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Evolution of Financial Risk Analytics at EnCana

EnCana is one of North America's leading independent gas and oil production companies. We buy and sell product in the market place and need to offset and monitor risk from market movements, and assess risks associated with our customers, to ensure business is conducted within acceptable financial risk profiles. We have needed greater sophistication in our Risk Analytics to calculate "at-risk" metrics on revenue and mark-to-market including VaR, CVaR, PFE, CFaR along with other market, credit and liquidity metrics. Our existing systems were not up to the task so we implemented SAS Risk Dimensions (RD). We started early in 2005 and had our initial implementation running by April. We then began enhancing the analytics within RD and infrastructure that support it. This paper will discuss where we started with RD, the enhancements that have been made to date and where we are planning to go in the near future. This evolution will be presented from both the business and IT perspectives. Gord Anderson, Market Risk Analyst, Financial Governance, will present the business perspective. Mark Perrin, IT Group Lead, Financial & Market Risk, will present the IT perspective. WHY RISK ANALYTICS AT ENCANA? We are active participants in the physical and financial energy commodity markets. This activity brings risk, both exposure and uncertainty, for us to mitigate. One of the ways we can mitigate risk is through hedging. It is important for us to have analytics to assess the impact of these hedge transactions prior to execution in order to achieve the desired result. Actions engaging customers, business segments, and individual transactions all contain risk. Depending on the appetite for risk in a given area, we need to assess the risks associated with transactions. Our analysis provides better information on which management can base decisions. In the case of customers, we need to analyze the credit and liquidity risk to ensure we are not overexposed to a customer and can meet margin requirements if necessary. Potential implications to financial results due to market movements helps to identify the areas in which we are at risk, while assessing the impact of our corporate hedging strategy allows us to see how effectively we are mitigating those risks. The why and how of analytics at EnCana is a constantly evolving process. As markets and fundamentals change, so do the objectives and requirements of analysis. INITIAL PROJECT OBJECTIVES At the start of the project in early 2005, there were several objectives. One of the primary objectives was to enhance the validity of our current at-risk metrics. These were being calculated using a variety of methods and technologies. Consequently, there was no consolidated corporate view. Individual business units, such as natural gas and crude, produced their own separate metrics. These types of metrics could not simply be added together, and needed to be calculated starting at a risk-consolidated basis. Most importantly, we wanted to produce a true corporate view in order to evaluate risk as it pertains to the financial outlook of the company. To achieve this, we needed to combine the physical and financial transactions of our main commodities (natural gas, crude, and liquids) into one risk portfolio. Our goal was to apply a standard Monte Carlo simulation methodology to this portfolio to generate CFaR (Cash Flow at Risk), PFE (Potential Future Exposure; credit and liquidity exposure), VaR (Value at Risk), and ad hoc scenario and PL (Profit/Loss) Curve analysis. An additional objective was a faster desired turnaround time for our CFaR process – less than one day – to allow more responsive analysis. Most of the existing metrics were being run by business units through existing multifunctional systems. In achieving these objectives, it was also important that the environment for testing ad hoc scenario and stress analysis would not negatively impact the business resources, both people and systems. 1 Energy and Utilities Focus Session SAS Global Forum 2007