Fuel hedging as oil stays ‘lower for longer’

The last decade has seen extreme volatility with unprecedented price swings. Having been at $115 per barrel in June 2014, oil slipped below $30 at one point in less than two years, driven lower by overproduction, harking back to the kind of volatility we saw during the global financial crisis of 2008-09. 

While the latter was down to a dip in demand, and the former is being caused by oversupply sentiment, volatility makes hedging crucial for fuel consuming companies. Two experts from financial consulting firm Volguard – Simo Mohamed Dafir and Vishu N. Gajjala – have made a brilliant attempt to tackle subject via their book Fuel Hedging and Risk Management published under the current batch of the Wiley Finance series.

Acknowledging the turbulent times faced by fuel derivative providers, Dafir and Gajjala, set about offering their own hedging solutions to those hoping to manage fuel price volatility, by putting forward strategies from origination to execution of a hedge within confines of a holistic risk management structure.

This book, of just under 300 pages split by 10 detailed chapters, begins with a basic overview of inherent market risks and the strategic nature of the oil and gas business, before moving on to tackling fuel derivative instruments.

Subsequent strategic dialogue moves on to scenario analysis, derivative term sheets and market curves for those starting out on their careers. Concurrently, advanced practitioners in the fuel derivatives market will appreciate Dafir and Gajjala’s treatment of price, volatility and exposure optimisation models, as well as credit risk and associated Company Voluntary Arrangement [or “CVA”] cost examinations.

Key bits of the text are accompanied by detailed case studies and examples treating real-life trading scenarios. The Oilholic feels such a format helps readers appreciate the tone and complexity of risk management of derivatives far better than a bland linear treatment of the subject. One find’s the narrative is just as useful for established players, as well as newcomers to the fuel hedging world.

However, this blogger would attach a caveat – for those contemplating a career in the fuel hedging business – Dafir and Gajjala’s work is not a starter kit, rather a very solid, splendid second title that serves as a constructive follow-up to an initial baptism to the derivatives world. 

The Oilholic would be happy to recommend this book to commodity traders seeking a refresher course, quantitative professionals in the fuels space, risk managers and corporate treasurers at transportation firms, including airlines and shipping businesses whose needs and concerns it directly addresses. It could also be of immense help to those looking to develop a corporate framework for financial risk analysis.

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© Gaurav Sharma 2016. Photo: Front Cover – Fuel Hedging and Risk Management © Wiley Publishers, 2016

Jargon free volume on upstream fiscal design

Takings from upstream oil and gas projects, whether they are small scale or big ticket ones, ultimately determine their profitability – the stuff that shareholders, venture sponsors and governments alike have a keen interest in.

It is why oil and gas companies, both state or privately held, deploy an army of petroleum economists to offer conjecture or calculated projections on what the final fiscal share of such ventures might be.

In this complex arena, both budding petroleum economists and established ones could do with all the help they can get. Industry veterans Ken Kasriel and David Wood’s book Upstream Petroleum: Fiscal and Valuation Modeling in Excel (published by Wiley Finance) goes a long way towards doing just that, and quite comprehensively too.

In a volume of 370 pages, with eight detailed chapters split into sequential sub-sections, the authors offer one of the most detailed subjective discussions and guidance on fiscal modeling that is available on the wider market at the moment in the Oilholic's opinion.

The treatment of fiscal systems, understanding and ultimately tackling the complexities involved is solid, predicated on their own views and experience of understanding the tangible value of upstream projects before, during and when they ultimately come onstream, and what the takings would be.

Kasriel and Wood have also included five appendices and a CD-ROM (in the hardcover version) to take the educational experience further, and accompanying the main text of the title are over 400 pages of supplementary PDF files and some 120-plus Excel files, with an introduction to risk modeling.

What is particularly impressive is the authors’ painstaking effort in cutting through industry jargon, putting across their pointers in plain English for both entry-level professionals and experienced practitioners. Furthermore, the sequential format of the book makes it real easy for the latter lot to jump in to a section for quick reference or for a subject specific refresher. 

Generic treatment of taxation, royalties, bonuses, depreciation, profit sharing mechanics, incentives, ringfencing, and much more, including decommissioning finance, are all there and should withstand the passage of time as both authors have called their combined 48 years of experience in the industry into play, to conjure up a reasonably timeless discussion on various issues. 

Above everything else, Kasriel and Wood’s conversational style makes this book a very purposeful, handy guide on a subject that is vast. The Oilholic is happy to recommend it to fellow analysts, (aspiring, new and established) petroleum economists, policymakers, industry professionals, corporate sponsors and oil and gas project finance executives.

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© Gaurav Sharma 2015. © Photo: Front Cover – Upstream Petroleum: Fiscal and Valuation Modeling in  Excel © Wiley Publishers, March, 2015.