Following the sale of its upstream liquified natural gas (LNG) business in July 2018 to French oil and gas major Total, Engie’s trading and risk management arm Global Energy Management (Gem) absorbed its remaining downstream LNG activities. While Gem had previously only managed the LNG unit’s hedging activities, combining the physical and financial LNG business under one roof necessitated the alignment of the legacy unit’s risk management practices with that of Engie’s trading business. The resulting business now uses both the physical and financial aspects of Engie’s LNG expertise to offer clients a range of solutions protected by a robust internal risk management strategy.
As a large trading business, Gem is subject to stricter financial regulations than the legacy LNG business, which had previously conducted portfolio management activities with long-term contracts. “Our financial derivatives business is fully regulated by the financial authority ACPR in France, and so it is subject to all of the same capital rules and other regulations that would apply to a large bank,” explains Eric Strongin, chief risk officer for Gem in Asia-Pacific at Engie.
“As a result, Gem has much tighter and more rigorous standards for risk management even on the non-regulated business than the former LNG unit, so we also had to do the necessary KYC [know your customer] and other credit checks.”
For market risk management purposes, Gem adheres to “full, bank-style Basel-mandated value-at-risk stress tests,” Strongin says, and must maintain the necessary level of capital against those measures. “We have a variety of sophisticated risk management systems, both for derivatives and physical products,” he continues.
Our financial derivatives business is fully regulated by the financial authority ACPR in France, and so it is subject to all of the same capital rules and other regulations that would apply to a large bank
Eric Strongin, Engie Global Energy Management
In addition, Gem can leverage Engie’s global footprint and its position as a major power and gas trader in Europe to manage the physical risks arising from its LNG portfolio. “We can easily manage [Dutch gas hub] TTF and [the UK’s national balancing point] NBP exposures, plus we have a large trading office in Houston to manage any US price exposures there,” he says. “And we have a wide variety of assets around the globe that provide us with the optionality and flexibility to continue to offer risk management services to clients.”
Over the three months following the completion of the Total transaction in July 2018, Gem traded more than 30 cargoes, equivalent to almost three million tonnes of LNG, according to Gordon Waters, chief executive officer of Gem in Asia-Pacific and global head of LNG at Engie. As a result of this activity, he says Gem is “definitely getting a lot of attention in the space, even though we are essentially a new entrant after the Total deal”. The LNG desk is now expanding and Waters says there are plans to add two new traders to the existing team in the near future.
Beyond LNG, Gem is increasing its footprint in the Asian renewables energy sector, thanks to its position as a major power market participant. By offering power purchase agreements and structured solutions that include offtake deals or hedging strategies, it can help clients by absorbing the risks associated with intermittent power sources. It is also currently working with project developers to design risk management solutions over a longer-term horizon than is usually available.
“We can provide clients with more visibility over their revenues, but managing the associated risks is very challenging, especially if you consider that liquidity in these markets – even for the baseload – is quite reduced more than two years ahead,” says Guillaume Servajean, business developer for Gem in Asia-Pacific, at Engie. “We really need to have strong modelling capabilities and be able to use our experience of other markets.” Engie is already active in the European and US renewables sectors.
When working with clients in the power and gas markets in Asia, Waters believes Gem is often perceived favourably because of its utility background and experience in the markets. Its internal risk management systems and processes also contribute to the perception of the business as an experienced potential partner that can add value to a project.
“Rather than being seen as a competitor, we are often viewed as a utility providing a service, not trading against them.” he says. “Certainly, when we are looking at joint ventures, potential partners are interested in Engie because we have developed the level of complexity that they are aiming for – we have gone through that learning curve.”