Risk Management no longer does what it says on the tin

There has been a trend recently that suggests Risk Management no longer does what it says on the tin; so much so that nowadays it appears risk management and optimisation drive business decisions even less than accounting, as identified in my earlier comment (http://energyandcommoditiesnews.blogspot.com/2009/09/without-risk-taking-there-is-no-banking.html).

Over the last year in particular, Risk Managers have become more like Risk Controllers (to bash the trader) and Risk Reporters (more for regulatory reasons rather than business reasons). The days that good risk management was a tool to help the business make positive contributions rather than just limit innovation may now be part of history. Good risk analysis, information and advice can improve performance, help traders use their risk capital more efficiently and highlight scenarios that their position is exposed to; it is also reasonable to expect that new profit opportunities will be identified as a consequence.

Risk Managers, whether they are the trader as the first line of risk management, an independent group or both, need to spend more time looking forward at how risk can impact and change performance rather than looking back.

The timeliness of this information is also important and more often than not it is almost a day behind, by the time it has been usefully interpreted! Providing the data for analysis and reporting the results of standard metrics can often be outsourced and provided in a timely manner for interpretation. This requires a different skill set to the real expertise of understanding what risk can do and how to utilise it in order to benefit the business.

Let’s look forward to the days when highly skilled and experienced Risk Managers start thinking about managing risk again, rather than spending their time preparing cushions of reports at ridiculous levels of confidence, precision and complexity.

OpenLink closes Petrobas

Petrobas, the Brazilian energy giant, announced that they will use OpenLink’s Endur platform as well as the cMotion suite for their refined products business.

Reference:

Petrobras Selects OpenLink's Endur for its Crude Oil and Refined Products Business

| Bobsguide

3 becomes 1: welcome to the US Power grid

Many of you have probably been reading about the benefits of a High-Temperature Superconductor (HTS) in the media recently. Apparently it was announced today by the American Superconductor Corporation (AMSC) that they have been chosen for the Tres Amigas Project which will connect all three major electricity grids in the US as well as provide pipe to bring in new non-dispatchable renewables onto the newly formed national grid.

Apparently scheduled for completion in 2014, it sounds like a pretty exciting prospect that should bring greater reliability and competition to the grid as well as provide a more effective environment for renewable sources to sell intermittent power into. Looking at AMSC’s chart, however, it appears this news was not a surprise as there was effectively no movement in the stock price today although maybe we’ll see a jump tomorrow as the announcement was late in the day.

References:

Superconductor Electricity Pipelines to be Adopted for America's First Renewable Energy Market Hub | Yahoo Finance

American Superconductor to Provide Hardware for Tres Amigas Project | Green Energy Reporter

The Tres Amigas Project: America's Renewable Energy Hub? | Fast Company

An interesting investment or a foolish gamble

If you like to try your luck at the casinos in Vegas and also secretly hope to see a major green revolution take place in the near term you can take a position on both today. How? Buy ZENN stock (ZNNMF). ZENN, for those of you who don’t know, has been in the business of making zero-emissions vehicles but recently decided to change tact and now is focusing exclusively on an electric drive train that they plan on selling to Ford, Toyota and other major manufacturers. The ace up their sleeve? Their intimate relationship with EEStor a company that few know well but who is making some fairly audacious claims in the ultra-capacitor marketplace.

An “ultra-capacitor” is similar to battery technology in that it stores energy but rather than using a chemical process it stores electricity on it’s surface. A capacitor (even an ultra-capacitor) is typically characterised as possessing very high power-density (aka, power can be moved into and deployed out of very quickly) but very low energy-density (aka, stored energy on a per mass or per volume basis is very low). See the chart below to see this historic relationship with other technologies. It’s true that ultra capacitors are gaining greater energy density through nano-technologies but what EEStor is claiming would be a huge jump from anything else in the market. If believed, the EEStor technology would not only revolutionise motive transport but also the whole power industry (peak shaving, reduced spinning reserve, more economic and new power switching and quality devices, etc.)

EEStor’s ownership structure is not completely clear but it appears the two biggest holders are Kleiner Perkins (20%) and ZENN (12%). Even without the ownership stake it appears ZENN’s fate is highly correlated with EEStor’s. Admittedly I’d prefer to take the gamble directly with EEStor but as that option isn’t available to the public I think I’ll take a punt on ZENN. What do you think? Smart bet? Interesting gamble? Easy way to lose money?

Here’s a few links to help you decide:

[a few over-enthusiastic investors]  [news on ZENN’s April run-up on prices]

[more news on ZENN]  [more news on EEStor]

Gary Gensler - CFTC gets some teeth

Looks like the CFTC, for long seen as a country cousin of the SEC, may finally be getting some teeth with Gary Gensler...

Go to Story

Debating Peak Oil

The Oil Drum blog today posted a rebuttal to both a NYTimes article and Scientific American article that it feels painted a far too optimistic picture about our proximity to “peak oil”, in particular pointing to physical possibilities that have a questionable economic reality. It’s an interesting debate which you can find at:

Peak Oil Not a Problem According to NY Times; Scientific American - Our Response on the Financial Aspects

I will warn, however, that this blog tends to be a bit of an echo chamber of “oil peakers” but it’s always worth reading a different point of view if you’re used to the more tame views available in mainstream press.

Without risk-taking there is no banking industry

Bob Diamond, the chief executive of Barclays Capital, said recently in a radio interview that without risk-taking there is no banking industry (link to radio interview).

This is correct, though may be a concern for those who believe the traders who take the risk are to blame for the banking crisis. Of course, traders should be rewarded for successfully making money from the active use of risk though the real question is whether the risks are properly understood and therefore whether the returns are sufficient and rewards appropriate.

Actually, what this highlights is the need to properly measure, manage and report the risk being utilised in a relevant way, perhaps pointing the finger at the accounting and audit practices; do they expose the risk sufficiently to help its management or just to meet fiduciary and regulatory requirements?

Another outstanding question, emanating from the same underlying issue, is why did the Lehman Bros' published and audited accounts not give a proper warning of their impending and sudden failure; surely it wasn’t due to new trades after the accounts were published but a consequence of risk in the books not being recognised.

A further side effect of the existing accounting policies is that they potentially put incentives in the wrong place, particularly those for companies that actively manage the market risk of their own assets. For example, trading decisions driven primarily by hedge accounting policies, rather than for risk management, could result in the diversion of P&L from assets to trading groups while leaving some unmanaged risk with the asset. Interestingly, recent results published by a leading utility with an active trading group show huge trading P&L and weak asset results; leaving the investment analysts questioning the organisational set up.

The common factor is that accountants and auditors are really only reporting a snapshot of the financial state rather than the real risk in the business that can impact future performance; this could be an underlying reason for the recent problems. These accounting driven decisions are also the reason many organisations are structured in such a way that helps to satisfy accounting standards rather than to best manage the asset's profitability and risk. This is not a matter of MTM or accrual accounting but how to represent the state of the business risk.

In the rush to blame the traders and their bonuses, the regulators and the industry commentators appear to have completely missed that the current accounting rules are a significant contributor to the crisis we have seen in the markets!