Physical portfolio optimisation – improving margins in a tight market

Corporate statement: Sapient Global Markets

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In this corporate statement, Rashed Haq, vice president, Sapient Global Markets, explains how an analytical market-based approach can improve decision-making and reduce risk for commodity firms.

Over the last decade, the energy industry has seen considerable change. Market conditions fluctuated at an unprecedented pace, an influx of independent players increased competition and transaction complexity, and there was growing ambiguity around regulatory requirements. In addition, energy companies implemented organisational structures such as heterogeneous business units and silo-based physical asset management entities that have actually hampered revenue and margin growth. If cost reduction and efficiency alone aren’t the answer, how can firms guarantee a leadership position in the marketplace?

A systematic approach to managing the business
For many commodity market participants, the answer lies in physical portfolio optimisation – an analytical market-based approach for improving decision-making, execution and business operations while reducing risk. It treats all assets in the business – physical assets, term contracts, transport or storage leases and positions – as an integrated portfolio.

The key concept in physical portfolio optimisation is that the value of a business should be denominated by the value of the portfolio as a whole as well as by how the portfolio is managed:

  • All transaction decisions should be managed in a manner that allows all contractual obligations to be met while adding the most value to the entire portfolio for a given level of risk tolerance.
  • All asset decisions should be evaluated for the value the assets add to the portfolio at a given risk threshold.


For a business to manage its portfolio along the principles of physical portfolio optimisation, all the rights and obligations for each contract need to be available with all physical, contractual or policy-based constraints. Based on the business model, the optimisation process will utilise these inputs to develop the target or recommended transactions.

230413-rashed-haqThe best set of transactions will meet all contractual obligations within the physical and policy constraints, and create the maximum value within the risk constraints. Users, such as traders or schedulers, will try to execute the target transactions, but will likely run into execution roadblocks, such as not being able to find a counterparty willing to transact the target volume, and so on. Based on these types of roadblocks, they will get to an executed transaction set that is close – but not identical – to the expected portfolio. In the meantime, market prices may have evolved throughout the day. As a result, markets and new beginning positions will then become inputs into the next iteration of optimisation for the next period. The expected portfolio continuously evolves with market conditions and target transactions that are executed.

Benefits of physical portfolio optimisation
Physical portfolio optimisation improves the management of the overall business in an integrated way across lines of business through transparency in key day-to-day decisions. With all the contract and asset information at hand, decision-makers will be able to explicitly view the potential options for execution across all business divisions, including the potential financial and risk effects of the decision before it is made. Additionally, transparency will help in the development of the optimal baseline movement plans, re-routes in case of extreme weather, and so on. An additional benefit of this approach is that a large part of the organisation’s contract usage and operating knowledge base is transparently captured in information systems, improving knowledge retention and simplifying the ramp up of new users.

Greater knowledge for better results
A physical portfolio optimisation approach can be leveraged to shape the future of the asset and contract portfolio, enable the creation of what-if contracts and markets, and evaluate how these impact the portfolio in terms of value and risk. Best of all, it has been shown to have a real impact. Companies that have undertaken this kind of systematic optimisation have realised up to a 5–10% increase in margin across the board.

Sapient Global Markets is a leading provider of services to the capital and commodity markets. To learn more about us or physical portfolio optimisation, visit www.sapientglobalmarkets.com or email sgm@sapient.com to set up a meeting at Energy Risk Canada in Calgary on June 18, 2013.

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