meeting involve the judgment of the current global energy market environment, the understanding of the urgency of strengthening energy risk price management, the characteristics that a perfect energy market should have, the government's energy regulatory objectives and the role that the government should play, the steps of energy risk price management and the design principles of risk management framework, the role of hedge funds in the energy futures market, some research topics that need to be carried out in the field of risk management, and the specific contents of risk management. For example, risk identification, risk classification, the interaction between market risk and credit risk, the choice of hedging tools, and the technical challenges faced by energy risk price management. Here are some selected contents to introduce the main viewpoints of experts.

1. It is urgent to strengthen energy risk price management.

Dr. kaminsky, a famous American risk management expert, a professor at Rice University and a former managing director of Citibank, and Professor Kumar, director of the Finance Department of Bauer Business School of the University of Houston, pointed out that the world energy market is facing a series of challenges. First of all, the trend of integration and globalization of the energy industry is getting stronger and stronger. Various fields of the energy market are increasingly integrated, and the high integration of the energy market will make the impact on the local market spread rapidly. Secondly, the energy market is developing and evolving rapidly. Due to the emergence of new market entities-powerful financial institutions and hedge funds, the liquidity of the energy futures market has been enhanced, and new participants have changed the rules of the game, which has a significant impact on price changes. Thirdly, more and more financial investors regard the energy commodity market as a new investment asset category, which leads to a new investment channel and many complex, long-term and highly capital-intensive transactions. The resulting increase in energy price instability makes it necessary for energy producers and consumers to develop reliable risk management methods. Fourth, the cost of obtaining energy resources in human society will become more and more expensive. In the next few decades, we will face the problem of how to increase energy production to meet the growth of global demand. On this issue, technology and financing are facing challenges. The development and utilization of renewable energy and new energy need advanced technology and a lot of money. However, the current investment in infrastructure is very insufficient, which may cause greater price fluctuations in the future. In addition, the trend of deregulation in the oil and gas industry will continue, which also puts forward higher requirements for strengthening risk management. China, Indian and other developing countries' economic development stages determine that their energy consumption will increase rapidly and have an impact on world energy prices. There are market risks of price fluctuation, operational risks of infrastructure, credit risks and policy risks in the energy market. In the environment where energy prices and commodity prices are very unstable, improving resilience will determine the future survival and development of energy companies. Therefore, it is very important and urgent for energy companies, especially the inexperienced China Energy Company, to carry out risk management training and practice.

We should cultivate and develop an effective and transparent energy market.

Kaminsky believes that the key factor of risk management is not the value of risk management, but the cultivation and development of an effective and transparent energy market. The design and development of energy market is an important part of economic policy and should be implemented as a national key project. The energy market, or, in a broader sense, the commodity market, can play two key roles. One function is information processing and information discovery. Market is the most effective tool for information collection and processing. The second function is to develop price signals, which can be transmitted to energy producers and consumers at the same time to produce the best resource allocation.

He said that an efficient and transparent energy market could not be formed overnight. The United States has the most efficient and advanced energy market, but we also made many mistakes in the process of developing this market. I hope China and other countries can learn from our mistakes and avoid repeating them.

He also pointed out that the spot trading market is one of the most important components in the energy market and the earliest developed market. The futures market is established and developed after the spot market, and it regulates transactions through electronic systems or public price information systems. The price is transparent and anyone can check it at any time. In the futures market, goods will be delivered at current prices in the future.

However, designing and developing the futures market is a complex and arduous task. In fact, many futures markets can't continue to operate in the end, which is caused by many factors. We must realize that there are many preconditions for the successful development of the futures market and whether the futures market can play its role. First of all, there should be more market participants, including a large number of market subjects, namely sellers and buyers, and no participant can exert significant market influence on buyers or sellers; The market has good liquidity and reliable price index. Secondly, there must be hardware infrastructure to support the futures market, including the transportation system for delivery, which is beyond the control of large market participants. In other words, there should be no monopoly on the infrastructure that determines the contract. When any goods are to be delivered, the storage and transportation facilities at the delivery point should be available. Last but not least, the futures market should be supervised and win the trust of the public. Because the commodity market is sometimes easily manipulated, efficient and powerful supervision is the key factor and prerequisite for the successful launch of the futures market.

Dr Xu Gang, vice president of strategic research department of Constellation Energy Commodity Trading Group, believes that one of the important functions of the market is to obtain information. There are many uncertainties in the energy market, and information collection is very important for energy business. Useful information is naturally collected in the market. In the market, participants will want to share and publish information, which will greatly reduce the cost of information collection. The price information generated by multi-party bidding reflects the overall influence effect of each factor.

Another function of the market is to provide a risk transfer channel for market participants. There are both speculators and hedgers in the market. Hedge traders usually look for an insurance method to avoid risks, thus making their business more stable. From the perspective of social benefits, the market enables people to transfer risks to each other, which is beneficial to every trader. The liquidity of the market can also enable companies to obtain a means of asset allocation to spread risks.

The third function of the market is to promote management and innovation through competition, and at the same time, to restrain bad market players and eliminate inferior ones. If the market can operate efficiently, the economic operation efficiency will be higher and the cost will be reduced. From the government's point of view, the market can promote the implementation of energy policy. For example, enterprises can be urged to act in the direction that the government wants through taxation and other means.

William, who served in the Federal Energy Regulatory Commission, set up the Market Supervision Department and served as the executive director? Mr. Heideman pointed out that for a perfect energy market, consumers and producers of energy products should have the right to choose freely; The market should have perfect laws and regulations and be well implemented; The market should be transparent and business information should be smooth; The government needs to take measures to encourage market participants to be honest, efficient and innovative; A perfect market also needs good communication channels; In addition, the moral behavior of market participants and government officials is also extremely important.

3. The government's energy policy objectives and the role that the government should play.

Blanco, former member of the US Federal Energy Regulatory Commission? Mr. Tezik pointed out that the typical goals of the government's energy policy are to improve energy efficiency, ensure stable and reliable supply, protect the environment, provide fair social subsidies and cancel energy price subsidies. No matter what the government's policy objectives are, they must be clear. If the goal is to introduce competition, then there must be a perfect system to monitor the market and ensure that competition can play its role. This means that the government must establish a non-discriminatory and transparent management system for the market to play its supervisory role. The government should also supervise monopoly areas to ensure that consumers who want to benefit from the competitive market can get a competitive energy supply fairly.

Mr. Tezik also introduced the view of the World Bank, that is, the goal of government supervision should be to protect consumers from the wrong monopolistic behavior, protect investors from the wrong government behavior, and promote economic efficiency. The responsibilities of regulatory agencies include monitoring market access, prices, service quality and conditions, and providing a regulatory platform that all investors trust.

In order to attract private capital, there are some globally applicable regulatory principles, including transparency, timeliness, balance, auditability, stability and independence of regulators.

As far as the independence of regulators is concerned, regulators should not be influenced by political pressure; Supervisors should be experienced and make decisions based on scientific analysis, fair economic analysis and accurate judgment; Adequate sources of funds and support are also needed. In addition, it is very important to win the trust of the public when establishing a new regulatory body. The public must believe that the institution that supervises monopoly is fair.

Mr. Heideman said that in the early stage of the development of the energy industry, the government's energy policy objectives were only for economic growth and national resource management. However, today, the government's energy policy should urge people to strive to achieve the balance between energy security, energy efficiency and economic growth goals, protect the environment and rationally distribute the costs and benefits of the energy industry.

Victoria Chu Pao, president of Platts Energy Information, analyzed two possible ways to achieve energy security, one is to directly control resources through government supervision, and the other is to use global trade, market transparency and modern risk management tools. At the same time, she also discussed whether there is another better way or a good way to strike a balance between the two.

In her view, in the short term, it may be better to adopt government supervision in a rapidly developing country like China. However, with the development of economy, it will be more effective to adopt more open and transparent market policies at a certain time. "Global trade and risk management can help the government achieve the goals of energy balance and energy security."

Zhu pointed out that many countries in the world are trying to achieve national economic security through legislation. Some countries endow energy companies with monopolistic government functions, some countries supervise market behavior with numerous bureaucracies, and some countries try to create conditions to obtain the protection of energy resources. In their view, if oil resources are at home, there is no need to worry about the Middle East. As long as you sign a 25-year LNG supply agreement, you can get a 25-year cheap natural gas supply. Actually, it is not.

Energy security is ultimately a price issue. Since it is a price issue, how can the government achieve cheap energy? Many countries seem to think that the simplest method is direct pricing. Zhu pointed out that this method may be effective when the global market is not connected as it is today. But today, commodity prices are global. Whether you own your own oil mine, oil well or pipeline, or wheat field, locking in the source of supply cannot protect your economy from price changes. Similarly, it is useless for the government to try to prevent price fluctuations by fixing prices. In this way, not only the original goal of cheap energy can not be achieved, but also the price will become higher because of the distortion of the market price signal.

For example, Zhu said that the price of gasoline varies from country to country. A recent Platts survey showed that the price of gasoline in European countries was the highest, exceeding $ 6-7 per gallon, exceeding $4 in Japan and Singapore, $3.8 in India, about $3 in the United States, and less than $3 in Thailand, Vietnam and Indonesia. China is the country with the lowest gasoline price, which is 2. 1 1 USD per gallon, except the oil producing countries in the Middle East. Zhu pointed out that the price difference mainly lies in that some countries implement price subsidies, while some countries impose heavy taxes on gasoline consumption. Although these are all government interventions in the economy, the effects are quite different. European countries subsidize agriculture with gasoline tax, while China (similar to the United States) transfers other economic income to subsidize gasoline consumption.

Artificially lowering the price means that the investment that should have been invested in energy infrastructure will seek to invest in more profitable industries, resulting in inefficient resource allocation; Artificial low prices also mean that energy demand and consumption will increase indefinitely. So, what is the way to achieve energy security?

Zhu also pointed out that government supervision alone may not necessarily achieve sustainable energy security. The market is made up of people. The process of doing trade is the process of communication and dialogue, that is, the process of exchanging what you have for what you want. In essence, dialogue is a series of transactions. Dialogue includes dialogue between people, between companies and even between countries. Therefore, Zhu regarded "market trade and dialogue" as a key word in her speech.

Another key word she pointed out was "transparency". She believes that good transparency is the key to formulating effective regulatory measures, and the core of market transparency and efficiency lies in smooth information and free competition. However, improving market transparency is inseparable from risk management.

Finally, Zhu said, we believe that China is willing and able to play an active role in the global energy dialogue. We expect China to become a leader in technological innovation to improve energy efficiency, in formulating and adopting new standards to create an open and efficient market, including new energy risk price management practices.

4. The practice of energy risk price management and the application of risk management tools.

In an open and competitive market, there is a great need for two abilities, namely, the ability of risk management and value optimization. Mr. kaminsky pointed out that risk management in the energy market is a very challenging process, which requires comprehensive application of various skills. The first step of risk management is to identify potential risks, the second step is to formulate strategies to reduce risks, the third step is to select the best risk management tools, including the best hedging tools, and the fourth step is to implement hedging strategies. Hedging has a certain cost, so we must find a balance between hedging cost and reducing risk. The key factor to achieve risk monitoring at the company level is to invest in risk management infrastructure, so that risk management tools and plans can be evaluated internally.

Dr. Yuan Xianzhi, Senior Director of Financial Risk Management Department of KPMG Financial Audit Company, gave a detailed introduction and analysis on energy market risk, energy price trend curve modeling, energy derivative pricing, especially the risk management of China energy market, including key energy risk parameters, risk measurement tools, risk assessment practices and risk management framework.

Professor Feng Youyi from the Department of Systems Engineering and Engineering Management of the Chinese University of Hong Kong introduced the application of real option method in energy strategic evaluation with the theme of price discovery, market liquidity and energy risk price management in China, such as evaluating the strategic deployment of strategic oil reserve investment and energy investment, helping energy enterprises to build risk management mechanism, and designing and purchasing appropriate risk hedging derivatives. His speech also discussed the application of swing options to avoid demand risks, as well as the flexible value and correct pricing of emission rights through real options.

Understanding and mastering market rules requires complex quantitative analysis tools. In his speech, Dr. Xu Gang expounded the application of quantitative analysis in competitive energy market with a large number of examples, including the application in long-term fundamentals and enterprise development strategy analysis, the application in transaction support and risk management, and how to obtain additional value through hedging, risk-free arbitrage, service provision and real options. He also illustrated the application of real options in crude oil reserves. He concluded that a competitive energy market is beneficial to the economy; The energy market is full of risks; Effective quantitative analysis is the way to win the energy market; The energy market is full of opportunities for market participants who are proficient in quantitative analysis.

Dr. Li Chengjun, Vice President of Global Currency and Commodities at Deutsche Bank (new york), pointed out that one of the main cornerstones of the development of American energy market ahead of the world is that the United States has developed top-notch technologies in energy asset pricing and risk management in the past decade. Dr Li Chengjun commented on this top technology, and summarized and compared different quantitative analysis models and methods in the development of energy market. He believes that energy assets are a unique asset with high volatility, high return, low correlation with other assets, fixed income and low liquidity, so they are favored by investors. The mathematical modeling of energy assets (including physical assets and financial assets) faces many challenges due to the variety of energy assets, changeable business environment and numerous uncertainties. Effective management of energy assets requires comprehensive risk management experience.

5. Research topics in the field of energy risk price management

The report of Associate Professor Deng Shijie, director of the Department of Quantitative and Computational Finance at Georgia Institute of Technology, reveals the challenges faced by energy risk price management. He pointed out: energy risk price management needs to cover a wider range of regions and projects, and solve problems such as regional-related risks, long-term and short-term intertemporal risks; It is necessary to study more suitable risk assessment methods and encourage companies to effectively use market tools for risk management; It is necessary to develop advanced statistical tools, modeling tools and financial tools to make very complicated risk management problems easy to solve. At the same time, he also introduced the topics they are currently studying. For example, financial pricing tools and trading strategies (including price curve models of electricity, natural gas and crude oil; Energy derivatives; Trading strategy of strategic petroleum reserve), investment evaluation of physical assets, value evaluation of emission rights and related equipment, etc.

Desire of Chinese and American energy experts

This seminar was organized by expert volunteers mainly from China Association of Experts in the United States and China Petroleum Association, which lasted for more than one year. From the pre-planning preparation to the end of the meeting, the meeting was always filled with the heartfelt enthusiasm of the volunteers. According to Yang Xiaozhuo, president of China Association of Experts Studying in the United States, the main planners and organizers of this conference are international students who have learned a lot in the United States and engaged in energy trading and risk management in world-renowned oil companies or investment banks. They not only have extensive knowledge, solid knowledge of quantitative economics, rich experience in energy trading and risk management, but also have painful lessons from risk management mistakes. They very much hope to make some contributions to the construction of energy risk price management in China at the beginning of energy market opening and energy risk price management in China. They believe that China and the United States should take this seminar as a starting point, build an energy risk price management platform and strengthen exchanges and cooperation. William? Mr. Heideman said, "We in the United States have many experiences for China to learn from. We hope to establish a constructive, friendly and competitive relationship with you. Because we know that having a strong competitor will make us do things better. We welcome fair competition. If you don't make the same mistakes as the United States and Europe, I believe you will win a huge advantage in the competition with OECD countries. At present, we are caught in some huge vested special interests, which has caused fetters to the work we need to carry out next. If you have no constant interest in this area, it is easy for you to start your work and achieve rapid development. " During the meeting, the organizer and the Chinese representatives who came to attend the meeting initially agreed that an energy risk price management forum will be held in China in some form in 2008 to continue in-depth discussions and exchanges; The editorial department of International Petroleum Economy will also continue to play a role in the organization of the conference.