ETRM Blog

I met up with Mike Muse, president of Woodlands Solutions, last week to get a look at the company’s Phoenix ETRM product and catch up on the latest developments with the company. According to Mike, since they laid down the first line of code about a year and half ago, Woodlands has signed 3 customers for Phoenix, with 2 in production and the third, signed in March of this year, due to be in production next month. Given the time and effort to build a new product from the ground-up, this is a fairly remarkable achievement. Mike indicated that all 3 are using the product for managing natural gas marketing activities, with one of the three looking to also bring power into the system.

While the product was clearly designed to initially address the needs of gas marketers, with strong deal management and risk capabilities, Mike indicated they are continuously adding new capabilities and, with the support of their current clients, are broadening the product’s reach very quickly to address all aspects of not only natural gas trading and marketing, but also bringing additional commodities, like the previously mentioned power, into the system.

With the first half of the year behind us now, we can start to get a gauge of how the market for ETRM/CTRM products is looking. A couple of the vendors that I’ve talked with, namely Solarc and Triple Point, are reporting that they’ve set records for license sales during the period.

Solarc, who naturally say they can’t confirm or deny unannounced deals, appears to have built on a solid first quarter by landing a bunch of new clients in second quarter, including (if industry scuttlebutt proves correct) big wins at BP and Standard Bank in London (a company that now joins a list of more than a half dozen banks that use RightAngle).

So, do record sales at Solarc and Triple Point (who I will discuss in additional detail in the next day or two) indicate that the market for ETRM/CTRM products is growing at a record setting pace? In a word, “no”; this is not a case of rising tide lifting all ships. While the market is relatively strong, and certainly compared to 2009, it seems that record sales levels are not the rule throughout the industry. In fact, it is very likely that these companies’ successes are coming at the expense of several of their competitors.

While we at CommodityPoint do think the market for new products will continue to show growth through the year, in total that growth will be somewhat muted when compared to the fast and furious sales that took place prior to the market meltdown in July of 2008.

We are going to be developing our bi-annual CTRM Market Sizing Report soon and once complete, the report will provide a very granular view of the global market for new products, including a look at the market by commodity, industry segment and geography. Look for the new report to be out sometime around the end of the third quarter.

A Commodity Point CommodityAlert
By Patrick Reames

At CommodityPoint, we will on occasion visit with the leaders of the largest suppliers of technology in the commodity trading and risk management (CTRM) space to get their take a broad range of topics, from the current state of the ETRM/CTRM market place to recent developments within their companies.

Today’s conversation is with Brad Anderson, founder, president & CEO of Solarc, Inc.

CommodityPoint: For many ETRM vendors, the last 18 months have been a bit of a mixed bag from the standpoint of new license sales. How has the market been for Solarc during that period?

Brad Anderson: SolArc has seen continued growth in revenue and new customer acquisition over the past 18 months. For that period, 70 percent of our license contracts have been with new customers. The past 18 months have been driven by significant new customer activity. We have been particularly pleased with our success in Europe, the Middle East and Asia (EMEA). Many of our new customers have chosen Solarc to replace products from current vendors. The common theme across geographies is that customers are setting aside systems that no longer served their needs.

SolArc’s experience with prospective customers would suggest that they have become more educated about the system selection process and are interested in identifying a CTRM vendor they can partner with for the next decade. Their approach matches Solarc’s primary business strategy&#151develop long-term partnerships with customers by providing market leading solutions, services and support. Therefore, an educated prospect typically finds SolArc a pleasant alternative to their existing vendor environment.

CommodityPoint: Solarc has long been associated with the crude, crude products, and NGL markets, particularly so for those companies looking for strong physical logistics capabilities. However, at CommodityPoint, we’ve recently noted that Solarc has signed a significant number of new clients that lay outside those traditional markets, including banks and natural gas players. What has been responsible for the shift in market for Solarc?

Mr. Anderson: SolArc believes commodity organizations must manage the underlying physical trades, movements and accounting accurately if they are to have any hope at managing their financial trading position. That is why SolArc is uniquely situated to help large and small organizations alike manage their financial risk position.

The banks are seeing significant opportunity to drive trade P&L leveraging more physical aspects of the commodity markets. And, SolArc provides banks and other financial players the ability to combine physical movements and manage some of the more complex issues around bulk products which help them produce a correct position to effectively trade around financially or physically thereby increasing trade P&L. Banks quickly put SolArc at the top of a short list of vendors with the right capability. We provide capabilities to the banking sector that others simply cannot. Our current banking customers are all in the top tier of financial institutions.

In the natural gas market, we have seen increased activity emanating from the shale plays. We believe there is a synergistic effect of increased activity in shale exploration and field development combined with private equity investing capital in midstream operations. Both of these events are driving organizations to improve the processes around their systems. SolArc is uniquely situated to support these customers with a combined solution that supports producer services, gathering, plant allocations and gas marketing which resides in one technology platform thereby providing better operational visibility, and the lowering of risk and total cost of ownership.

CommodityPoint: Airlines and other transportation centric businesses have also been a large part of Solarc’s success over the last several years, in large part due to the volatility in the fuels markets. With the collapse of energy prices in 2008, that market appears to have cooled significantly. Have you seen any indications that market might be coming back with the recent increase in crude prices?

Yes and no. It is difficult to determine how an absolute price affects the interest in systems across our prospects and customers. We like to think of ourselves as long on volatility. If prices go up or down, that effect causes some in either case to examine their solutions. Analysis would show that some of our Q2 business was a result of price drops in 2009 and some was a result in opportunities seen this year around price increases.

More broadly, our observation is that the commodity market and the economy in general are adapting to the “New Normal” and that the uncertainty and opportunity will continue to drive demand for CTRM solutions in any market segment that has material enterprise exposure to commodities. The broad-based commodity price shock and volatility we experienced in the last couple of years has been seared into the conscious of many boards from transportation to food beverage companies. As result, we are very bullish on these sectors over the long term.

CommodityPoint: Having been in attendance at several of your client meetings over the last couple of years, we’ve noted a particular emphasis by Solarc in the area of new technologies for CTRM, including the potential use of multi-touch technology pioneered by Microsoft. Do you anticipate this, or other, new technologies appearing in your products in the near future?

Mr. Anderson: SolArc’s technology investments are focused on three areas: mobility, collaboration and visualization. We are the only CTRM vendor investing in the next generation technologies. Example investments include, and are not limited to, Microsoft’s surface computing and mobile handhelds and the integration of these into the production suite.

SolArc believes the mobile handheld market is a vital extension of the enterprise environment. Our customer’s lives have been changed by the Blackberry™ and the iphone™. Mobile technologies are here to stay and we will serve our customers on their mobile device of choice.

We are set to release our first mobile application this quarter. Organizations have made significant efforts to facilitate a virtual work environment for employees. Un-tethering the trader or schedule from his office is the clear next step in the evolutionary process. And, the world of trading does not stop while someone is at lunch or at an outside meeting. SolArc will provide the tools and the access to information in the simplest manner possible for collaboration of what is a complex process.

CommodityPoint: We’ve seen a significant number of acquisitions over the last two years by your competition. Are you feeling pressure to make a similar move? Is Solarc contemplating growth through acquisition in near future?

Mr. Anderson: We have seen a number of deals in the market. There is a significant distinction that needs to be made between deals and good deals. We are only interested in doing good deals.

CommodityPoint: One of your competitors, Open Link Financials, filed their S-1 in 2008 anticipating a public stock offering sometime in 2009. However, they eventually withdrew the S-1 and subsequently did a private equity placement with The Carlyle Group. Do you see an opportunity for Solarc or any of your competitors to go public within the next year or two and you believe there is “room” in the public markets for more than one or two pure play ETRM/CTRM technology companies?

Mr. Anderson: We definitely believe that there is room for a couple of public companies in this market. Over the next few years, as companies in this market mature and obtain scale, public market financing should become an option.

CommodityPoint: At CommodityPoint, we believe that even though North America will continue to be a reliable market for CTRM solutions, the real growth in the future will be global, in particular Europe and Asia, but also including South America and Africa. What do you see as the most promising growth markets for Solarc’s products, either regionally or by market segment?

Mr. Anderson: SolArc has made, and will continue to make, significant investment in EMEA. We are beginning to see return on that investment, for example a large African bank recently selected the Solarc solution and in 2009, approximately half of our new customers were EMEA based. We anticipate that a significant percentage of our 2010 business will be outside the United States.

CommodityPoint: From the perspective of Solarc, what is the market looking for, or pointing to most often as their critical need, in a new CTRM system?

Mr. Anderson: The common message from prospective customers is business leaders are no longer willing to accept solutions that do not serve their needs. Out-dated software is becoming more expensive to maintain and provide increasingly less benefit to the business. The market demand has moved from an emphasis on specific feature/function to an emphasis on solutions that provide depth, breadth, and flexibility.

Customers no longer want to hear, “Yes, we do that” from vendors without proof. Customers want to ensure vendors can deliver what they promise. The buyers are more sophisticated and better understand the needs and requirements of their business. Moreover, they are looking for a trusted advisor and a partner who will be there for them post the sale. In other words, they want a vendor that has the expertise to understand their business challenge, clearly demonstrate a solution to their problem and, a commitment to long term project success. Simply seeing a graphical user interface (GUI) image is not enough.

CommodityPoint: What’s your company’s greatest challenge these days?

Mr. Anderson: We believe managing the growth is the largest challenge we face while maintaining our stellar customer delivery record. Satisfied customers matter to SolArc. We have been very successful in increasing the strength and depth of our Solarc team over the past 24 months and we continue to strategically invest in our customers, solutions, and people.

About Brad Anderson

As chief executive officer and one of three original founders in 1991, Brad Anderson has overseen SolArc’s rapid growth from a startup company to its current position as a leading provider of software and services for global commodity trading and risk management. Under his leadership, SolArc has grown to provide mission-critical software and services to more than 70 industry-leading companies around the world.

In 2004, Mr. Anderson oversaw the strategic relocation of the corporate headquarters from Tulsa to Houston. Since then, the company has grown rapidly in Houston and continues to maintain a large development and support staff in Tulsa. SolArc opened its first international office in 2006 and now has offices in Houston, Dallas, Tulsa, London and Singapore. SolArc has twice been named to the Houston Fast 100 and FastTech 50 lists for the fastest growing companies and high-technology firms in Houston by the Houston Business Journal. Mr. Anderson has twice been named Top 50 People in Energy IT by New Energy Economy and Commodities Now.

A strong believer in community involvement, Mr. Anderson personally supports and encourages SolArc employees to participate in a range of charitable activities in the communities where the company works. These include the Carl McCain Foundation, Houston Livestock Show and Rodeo, Toys for Tots campaign, United Way and many other community-based activities around the world. Mr. Anderson has served as an advisory board member for The Street School, a non-profit alternative education program.

Mr. Anderson earned his bachelor’s in electrical engineering at Oklahoma State University. Prior to founding SolArc, Mr. Anderson designed systems at Andersen Consulting.

House and Senate committees worked through the night last night to reconcile their two versions of banking reform legislation and announced this morning that their work was done. Based on the early reports, its not entirely clear what the full impact will be on bank-backed energy trading operations.

According to the Washington Post, here are the key provisions:

- New consumer protection bureau housed in the Federal Reserve with independent funding, an independent leader and near-total autonomy to write and enforce rules.

- Prohibit a banks from investing more than 3 percent of their capital in private equity or hedge funds.

Its clear that the new bill will not force financial firms to completely abandon their energy trading and commodities businesses as was the implication of the original Volker Bill. There will still be alternatives if a bank wishes to engage in energy and commodity trading, either through affiliated businesses or via limited investment in hedge funds.

However, as we see more and more with these mega-bills (like health care legislation), nobody, even those that write the legislation, ultimately know what’s in the bill that they are voting for; evidenced by one by of the bill’s chief architects, Connecticut Senator Chris Dodd, noting, “No one will know until this is actually in place how it works…”. Terrific.

Given my operational background, I’m intrigued by the Gulf of Mexico disaster, because I know that it is an event that should have never occurred, particularly if all proper procedures had been followed. I’ve read and seen all sorts of theories about the cause from various experts and even a few nutjobs (the most interesting being that BP had actually drilled into an alien refinery buried beneath the sea). Setting the nutjobs aside, there are lots of sound ideas about what went wrong; with most of them, including my own early thoughts, centering on a catastrophic BOP failure.

However, after reading several internal BP documents and Transocean’s account of the event, I now think the BOPs did work briefly; that is, they tried to close, but they couldn’t because there was 9 7/8 inch casing blocking them, a pipe size for which they were not configured to handle.

BP had made several changes to the well design in the days leading up to the disaster, including changes to the casing program - making the decision to change from a liner which would be set from about midway down the hole to the bottom, to a long string of pipe running from the bottom of the well all the way to the well head on the ocean floor. Though the new design would be cheaper and faster to set, it did have additional risks in that, because it was made up of two different sizes of pipe, 9 7/8″ and 7″, and because of poor bottom hole conditions that had previously caused them to lose circulation, it was going to increase the risk of not getting a successful cement job. In fact, while contemplating the new design, BP personnel had exchanged a number of emails expressing concern that they may not be able to get the cement to flow up behind the pipe (in the annulus) to a level that it would completely cover the producing formation. Without this coverage, the formation would be exposed, allowing hydrocarbon flow that would be creating building pressure behind the casing. That pressure would then be pushing against the seal at the wellhead where the 9 7/8″ casing was connected, called the wellhead hanger seal assembly. Casing is essentially “hung” in the wellhead, meaning that it locked in the wellhead under tension, and that tension keeps it in place and also applies force that seals the joint where the casing and the wellhead meet.

I think what ultimately happened with this well is that the cement job failed to fully cover the hydrocarbon producing formation, and may have even failed to adequately set-up at the bottom of the hole because the decision was made to hang the casing off without allowing sufficient time for the cement to cure. According to Transocean documents, the the nitrogen foamed cement that BP used (because of the difficult downhole conditions) may have needed up to 48 hours to set. Records from the rig indicate that BP allowed only 18 hours before they set the casing in the wellhead hanger - meaning after they pulled tension on the casing and locked it in the wellhead, it may have broken free from the cement down hole, relieving some or all of the tension that had been applied. Adding to the problem, BP never ran a cement bond log which would have told them that the cement job was bad. They did have contingency plans to run the log if there were indications the cement job wasn’t successful, but because the cement job appeared to have proceeded pretty much as they planned it, they made the assumption that it had worked.

Once BP ordered the crew to start circulating the mud out of the hole, the seawater that was displacing the mud essentially lightened the casing, allowing it to float and start to move up hole (think of it as a very long bottle floating in a sea of mud - if the bottle if full of the same mud, it will sink. But, if you remove some of the heavy mud and replace it with lighter water, the bottle will start to float). Once the casing started to “float”, it released from the wellhead hanger, breaking the seal and allowing the hydrocarbons from the exposed formation to start flowing out of the well. In fact, I think the casing may have broken loose from the hanger with enough force that it was propelled up into the BOP, blocking or jamming the rams that could have shut in the well. At this point, the last line of defense would have been the annual BOP’s that set atop the BOP stack. However, for some reason yet unknown, they also failed to close, either due to mechanical failure or just lack of time. If the casing had suddenly released from the wellhead hanger, the flow up the riser pipe to the rig would have been almost explosive, allowing the rig crew little time to react.

If my theory is correct, it could be very difficult to kill this well. In order to kill a blowout via a relief well as BP is currently working toward, you have to ensure that you intersect the blown out well at the right point with the relief well. If you are too low, below the producing formation, you are not going to be successful. I believe that ideally, BP wants to intersect right near the top of the producing formation, allowing them to redirect the pressure up the new well and plug the old well from the top; or if its not possible to get into the old well due to trash or collapsed pipe, the can pump (under high pressure) large volumes of mud into the well and hope to overcome the formation pressure. However, if the well is flowing behind the casing, its going to be more difficult. If thats the case, I’m unclear how they would do it, but it would no doubt require massive volumes of mud pumped under high pumped pressure in order to kill this well.

BP is currently drilling two relief wells. I originally thought the second well a contingency - if something went wrong with the first well, they would still have a chance to kill the well as soon as possible with the second relief well. However, it now appears to me that BP is also concerned that the well could be flowing behind the casing and intend the other relief well to intersect the well bore up hole, ensuring that they will have a chance to kill the well regardless of whether the flow is coming up the casing from the bottom of the well, or from behind the casing, up hole from the bottom of the well.

We won’t really know what happened until the blowout is controlled and BP can re-enter the well to determine the cause. I do hope my theory is wrong because if I’m right, this could be a very difficult blowout to deal with.

Allegro issued a press release this week announcing that Repower (formerly known as Räetia Energie), an international energy company based in Switzerland, had purchased and successfully implemented Allegro 8 to manage its emissions trading activities. Further, the company also announced that they had extended their reach with Repower and will be implementing their system to provide coverage to Repower’s power and natural gas trading business, and in multiple offices across Europe.

As noted in the press release, “Repower is an international energy company based in Switzerland with operations throughout Italy, Germany, and Central and Eastern Europe. The company operates along the entire power lifecycle, from trading, production, transmission and distribution to sales. With power plants in Switzerland, Italy and Germany, Repower also trades electricity throughout Europe and supplies energy to thousands of customers, both directly and through electricity resellers.”

Though no official announcement has been made yet, Alan Gunn, Solarc’s VP of Product Marketing has confirmed that the company has recently closed a deal with Lansing Trade Group in Overlandpark KS for Solarc’s RightAngle product. Lansing will use RightAngle to manage the business of their newly established NGL trading group.

Additionally, Mr. Gunn tells me there are several other new deals they have recently completed that have not yet been announced.

Hollywood hotshot director, James Cameron, is PO’d. And why wouldn’t he be, after all he did volunteer to step in and solve the Deepwater Horizon blowout, but BP doesn’t seem to be taking him seriously. What the heck is the matter with BP, don’t they realize this is the guy that pioneered deep water drilling with his movie “The Abyss”. I had the opportunity to see that movie again this weekend on TV and I have to tell you, it was brilliant! As shown in the movie, instead of using a floating drilling platform like the Deepwater Horizon, Cameron’s big idea is to create a drilling submarine, in which you encase the drilling crew in a bunch of metal spheres thousands of feet underwater and resting on the sea floor. What a terrific idea.

What BP doesn’t seem to understand about the self proclaimed “King of the World” is that his brilliance is so great that even though he admits he knows nothing about how to cap a blowout, his underwater filming skills will somehow undoubtedly translate into a solution for what has proven, so far, to be an intractable problem for the some of the most experienced and skilled deep water drilling engineers in the world. His understandable frustration with BP having declined the use of his giant intellect lead him to say, “Over the last few weeks I’ve watched as we all have with growing sort of horror and heartache watching what’s happening in the Gulf and thinking, those morons don’t know what they’re doing.” Wow.

I’m actually surprised that BP hasn’t taken him up on his offer. After all, a giant engineering problem could probably use a giant tool…like James Cameron.

A CommodityPoint CommodityAlert
By Gary M. Vasey, Ph.D.; Managing Director, Europe and AsiaPac

The announcement by Triple Point this week that Su-Raj Diamonds had selected it’s Commodity Trading and Risk Management (CTRM) software to manage its Precious Metals sourcing and operations is the latest in a series of announcements by the CTRM vendor community of licensing deals in what might be loosely termed the “end user” market. The “end user” market segment comprises firms that utilize commodities in their operations and wish to reduce their exposure to price volatility. It includes companies in the food and beverage, agricultural, transportation, and manufacturing areas, and it is rapidly growing in importance as a source of new clients and revenues for CTRM software vendors.

A Growing Market?
The “end user” market segment has, in fact, historically sourced a number of deals each year. SolArc, for example, has gained a solid foothold as a solution of choice among airlines managing their aircraft fueling operations. But recently, the licensing activity in this segment appears to have surged as Triple Point has signed companies in a number of industries including the explosives business and counts Unilever, North China Shipping, ST Shipping Nidera, General Mills, IFFCO, Campbell Soup Company, and Incitec Pivot amongst its installed base. Recently, Abacus Solutions announced its selection by Walmart Texas Retail Energy which manages the energy supply for Walmart and Sam’s Club stores and distribution centers including over 300 stores in Texas and over 400 stores in the United Kingdom, and vendors like Eka and Brady, amongst others, have also had success in the “end user” segment. SunGard Kiodex and Aspect Enterprise have also had successes in the segment with their Software as a Service (SaaS) delivery model.

To some extent, the increasing activity in the “end user” market segment is the natural consequence of how commodity markets have, and continue to, develop. Commodity prices have become increasingly more volatile while access to commodity trading has become easier. In fact, ease of access to commodity trading via very transparent and quite liquid Exchange-traded instruments may be one of the reasons as to why commodity prices are now more volatile. It is no real surprise that companies exposed to commodity price volatility in agricultural feed stocks, fuels, chemicals, metals and elsewhere should start seeking to manage that price volatility and exposure. In doing so, they naturally find that they require a CTRM solution to track and account for their trading activities and to insure compliance with various regulations and standards such as hedge effectiveness testing, for example. This trend has naturally been a boon for CTRM software vendors.

Helping Change Deployment Models?
In parallel with the uptick in “end user” CTRM software procurements, non-traditional CTRM deployment models such as SaaS and hosted have increased in popularity too. Again, these two trends appear to be related as a company seeking to manage its commodity supply side will often naturally gravitate to a SaaS or hosted solution to minimize its upfront software and IT investment while obtaining a good trading and risk platform for its activities. As the financial crisis continues to bite into budgets, SaaS and hosted CTRM solutions often appear to provide a better value solution.

CTRM Market Maturity
CommodityPoint’s model of CTRM adoption discussed in detail in Chapter 2 of our book, “Trends in Energy Trading, Transaction and Risk Management Software - A Primer”>1 suggests that historically periodic dislocation events such as the Merchant collapse a few years ago help shift market requirements and therefore the pace of licensing deals. Since the Merchant collapse however, we have observed an expansion of the market across commodities (ETRM to CTRM), the entry of hedge and other funds and banks (despite the temporary reversal of this trend as investors pulled funds and commodity prices collapsed, the funds are back) and now a rapid expansion of the market into the end user segment.

Potential market dislocators such as the collapse in commodity prices last year and the impact of the financial crisis appear to have had more limited negative impact on market growth indicating to us that the CTRM software category has long since moved from the early majority phase and is now mainstream. The, at times, rapid development of commodity markets has allowed broader and greater participation across many commodities for a broader group of participants beyond the producers and marketers of those commodities. At the same time, technical developments such as SOA, for example, have allowed vendors to respond to the twists and turns in market development faster as well as access via hosted or SaaS delivery, much more of the potential market.

At this point, it would seem that CTRM has finally come of age.

A CommodityPoint CommodityAlert
Patrick Reames - Managing Director, The Americas

The Deepwater Horizon disaster is clearly a human tragedy and ecological catastrophe. The impacts of the event are being felt along the fishing grounds of the Gulf Coast, in the board rooms of the various companies that drill for offshore oil and gas, in the halls of government in Washington, D.C. and of course, and most deeply, in the homes of the families who lost loved ones in the tragedy.

As with every disaster, there is vigorous finger pointing by all parties involved, each attempting to apportion and/or deflect blame. BP, Transocean, Cameron (the manufacturer of the blowout preventer), Halliburton, the Minerals Management Service (MMS), the Coast Guard, and even President Obama will be forced to assume some level of responsibility for at least some portion of this unfolding event, from the initial blow out, to the continuing and unabated release of crude into the Gulf waters, and ultimately the clean-up and remediation efforts.

Based upon the information that has been released to date, it would appear that this disaster was entirely avoidable. BP and Transocean have both indicated that anomalous pressure test data indicated that the cement job performed by Halliburton had not been successful, not an entirely uncommon occurrence. Despite this information, it now appears that the BP company representative made the decision, over objections by the rig crew, to move ahead with displacing the drilling mud, the first line of defense against a blowout, with seawater in preparation for temporarily plugging and abandoning the well. As the mud was circulated out and replaced by seawater, the hydrostatic pressure was reduced at the bottom of the well, allowing gas and fluids enter around the faulty down hole cement and rise in the well bore, a situation known as a “kick.” After the kick was noted, whatever actions the crew took (actions which are still unclear at this point) to bring the well back under control were ineffective. Once the gas and fluids in the well neared the surface, it would have been too late to do anything other than to close the blowout preventer, or BOP&#151the last line of defense. Tragically, the BOP failed to shut-in the well despite multiple and redundant safety systems. There is evidence that indicates that the emergency hydraulics that would have provided the back-up energy to close the rams (in the event of an otherwise complete hydraulic failure) had been disabled for some inexplicable reason. Additionally, BP has reported that records indicate that the BOP was not even properly configured with the right type of rams that could have sealed around the drill pipe and prevented fluid from escaping from the annulus, the space between the well casing and drill pipe. If the pipe rams could have been closed around the drill pipe, the flow could have been contained to that drill pipe and the blow out could have most likely been controlled; and the Deepwater Horizon, and eleven of its crew, would not have been lost.

There is little doubt that this disaster was the result of a series of human errors, errors that most likely began occurring prior to the well being spudded. If the right decisions were made and the proper actions taken prior to and during the blowout, the events of that day would have gone relatively un-noticed and the well would have been counted as just another successful effort in the Gulf, just like the more than a hundred other deepwater wells that are drilled in the region every year. Unfortunately, it didn’t happen that way and now there are cries for something, anything, to be done to prevent this type of event from ever occurring again. Clearly, the MMS must exercise improved oversight of offshore operations and new regulations may be necessary if it’s found that industry standard (and hereto now proven) procedures were either not effective or were not properly followed. Additionally, after a complete and thorough investigation of the accident, every avenue of legal recourse must be pursued against those individuals or companies that were ultimately responsible.

Unfortunately, every industrial process has inherent risks, though oil and gas exploration is certainly on the high end of the scale of in terms of potential impacts should something go wrong. However, wells are drilled and completed everyday and without incident in the waters of the Gulf Mexico and across wide swaths of the continental United States and Alaska. These drilling activities contribute to meeting the needs of an energy hungry country and reduce our dependence on foreign sources of oil. Of the total U.S. production of more than five million barrels a day, about a third comes from the waters of the Gulf of Mexico, California and Alaska. These offshore reserves are vital to the United State’s energy security and, despite this tragic accident, must continue to be exploited until economically viable alternative sources of energy are perfected and available.

BP is providing a live video feed of the flow from the site of the Deepwater Horizon disaster site. The feed, here, shows the gas and crude flowing from the end of the damaged riser pipe, which I believe is about 12 inches in diameter. The company has also created a dedicated section on their website here in which you can see a breakdown on the various methods they are attempting to employ in order to stem the flow from the damaged well. A huge disaster, but nonetheless interesting to see what they are coming up with to try to solve a very complex problem.

Allegro announced yesterday that Genesis Energy, L.P. has licensed Allegro 8 to manage their crude oil gathering and refined products operations. According to the press release, Genesis will utilize the system for crude purchasing, physical logistics, refiner services, storage and hedging activities for their wide ranging, crude-centric business activities along the Gulf Coast.

The ETRMCommunity site was down a couple of days because some &%$#& decided to spam attack us. It took the server down and the whole thing had to be rebuilt.

But we’re back now.

Speaking of attacks, this is what happens when mother nature decides to attack Oklahoma City with frozen baseballs…stay with it until about 1:45, that’s when the swimming pool erupts like an Icelandic volcano.

A CommodityPoint CommodityAlert

By: Gary Vasey and Patrick Reames

Commodity trading, transaction and risk management, as a practice, is complex, very complex and for a variety of reasons. Traders in this industry can, and many do, transact in multiple commodities, multiple markets, multiple instruments, multiple assets, multiple currencies, and utilize multiple transportation methods; making their buying and selling decisions by constantly tracking and analyzing price trends, price correlations, supply/demand imbalances, physical system constraints, weather forecasts, and a plethora of other factors, both internal and external to their company. Even the most “simple” commodity trading activities (such as buying/selling a single commodity in a specific market or region) usually involve complex deal structures and specific and highly detailed logistical requirements.

CTRM Software

As a result of all of that complexity, the systems that are utilized to capture, track, analyze and account for trading activities, the CTRM software systems, tend to be built to be highly configurable. They have to be built that way or else a commercially packaged software model couldn’t work in this space, as the size of this software market will never be large enough to justify the investment in developing a true “one size fits all”
shrink-wrapped software solution. In fact, the CTRM software market simply isn’t a classical commercial software market at all. Any software package in the CTRM space, at best, may meet 80% of the requirements after configuration (and more commonly less than 70%) with the remaining requirements being met via other packages, home grown software, the ubiquitous Excel spreadsheets or manual process. That’s why integration is such a pervasive (and often massive) issue for the trading and risk departments of almost every trading firm on the planet.

The successful larger CTRM vendors have found ways to develop broadly functional software that is highly configurable usually using a modular approach to deliver specific functionality for specific areas - either for a particular commodity, market, geography or function. Their success in developing these modular solutions is evidenced by at least two vendors boasting of greater than $100m annual revenues and several more are between $30 and $100million; but, there are more than 80 vendors with multiple products still serving this market, with many of those serving a small geographic or functional niche and doing so profitably.

However, given that the energy trading industry (not even the larger commodity trading industry), is often quoted as having a turnover of hundreds of billions, if not trillions of dollars a year, the fact that the largest of these CTRM solutions vendors generates around $200 million/year should speak to the difficulty of creating a singular solution that can meet the needs of that broadly defined market place.

Underestimating Complexity

Periodically, CommodityPoint receives inquires from Venture Capital or Private Equity firms looking at this software class and thinking about making an investment in one of the vendors. In most cases, they tend to view CTRM as a homogenous software class just like ERP or CRM and even will sometimes argue our views regarding its complexity. You see at a certain level it is simply deal capture, position keeping, risk management, back office and logistics, right? In other asset classes this is all fairly standard and mundane stuff so how can it possibly be so complex and fragmented as we say it is in commodities? The more they chose to dig and learn, the more they begin to see and understand the reality - it really is that complex and requires a lot of expertise to understand.

Often, potential buyers of software have the same problem. “It’s just vanilla stuff we do,” they say. “Surely the software can do that?” It might, but it has to do all the other things that all the other trading firms do too in order to have a market large enough to sustain it; but, more importantly, what is normal stuff at one firm often isn’t at all usual at another. In part, it’s the industry lexicon that’s at fault. “Price risk management” is a common term and it means broadly the same thing across the industry; but, at the detailed level of practice, procedures and so on, it can prove to hide a number of remarkable differences and the same goes with many of the other terms we all use so loosely.

Models Versus Tools

After more than a combined 30 plus-years in the industry being involved in nothing other than ETRM and CTRM software, we can tell you categorically that this is a complex software category that defies the use of simple models to classify it, or the products or vendors that serve it. The use of such models does a disservice to everyone in the industry by dumbing it down to a nonsense level and it reveals the promoters of such models to be naive about CTRM software.

Because of this, CommodityPoint has always adopted a different approach and that is to provide tools to help prospective buyers navigate the complexity and risks successfully, to gauge the size and maturity of the industry and to follow market perceptions around vendors and products that reveal much about what is going on at a basic and detailed level. Our aim is not to dumb down the complexity but to acknowledge that complexity and assist those that operate in this industry understand and navigate through it, with the ultimate goal of reducing costs, risks and timescales for those seeking a solution that best fits their particular piece of the market.

Posted on Ventyx’s website…

Zurich, Switzerland, May 5, 2010 – ABB, the global power and automation technology group, has agreed to acquire Ventyx for more than $1 billion from Vista Equity Partners to become a leading provider of software solutions for managing energy networks…ABB will combine its related network management business within the Power Systems division, with Ventyx to form a single unit for energy management software solutions. By providing ABB with broader access to the utility enterprise management market, the acquisition triples the energy management software market available to ABB.

According to the press release, Ventyx’s revenues in 2009 were $250 million. Given that number, the purchase price seems somewhat high. However, given ABB generation focus, perhaps the company sees solid leverage with their products and the emerging smart grid markets.

From a CTRM perspective, this acquisition does raise questions as to what ABB will do with the Ventyx’s ETRM products, particularly what Ventyx now calls TRM, previously known as Monaco. Rumors have been floating around in recent months that Ventyx had essentially stopped selling the product and was moving away from ETRM to focus exclusively on utility operations, power distribution, and related markets. Its yet to be seen if ABB will try to reinvigorate that product and become more competitive in the wider ETRM space. Its probably unlikely that ABB would choose to go head to head with the global multi-commodity CTRM players, as the TRM product is essentially limited to gas and power functionality. Still the TRM/Monaco product has been around for years and is a functionally mature product that, with updating, could compete effectively within the wholesale gas and power markets.

We’ll keep watching this one…

We’ve just updated the CTRM Vendor and Product Sourcebook and posted it for download. This latest version includes the following updates:

- Updated description for Open Link’s Endur product
- Updated description and functional matrix for Ensyte Energy Software’s Gastar and Prism products
- New vendor/product listing for Woodland Solutions’ Phoenix ETRM product

You can download this latest version here.

Solarc just issued the press release that Alan Gunn, Solarc managing director, alluded to in my blog post below.

You can find the announcement here.

My recent blog posts concerning the use of mobile technology have prompted a number of conversations in recent days, including a couple with ETRM/CTRM vendors. One of the more interesting conversations was with Alan Gunn, Managing Director at Solarc, who, even though somewhat guarded about what he could tell, did describe a interesting take on the use of mobile devices in trading, and potentially even provided some insights into what may be next for Solarc.

According to Mr. Gunn, Solarc has for sometime been thinking about what he described as the best and highest use of mobile communications for energy trading – essentially moving past what most people think of when considering mobile devices in ETRM, that being deal execution, and into a true interchange of data and information between the mobile device and the enterprise scale ETRM system. As Mr. Gunn points out, in this space, it’s not just about a trader playing golf and filling an order on his iPhone, it’s about that trader, or scheduler, or risk manager using the device to exchange, in real-time or as near as possible, the information an individual needs to make the right decisions prior to taking an action, whether that’s executing a trade as a trader, confirming a nom for scheduler, or allowing an over the limit transaction for a risk controller. As he stressed, this data exchange has to occur in a push mode to the device and has got to be an intelligent, two way “conversation”, meaning the right (and relevant) data is pushed to each individual user and the user then makes the appropriate action and executes that action back to the enterprise system through the device.

Mr. Gunn also noted that he feels it’s important to be agnostic to the mobile device, whether that device is the iPhone, BlackBerry, iPad or whatever. As he points out, while the iPhone is popular in this space, devices such the BlackBerry is probably equally popular if not more so in this market. Additionally the arrival of the iPad and other tablet type devices may create additional communication channels for use by trading floor personnel. He notes that for a mobile strategy to work, the ETRM technology vendors must be willing and able to support the various devices that are, or will be, used in this market.

So, what’s driving the interest in this topic on the part of Mr. Gunn and Solarc? He wouldn’t say explicitly; however, he did intimate that we could be seeing an announcement very soon from Solarc that would explain all…

We’ll keep you posted if that happens.

I caught up with Michael Schwartz, chief marketing officer at Triple Point Technology, yesterday to discuss his and his company’s take on the current CTRM market - a take that is decidedly positive.

Triple Point, a company that has been aggressively expanding their capabilities and market reach via acquisition in the last couple of years, has been very successful in selling outside the traditional energy markets and into those trading shops that are not necessarily energy-centric. That’s not to say that they are not closing deals in energy, they clearly are, but they are also increasingly finding new customers in metals and ags. Additionally, according to Mr. Schwartz, they are seeing increased activity in Asia, where the company closed “3 or 4″ new customers in the first quarter of this year, in addition to another “6 or 7″ new customers in Europe and North America. While he said he couldn’t name names at this time, he did say that their new customers in North America included a large Oklahoma based energy company and “very large” consumer foods company.

He indicated that in terms of revenues, Triple Point is up about 60% in the first quarter of 2010 vs. the same period in 2009. While clearly some of the new revenues can be attributed to their recent acquisitions, they are also continuing to sell new Commodity XL licenses into their core markets. Based on these early 2010 results, and a sales pipeline that he describes as “very strong”, he is anticipating that this full year will be a record setting one for revenues…again.

ZE PowerGroup Inc. (ZE) announced a significant contribution to the University of Houston’s ETRM program, run out of the college’s Bauer School of Business. The company is providing the ZEMA Analyzer product for the course, giving students an introduction to one of the fast growing application areas in ETRM, data management and analytics, via what has quickly become one of, if not the leading, products in that space. Dr. Zak El-Ramly, ZE’s President and CEO, has also committed his time to the effort, serving a guest lecturer at the school last weekend.

As you’ll recall, the program is designed to acquaint students with the technologies and systems utilized in energy trading and risk management, and ZE’s donation and participation, in addition to Data Management Systems donation of the GasPro system, has provided the school with a solid base of real world ETRM technologies.

I was honored to be a guest lecturer at the school a couple of weeks ago and I was thoroughly impressed with not only the progress that the school has made in putting the program together, but was even more impressed with the quality of the students. They were all actively engaged in the discussion and based upon the questions they asked, were not only well versed with many of the technologies of ETRM, but also had a solid understanding of the many of the business issues inherent in energy trading.

In speaking with Ed Bell, who not only spearheaded the development of the program, but is also the lead lecturer for the course, he indicated that this first iteration of the course has been a great success. In fact, when the class kicked-off in January, all the seats were taken and there was a waiting list of students hoping to get in. Mr. Bell told me that they will be adding additional sessions in the coming semester to ensure they have adequate space for all students wanting to get involved.

CommodityPoint is proud to be a supporter of this program and we congratulate Ed and the University of Houston on their success in putting it together. The school and all those involved have developed a world class educational program which is preparing students to enter into a highly technical field and turn, providing a valuable pool of resources for this industry.