SUCCESSFUL IMPLEMENTATION OF ENERGY PRICE RISK MANAGEMENT

Abstract

Forces are gathering which require companies with significant exposure to financial risks including foreign exchange, interest rates and commodity prices such as energy to actively manage these risks. The paper describes this growing need for risk management and the characteristics of a successful risk management program using oil price by way of example, however, the concepts apply to financial risks generally. These attributes include understanding the nature of specific financial risks and risk quantification; active support and involvement by senior management including the board of directors; sound formulation of policy (including program objectives), procedures and controls; performance monitoring and reporting; compliance monitoring and disclosure of practices to shareholders and the investment community. Energy price risk management programs can be effectively implemented in quite small organisations without the need for significant increases in human resources. Programs rely on financial hedging transactions (often referred to as derivatives) to modify exposure to risk. Successful programs are more likely to be judged on factors like clarity of program objectives and program status, compliance with policy and procedures and avoidance of surprise outcomes rather than simply stand alone profitability of hedging transactions.