Several major downstream companies have recently embarked upon large-scale digital transformations with anticipated capital spend tallying in the tens to hundreds of millions of dollars. While these initiatives promise significant returns, not all small to midsize refining organizations are prepared to double down on digital and make investments of this magnitude.
On the other hand, there are numerous “no regrets” moves that can be made to start down a path to increased effectiveness and efficiency in key commercial and logistics process areas. Relatively low-risk steps such as these will also lay a foundation in core capability and technology areas that can be leveraged when the time is right to make some bigger, bolder bets.
The following five examples of quick-hit process and technology investments are concentrated in the value-creating commercial and logistics functions that aim to:
- Streamline deal entry for high-volume, low-complexity physical trades.
- Integrate derivatives transaction processing from order, to confirmation, fill, through allocation and broker reconciliation.
- Maximize utilization of electronic trade confirmation services.
- Automate market data acquisition.
- Enhance integration with logistics partners.
In each case, we’ll explore the short-term benefits that a small, focused, first step can deliver, as well as get a glimpse of how the initial investment sets the stage for more transformational projects in the future.
Streamline Deal Entry for High-Volume, Low-Complexity Trades
Ask almost any trader that has to input their own deals into an ETRM (Energy Trading and Risk Management) application and they’ll probably tell you exactly how long it takes to record their deals in the trading system. Some types of deals, such as international crude cargoes, are complex and key terms can vary widely from one trade to the next making trade capture inherently more arduous. However, there are many types of trades that are prime targets for use case optimization that can pay big dividends by way of improved productivity and accuracy.
Domestic refined products pipeline trades around systems such as Colonial, Explorer and Magellan are great candidates for streamlining. These kinds of trades benefit from standardized grades, as well as common schedules/cycles, locations, more straightforward terms and relatively common pricing so many of the trade attributes can be pre-populated omitting them from the user entry screen and ensuring valid data entry from the outset. Moreover, these types of transactions work very well as a stepping stone to wider use of electronic confirmations and for tighter logistics integration.
Pre-Digital Opportunity: Assess your most common trading scenarios and determine which can be simplified the most. Develop a simple trade blotter front end for web or mobile devices that allow your traders to rapidly enter 5, 10, or more trades in a grid and save once. Expose trade entry as a reusable API (Application Programming Interface) or web service (if your ETRM doesn’t already) preparing the architecture to support even more expedient methods for trade capture.
Digital Extension: Voice (e.g., digital assistant) and message scraping from Skype or ICE (Intercontinental Exchange) Chat become viable alternatives with this API-based infrastructure already in place.
Integrate Derivatives Transaction Processing
The previous section explored the opportunities for efficiency and data fidelity gains surrounding uniform physical trade scenarios. Exchange-traded derivatives offer even more in the way of instrument and transaction standardization upon which to build integration and automation. The contract specifications are published and the exchanges (e.g., ICE/CME) offer a multitude of foundational APIs that can be used to perform all manner of tasks along the transaction lifecycle from placing orders, to receiving confirmations, and acquiring fill data. In addition, many firms already use trade execution platforms such as those from Trading Technologies or Fidessa that offer their own suite of APIs and web services customers can use to build, automate and integrate.
Pre-Digital Opportunity: Don’t settle for manually entering futures or receiving a single flat file from your broker after the market closes. Utilize the API or web service exposed to your ETRM system as outlined in the section above to capture trades along with the ones offered by the major exchanges, the trade execution platforms or your broker to process fills directly as available. Often, there is a requirement to aggregate fills or preassign certain trade attributes (e.g., strategy) to make managing the transactions more straightforward once they are in the ETRM, and the latest generations of these systems and APIs make this easier than ever. Over time the exchanges and major brokers are making available ever more value-added services addressing needs in the areas of credit, risk management and regulatory reporting/compliance. Consider exploring these libraries of functions to optimize mid- and back-office processes for even more near-term benefit.
Digital Extension: Enable digital assistant placement of derivative orders. Provide a key building block for algorithmic trading.
Utilize Electronic Trade Confirmation Services
Blockchain is all the rage and offers a number of significant long-term benefits, especially as adoption increases among major market players. Meanwhile, there are already more than 1,000 market participants that have been using eConfirm for as long as 15 years to electronically process millions of trades. The previous two quick hit opportunities seek to simplify exchange-traded transaction processing, as well as a portion of the lifecycle for high-volume, low-complexity physical trades. eConfirm represents a logical, incremental step in physical trade automation that can bring a level of efficiency paralleling that which is more commonly available for derivatives.
Counterparts and brokers that elect to submit and match trade confirmations using eConfirm can take advantage of clear status tracking, eliminate paper/fax/email and minimize user error, thus reducing operating costs. eConfirm can be most expeditiously deployed in instances where grades, schedules, pricing, counterparties and other primary economic terms are highly standardized (sound familiar?). Often, one of the most significant obstacles to adoption of eConfirm is centered around master agreements, but getting this work out of the way can accelerate the adoption of this, as well as other enabling technologies, later.
Pre-Digital Opportunity: Step 1 was to develop and deploy APIs or web services for trade entry. Step 2 capitalized on that foundation and integration with the exchange to optimize derivative transaction processes. In this instance, the opportunity is to pass your trade data in confirmation form directly from your trading system to eConfirm to allow for automated matching with your business associate. Human intervention will only be required on an exception basis when terms don’t match. Blockchain may be coming, but it will be difficult and expensive to capture the benefits promised without agreed upon contract terms and a standardized transaction data model combined with an API/web service infrastructure for third- party transaction processing.
Digital Extension: Blockchain to enable efficient, transparent, and secure digital transaction ledgers between participants across the transaction lifecycle. To read more about how this technology is being applied in the energy industry read “As Energy Markets Evolve, Blockchain Powers Up” by Shane Randolph of Opportune LLP.
Automate Market Data Feeds
Many refiners already have quite finely tuned systems for processing a rack BOL (Bill of Lading), applying a price, generating an invoice, distributing it to the customer and collecting funds. The combination of people, process and technology is all geared to produce an accurate invoice and collect cash, but there are many processes well up stream of ticketing or lifting that could benefit greatly from more timely and reliable availability of market data.
Pre-trade analytics and risk management both require access to significant amounts of price data, but in many cases rely heavily on spreadsheets, downloads and manual entry to meet daily objectives. As a result, valuable quantitative analyst time is spent performing data cleansing and entry tasks rather than on assessing market risk and market opportunity.
Most commercial organizations already license at least one technology and subscribe to some source for market data whether that means using GlobalView, Thomson Reuters or sourcing directly from publishers like Platts. The major vendors offer desktop (often Excel), API, historical and streaming data solution options that can be integrated into existing Enterprise Resource Planning (“ERP”) and ETRM systems directly to enable efficient end-of-day processing, mark-to-market, VaR (i.e., value at risk) and many other valuable risk analyses.
Pre-Digital Opportunity: Create an inventory of the tools and publishers your organization employs to gather and process market data. There are likely opportunities to rationalize and standardize to reduce cost without adversely affecting the availability of valuable price series data to the enterprise. Once some consolidation of source and solution has been performed, create integration to directly deliver prices and corrections to the data warehouses, ETRM and ERP systems that use this information to support analytics and transaction processing. Don’t forget about the need to include broker and trader assessments in these technical and process solutions. For instances where prices must be entered manually the same type of UI (User Interface) and API solution framework used for trade entry can be applied.
Digital Extension: Machine learning to identify market opportunities and enable algorithmic trading.
Enhance Integration with Logistics Partners
Seemingly innumerable processes are dependent on timely and accurate information concerning the movements of products through the logistics systems exercised by downstream companies. They run the gamut from risk control reports, to inventory rundowns, to month-end accruals and more. All of these require the best available information on pump dates, load dates, actual quantities, qualities, etc.
Often, the best available information exists in the systems of your logistics partners or service providers, and the best solution is to interface that data into the IT environments used for scheduling and ticketing. This type of integration can also facilitate rapid ticketing through invoice processing for other MOTs (Modes of Transport) such as pipeline and rail.
Pre-Digital Opportunity: Explore the opportunity to integrate your ERP or ETRM system with applications like Transport4 to make available near real-time information about your company’s nominations, tickets and inventory moving on the pipeline systems of affiliated carriers. This integration has the potential to reduce duplicate nomination entry for schedulers and eliminate manual entry of pipeline tickets for the back office.
For rail movements, Bourque Logistics offers similar capability through its RAILTRAC solution. Solutions for cargoes are available from providers such as Navarik and their TICithub. Integrating these systems can reduce manual and duplicate effort for schedulers, loss control and accounting functions.
Digital Extension: Combine predictive analytics and Robotic Process Automation (RPA) to identify and execute on opportunities for supply chain system optimization. For more on predictive analytics take a look at “Optimizing Your Logistics Network Through Model-Driven prescriptive Analytics” by Chris Hedge of Opportune LLP.