PHYSICAL ENERGY COMMODITIES AND MARKETS

OIL, GAS AND COAL MARKETS-Exam Weight | 25%

Reserve estimation and reporting
Grades of crude oil and natural gas classifications
Proved, possible and probable reserves
Barrel of Oil Equivalent
Unconventional resources
Mineral rights ownership
Offset clause, royalty payments, and other lease provisions
Fiscal systems applied in global production
Concessionary
Contractual
Production sharing agreements
Project development and valuation
Real options
Global crude oil benchmarks and price formation
Brent
WTI
dubai-Oman
Petroleum transportation and storage
Pipeline and seaborne economics
Crude oil refining processes, products and economics
Refinery complexity
Marginal crude oils
Crack spread
Renewable identification numbers (RINS)
Global natural gas markets and price formation
Hub pricing
Oil indexation
natural gas transportation and storage
Pipeline processes and economics
Storage technologies and economics
Global coal markets and price formation
Physical properties
Global benchmarks and trading
2014 Energy Risk Professional (ERP) Examination AIM Statements

Readings for Oil, Gas and Coal Markets35 Questions
Reserves and Mineral Rights
1. Joseph Hilyard. The Oil and Gas Industry: A Non-Technical Guide. (Tulsa, OK: PennWell, 2012).
Chapter 2........................... Oil Overview
2. Vivek Chandra. Fundamentals of Natural Gas: An International Perspective.
(Tulsa, Ok: PennWell Books, 2006).
Chapter 1........................... The Basics
(Gas Chemistry and Language, Units of Natural Gas, and Gas Formation Sections only)
3. Charlotte Wright and Rebecca Gallun. Fundamentals of Oil & Gas Accounting, 5th Edition.
(Tulsa, Ok: PennWell, 2008).
Chapter 1........................... Upstream Oil and Gas Operations
Chapter 15 ......................... Accounting for International Petroleum Operations
4. Andrew inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance
(Tulsa, Ok: PennWell, 2011).
Chapter 4........................... Developing Oil and Gas Projects
AIMS:
Joseph Hilyard. The Oil and Gas Industry: A Non-Technical Guide.
Chapter 2 .............................. Oil Overview
Candidates, after completing this reading, should be able to:
Describe each major class of benchmark crude oil.
Understand how reserves differ from resources and how that difference affects project economics.
Define an unconventional resource and understand the two most common types (tar sands and shale oil)
including the characteristics that make them different from conventional hydrocarbons.
Describe the difference between proved, probable and possible reserves and apply the terms 1P, 2P and 3P
Summarize the different units of measure for crude oil and natural gas.
Define the term Barrel of Oil Equivalent (BOE) and understand its application.
Vivek Chandra. Fundamentals of Natural Gas: An International Perspective.
(Tulsa, OK: PennWell Books, 2006).
Chapter 1 .............................. The Basics
(Gas Chemistry and Language, Units of Natural Gas, and Gas Formation Sections only)
Candidates, after completing this reading, should be able to:
Describe the relationship between liquefied petroleum gas, natural gas liquids and condensates.
Define wet, dry, sweet, sour and associated natural gas.
Identify the common units of measure for natural gas.

Charlotte Wright and Rebecca Gallun. Fundamentals of Oil & Gas Accounting, 5th Edition.
(Tulsa, OK: PennWell, 2008).
Chapter 1 ............................... Upstream Oil and Gas Operations
Candidates, after completing this reading, should be able to:
Describe mineral rights and interests, particularly hydrocarbon ownership regimes.
Differentiate between the acquisition and leasing of exploration and production rights.
Apply the offset clause, royalty payments and other lease provisions used in exploration and production.
Chapter 15 ............................. Accounting for international Petroleum Operations
Candidates, after completing this reading, should be able to:
Identify and apply the various fiscal systems used in global petroleum contracts including: concessionary
systems, contractual systems, production sharing or service contracts.
Calculate the gross revenue payouts owed to each party in a concessionary system.
Calculate the royalty payout under a production sharing or service contract.
Define profit oil and explain its application.
Describe how a joint operating agreement works and understand the circumstances when it is used.
Understand the primary accounting regulations that affect petroleum contracts.
Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.
(Tulsa, OK: PennWell, 2011).
Chapter 4 ............................... Developing Oil and Gas Projects
Candidates, after completing this reading, should be able to:
Understand the concept of unitization and its relationship to the development of Joint Development Zones.
Assess a project's financial viability using Net Present Value (NPV) and Internal Rate of Return (IRR).
Identify pre-completion, post completion and macroeconomic risks in project development.
Describe the role of contractors used by E&P firms in project development.
Identify the major challenges that can arise during project development and assess their potential impact.
Project Development and Real Options
5. Betty J. Simkins and Russell E. Simkins, eds. Energy Finance and Economics: Analysis and Valuation,
Risk Management, and the Future of Energy. (Hoboken, New Jersey: Wiley, 2013).
Chapter 11 ............................ Real Options and Applications in the Energy Industry
6. William Bailey, Benoit Couet, Ashish Bhandari, Soussan Faiz, Sunaram Srinivasan and Helen Weeds.
Unlocking the Value of Real Options. (Oilfield Review, 2004).
Freely available on the GARP Website.
AIMS:
Betty J. Simkins and Russell E. Simkins, eds. Energy Finance and Economics: Analysis and Valuation,
Risk Management, and the Future of Energy. (Hoboken, New Jersey: Wiley, 2013).
Chapter 11 ............................. Real Options and Applications in the Energy industry
Candidates, after completing this reading, should be able to:
Understand the similarities and differences between the exercise of real options and financial options.
Know the characteristics of the different types of real options (option to expand, option to exercise, etc.)
and the circumstances when they are employed.
Describe how Black-Scholes, binomial trees, and Monte Carlo simulations can be applied in a real option
valuation; identify the challenges associated with each approach.
William Bailey, Benoit Couet, Ashish Bhandari, Soussan Faiz, Sunaram Srinivasan and Helen Weeds.
Unlocking the Value of Real Options. (Oilfield Review, 2004).
Candidates, after completing this reading, should be able to:
Understand and apply a net present value (NPV) calculation to make investment decisions in a gas/oil field.
Explain how a binomial lattice is used in the valuation of an asset or option and be able to calculate the
value of an up or down move.
Describe the use of real options in circumstances such as switching or salvage decisions with an existing
oil or gas project.
Crude Oil Benchmarks, Global Pricing and Market Transactions
7. Bassam Fattouh. An Anatomy of the Crude Oil Pricing System. (The Oxford institute for Energy Studies).
(Sections 3 to 9 only)
Freely available on the GARP Website.
AIMS:
Bassam Fattouh. An Anatomy of the Crude Oil Pricing System (The Oxford Institute for Energy Studies).
Candidates, after completing this reading, should be able to:
Summarize the process used to determine price differentials and identify factors that influence the price
differential including the equivalence to the buyer principle.
Describe the role of price reporting agencies (PRAs) in price identification; summarize the methodologies
used by PRAs to assess commodity prices and identify criticisms of PRA price assessment.
Understand the mechanics and specifications of the 21-day BFOE (Forward Brent), the Brent Futures, the
Exchange for Physical (EFP) and the Dated Brent/BFOE contracts.
Define Contracts for Differences (CFDs) and understand their application when hedging basis risk associated
with Forward Brent contracts or deriving forward prices from a combination of Dated Brent prices and CFDs.
Understand the relationship between futures contracts and physical supply.
Compare and contrast the Brent, WTI, and Dubai-Oman crude oil benchmarks in terms of liquidity, price
transparency, and available financial products.
Summarize the mechanics of WTI futures contracts including related delivery requirements, and compare
WTI Posting-Plus (P-Plus) pricing to NYMEX CMA pricing.
Understand the logistical challenges that can impact the effectiveness of WTI as a global crude oil benchmark.
Explain how the Dubai benchmark price can be calculated using swaps.

Crude Oil Transportation and Storage
8. Andrew inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.
Chapter 11 ......................... Transportation
AIMS:
Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.
Chapter 11 ............................. Transportation
Candidates, after completing this reading, should be able to:
Identify the technical issues and economic considerations associated with building a new pipeline, including:
stakeholders, safety issues, routing decisions and storage options.
Understand how different refined products are separated in a pipeline and describe batch cutting, over wash
and transmix.
Identify demand-driven, supply-driven, and market-driven scenarios and know how they impact pipeline
development decisions.
Using the BTC case as an example, identify political, economic and logistical challenges to the construction
of pipelines.
Describe the different classifications and volume range of oil tankers.
Understand the Worldscale pricing system and calculate transportation costs for a shipment of oil.
Petroleum Refining
9. Andrew inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.
Chapter 12 ......................... Refining
10. William L. Leffler. Petroleum Refining in Nontechnical Language, 3rd Edition.
(Tulsa, OK: PennWell Books, 2008).
Chapter 20 ......................... Simple and Complex Refineries
11. Brent Yacobucci. Analysis of Renewable Identification Numbers (RINs) in the Renewable Fuel Standard.
(Congressional Research Service, July 2013).
Freely available on the GARP Website.
2014 Energy Risk Professional (ERP) Examination AIM Statements

AIMS:
Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.
Chapter 12 ............................. Refining
Candidates, after completing this reading, should be able to:
Understand how operations differ between an IOC and independent refiner.
Describe the relationship between a refinery's complexity, its choice of crude oil inputs, and its optimal product mix.
Assess the economics of refinery operations including the relationship between the cost of crude oil and
refinery margins and the impact of a refinery's complexity on its product mix and profit margin.
Summarize the products produced and the impurities removed during the crude oil refining process.
Identify common crack spreads like the 3:2:1 and the 6:2:3:1 NWE spreads, and calculate a crack spread given
input and output prices.

William L. Leffler. Petroleum Refining in Nontechnical Language, 3rd Edition.
(Tulsa, OK: PennWell Books, 2008).
Candidates, after completing this reading, should be able to:
Identify the factors that determine refinery complexity.
Explain the role refining margin plays in setting a price.
Describe how crude oil prices are established; including how complex refineries can increase their margin
by refining heavy crude oil.
Brent Yacobucci. Analysis of Renewable Identification Numbers (RINs) in the Renewable Fuel Standard.
(Congressional Research Service, July 2013).
Candidates, after completing this reading, should be able to:
Describe Renewable Identification Numbers (RINs) and explain how RINs are produced and traded.
Summarize the mechanics of the Renewable Fuels Standard (RFS) and describe the classes and categories
of RINs which can be used to meet biofuel requirements as part of the RFS.
Describe factors which can impact the market prices of RINs.
The Global Natural Gas Market
12. international Gas Union. Wholesale Gas Price FormationA Global View of Price Drivers and Regional Trends.
(Sections 1 to 5 and 8 to 10 only)
Freely available on the GARP Website.
AIMS:
International Gas Union. Wholesale Gas Price FormationA Global View of Price Drivers and Regional Trends.
(Sections 1 to 5 and 8 to 10 only)
Candidates, after completing this reading, should be able to:
Understand and apply the following natural gas pricing terms: wellhead price, border/beach price, hub price,
citygate price, end user price and netback price.
Describe potential short, medium and long-term supply-side and demand-side drivers for natural gas prices.
Summarize the eight key mechanisms for pricing gas and identify the geographic regions where each
mechanism is most prevalent.
Describe the relationship between a local gas pricing mechanism, the observed market price and the
hypothetical market-clearing price.
Identify the factors that influence the volatility of natural gas prices, including oil-linked prices.
Assess the relationship between price volatility and natural gas supply across various hypothetical price levels.
Natural Gas Contracts, Transportation, LNG, and Storage
13. Vincent Kaminski. Energy Markets. (London: Risk Books, 2012).
Chapter 10 ......................... Natural Gas Transportation and Storage
14. Andrew inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.
Chapter 9........................... Liquefied Natural Gas


15. Vivek Chandra. Fundamentals of Natural Gas: An International Perspective.
Chapter 2 .......................... Transport and Storage (Gas Storage Section only)
Chapter 4 .......................... Contracts and Project Development (Gas Sales and Transportation Contracts Sections only)
AIMS:
Vincent Kaminski. Energy Markets. (London: Risk Books, 2012).
Chapter 10 ..............................Natural Gas Transportation and Storage
Candidates, after completing this reading, should be able to:
Describe the US pipeline system and explain how capacity can be increased in a pipeline system.
Describe and compare different types of pipeline transportation contracts.
Understand the range of fixed and variable cost components associated with natural gas pipeline transportation
charges, including tariffs; calculate the cost of a natural gas pipeline shipment.
Explain the steps in the nomination process, including balancing mechanisms.
Explain how natural gas transportation rates are regulated in the US.
Understand the economic decisions that drive the transportation of natural gas through pipelines
Describe LNG transportation and production technology trends and identify factors which impact the cost
structure of the LNG supply chain.
Explain how natural gas storage inventories are reported and describe how weekly natural gas inventory data
can be forecasted, including drawbacks to this approach.
Explain features of natural gas storage contracts and explain how storage rates are regulated in the US.
Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.
Chapter 9 ................................Liquefied natural Gas
Candidates, after completing this reading, should be able to:
Identify regional trends in the global LNG trade.
Summarize the business and financial arrangements used in LNG production and transportation.
Understand the operation of an LNG train and describe the liquefaction process.
Compare and contrast three types of shipping contracts: Free On Board (FOB), Cargo, Insurance and Freight
(CIF) and Delivered Ex Ship (DES).
Understand the challenges associated with the development of the Gorgon LNG project.
Vivek Chandra. Fundamentals of Natural Gas: An International Perspective.
Chapter 2 ................................Transport and Storage (Gas Storage Section only)
Candidates, after completing this reading, should be able to:
Summarize the reasons why natural gas is stored.
Compare and contrast the common structures used for storing natural gas.

Chapter 4 ............................... Contracts and Project Development (Gas Sales and Transportation Contracts Sections only)
Candidates, after completing this reading, should be able to:
Understand the mechanics and terms of a gas sales agreement (GSA) including take-or-pay obligations,
nominations and force majeure.
Compare the terms of the sale and purchase of LNG versus natural gas.
Understand why some regions index LNG prices to crude oil (i.e. the JCC price in Japan); calculate an LNG
price using a crude oil index.
Global Coal Markets
16. Vincent Kaminski. Energy Markets.
Chapter 26 ......................... Coal Markets
17. Richard Morse and Gang He, "The World's Greatest Coal Arbitrage: China's Coal import Behavior and
implications for the Global Coal Market." (PESD Stanford, August 2010).
Freely available on the GARP Website.
AIMS:
Vincent Kaminski. Energy Markets.
Chapter 26 ............................. Coal Markets
Candidates, after completing this reading, should be able to:
Explain the physical and chemical properties important to coal analysis, and compare the physical properties
of anthracite, bituminous, sub-bituminous and lignite coal.
Identify and apply indices frequently used as coal price benchmarks.
Explain how coal is traded and describe features of popular coal contracts, including exchange-traded and
OTC contracts.
Understand, compare, and contrast the economics of coal-fired and natural-gas fired power plants.
Richard Morse and Gang He, "The World's Greatest Coal Arbitrage: China's Coal Import Behavior and
Implications for the Global Coal Market." (PESD Stanford, August 2010).
Candidates, after completing this reading, should be able to:
Understand the basic economics of the Chinese coal market; compare domestic reserves to domestic demand.
Explain the arbitrage opportunities available to coal buyers in southern China.
Describe the role of freight costs in setting coal market prices.
Explain how Chinese arbitrage has impacted prices on the global coal market.