From spreadsheets to state-of-the-industry trading, transaction and risk management technology (Case Study)

By Michael Hinton | 25 August 2016

The falling price of oil, cheap gas, renewables’ in-built unpredictability and baseline shifts in the global dynamics of energy market supply and demand are increasing the risk profile of energy trades. The challenge is how to prepare for today’s hurdles – and those to come. Take the case of the Dow Chemical Company, a global Fortune 50 petrochemical company combining the power of science and technology to innovate what is essential to human progress. 

Back in 1997 Dow Chemical selected a commodity trading and risk management (CTRM) system from us to increase visibility into daily risk and to react to change more promptly. With the help of system integrator capSpire, the upgrade moved Dow's Hydrocarbons and Energy business, including their U.S. and Canadian Natural Gas, U.S. and European Feedstocks, and Global Risk Group, from the legacy to the new platform in under eight months, significantly improving the company's P&L reporting capabilities.

A short delivery timeframe and large project scope made the transition a challenge, but close collaboration between software provider and integrator, along with a proven implementation toolkit employed on the case, enabled Dow to accomplish its objectives.

Some background facts

Dow’s Hydrocarbons and Energy business has long been a world leader in the production of crude oil and styrene. It is responsible for the procurement of fuels and crude oil-based raw materials, and supplying products and power for use in the company’s global operations. 

Hydrocarbons and Energy also purchase natural gas liquid feedstocks to produce products such as butadiene, styrene, ethylene, propylene, power and steam. Dow needed to manage the risk of the natural gas and natural gas liquids commodities, since the purchases of these products directly impact their profitability.

Prior to 1997, the business was executing its risk management function with multiple spreadsheets to monitor pricing, trading, transactions and risk management. Reliance on spreadsheets was limiting visibility into the daily risks affecting its portfolio, affecting its ability to react and adapt to changes quickly. 

They needed to replace spreadsheets with a state-of-the-industry trading, transaction and risk management system that could manage their highly complex operations, including global transportation of raw material and risk management strategies.

Dow began the search for a CTRM platform to streamline business processes and improve operational efficiency. Specifically they required decision support tools that could provide a wide range of valuation analyses -- value at risk, mark to market, and credit value at risk – which could integrate with all business processes, ranging from deal capture to settlement. 

With company growth and changes in FAS and SOX regulations, Dow also needed a system that could be flexible enough to be modified when necessary and could lower costs of regulatory, tax, and corporate compliance.

After a rigorous vendor evaluation process Dow selected our product and the company worked with the platform successfully for years, but in 2015, new business challenges compelled another evaluation of its risk management tools and capabilities.

The challenge 

With near-term plans to sunset its internal IT infrastructure, Dow was facing an urgent need to upgrade its system. 

Internal headcount at Dow had also been reduced due to business consolidation, and many manual processes needed to be automated, especially in risk reporting, P&L reporting and tracking of daily changes across Dow's business lines.

The budget was approved for a like-system replacement, with a full review of requirements and processes to be included as part of the upgrade. All businesses were to be upgraded concurrently, with a deadline for delivery set at eight months.

After a quick review of CTRM market and given Dow’s successful 19-year track record with us, the decision was made to go forward without further vendor evaluation. capSpire was called in to orchestrate the transition, with initial system reviews starting in mid-2015. 

The solution

The implementation team began by establishing requirements in collaboration with Dow's internal IT and business leads. The analysis included a full process review, business scenario modeling exercise, and systems integration roadmap. During the implementation, custom class events were created in order to replace older, stored procedures and address key gaps. 

capSpire formed a small group of highly skilled and experienced Allegro consultants to discern the business and technical challenges, and prioritise mission-critical tasks to meet the deadline and program objectives. 

Extension Manager, capSpire’s tool for maintaining class events, was employed to reduce the complexity of managing extension changes and protecting them for future upgrades. 

One area of concern that bore out during the review was Dow's existing P&L reporting process. To streamline it, data was extracted from our product and sent to an array of access databases to create a global risk book. By leveraging our core functionality, combined with enhancements for calculating MTD, QTD, and YTD P&L for realised and unrealised positions,

Dow is now able to produce its risk book directly out of the CTRM, without going through a network of spreadsheets or data manipulation.

The benefits

Successfully completing the project ahead of time and within budget was only the first of many accomplishments the team achieved for the client. The upgrade, affecting three separate business units within Dow, proved to enhance position and P&L reporting, while eliminating much of the manual labor associated with these tasks in the past. 

Class events associated with risk and data management can now be handled using our architecture, simplifying the way grid-based jobs and key user interface (UI) enhancements are created and maintained. 

Using the capSpire Extension Manager, UI enhancements, such as those related to scheduling, settlement and shipment details, can now be easily moved and secured going forward. The capability has allowed Dow to reconcile end-of-day business valuations in as little as 15 minutes.

The new system continues to provide Dow with sophisticated analytics on its complete portfolio, and interfaces directly to legacy SAP® applications to ensure that general ledger updates occur in real-time. Allegro also provides alignment via a common system of configuration across Dow Hydrocarbons and Energy’s three separate geographically dispersed business groups.

Basic counterparty information is still maintained, and the system still manages contract terms, schedules all physical commodities, actualises volumes, invoices counterparties, performs inventory valuation/tracking, and settlement of all commodity-based transactions.

Petchems need to adopt the best available risk management technology to minimise risk exposure. Dow Chemical’s journey from multiple spreadsheets to CTRM technology teaches us that having the right tools to manage price volatility in essential feedstocks can help to push ahead of the competition and remain profitable. 

By Michael Hinton, Chief Customer Officer and Senior Vice President Product and Solutions, Allegro Development.

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