OCTOBER 2011

WHITEPAPER
Liquigas creates an innovative new Access Regime using the Facilities Code business rules and SAM the Slate and Allocation Model for bulk LPG storage, distribution and management. Author: Craig Macleod Managing Director ABSTRACT
Liquigas achieved innovation excellence by reinventing their business model to meet the challenges of industry and market conditions. On 1 January 2010 the commercial environment under which Liquigas operates changed, and Liquigas made the strategic decision to cease being a trader of Liquid Petroleum Gas (LPG) and become an independent, neutral and impartial LPG infrastructure provider. Liquigas needed to move from an environment where they either owned or directly managed LPG stored in their facilities, to a situation where the bulk LPG was owned by a variety of wholesalers; and to establish a system to share the limited storage capacity among several wholesalers in a fair and efficient manner. Achieving a core business focus of storage, distribution and management would see them renegotiate nearly all their commercial and operating agreements and create a completely new information system. Operations research developer, Orbit Systems Limited, facilitated the actualisation of the new business rules as a software solution. This was a major initiative which included the creation of an information system which is now the core operations platform for the refreshed business model. Sponsored by: Business: Location: Management: Employees: Industry: Services: Partner: Orbit Systems Limited Liquigas New Plymouth, New Zealand CEO Albert de Geest 25 Energy / Petroleum Distribution / Facilities management Orbit Systems Limited

Co-author: Simon Yorker - Senior Developer

The Liquigas Facilities Code and SAM system has provided industry with peace of mind and a framework for all market participants to (co)operate in. David Wilson, OnGas

LIQUIGAS: CASE STUDY - 1

ABOUT LIQUIGAS
Liquigas is a major distributor of bulk LPG (Liquid Petroleum Gas) in New Zealand. Of the 140,000 tonnes of LPG consumed in New Zealand, 50% pass through a Liquigas facility. The business has 25 staff throughout the country mostly based in New Plymouth. Liquigas role is to coordinate the bulk storage and sea-based distribution of LPG throughout New Zealand. LPG produced in Taranaki can be shipped from the Port Taranaki depot to New Zealand or overseas markets, while domestic or imported LPG can be received by their Auckland, Christchurch and Dunedin depots (by ship or truck) ready for uplift by wholesale customers. Liquigas is 46% owned by Vector Energy and other industry stakeholders.

BUSINESS ISSUES
During the development of the new Access Regime, Liquigas first considered the needs of customers what services would they require following the changes to the LPG market in 2010? How could Liquigas meet those needs? What issues needed to be addressed to provide those services in an efficient way? A Stakeholder Steering Group was formed with senior representatives from each company to answer these questions. It was important to Liquigas that the new Access Regime was developed by the industry, and not by them, so the first step in the process was to ask the Steering Group What do you want?

INDUSTRY CHANGES
The commercial environment under which Liquigas operates changed completely on 1 January 2010. At that time Liquigas 28-year contractual rights as the sole purchaser of LPG from the Maui field at a fixed price ceased. For the first time, Maui LPG could be bought directly by wholesalers. The new Kupe field was commissioned at the same time, offering potential for New Zealand to once again be self-sufficient for LPG and several LPG wholesalers signed contracts to purchase this LPG. Liquigas made the strategic decision to cease being a trader of LPG, to enable the company to be an independent, neutral and impartial LPG infrastructure provider, which does not compete with its wholesale customers at the upstream or retail ends of the supply chain. Liquigas core business focus would become providing storage, bulk distribution and supply management services to the LPG industry. Liquigas facilities would become open-access and available to any wholesaler to store LPG from any source, under standardised commercial terms.

THE CHALLENGE
In order to meet the needs of the new business environment from 2010, Liquigas would need to reinvent its business model, renegotiate nearly all its commercial and operating agreements and create a completely new information system. Liquigas needed to move from owning or directly managing the inventory of LPG stored in their facilities, to a situation where the LPG was owned by a variety of competing LPG wholesalers; and to establish a system to share the limited storage capacity among several competing users in a fair and efficient manner. These objectives were achieved through the development and implementation of a new Access Regime, which included two key innovations, both of which were a first for the LPG Industry: 1. The Liquigas Facilities Code a legal document which sets out the rules, terms and conditions which apply to customers when they use Liquigas services. The Code provides fair, consistent, and transparent rules for all users of Liquigas facilities. 2. Slate and Allocation Model a purpose-built software package which enables Liquigas to administer the rules set out in the Facilities Code; track, monitor and forecast inventory levels at each depot by customer; manage the shipping slate; ensure a secure supply of LPG to the South Island, and report to customers and Liquigas management.

Over the next year, the Liquigas Facilities Code was developed. It contains all the business rules that define the nature of the relationship between the wholesalers and the facilities manager Liquigas. It was built in conjunction with the customer base to ensure it would meet the needs of customers, and provide rules which were consistent, transparent and fair to all parties. Successful operation of the Code requires cooperation by customers, and a high exchange of information. Over its first year of implementation, this has been successfully achieved. Formalising borrow and loan rules was a pivotal component of the new Code. These rules permit the separation of uplift rights from ownership rights. These rules were needed because, even when the overall market is balanced (i.e., supply equals demand), individual customers may be over-supplied or under-supplied on any given day at any specific location due to demand variability, maintenance, loss or gain of customers, supply constraints or logistical issues. The Facilities Code provides a mechanism that gives each customer rights to uplift product at each depot based on their forecast demand for LPG from that depot, irrespective of how much product that customer actually owns at the depot. It also allows more efficient use of the available storage, as each customer does not have to build their own buffer to deal with temporary imbalances. As part of the new Access Regime, a new pricing structure was also developed to provide more certainty to customers as to the pertonne cost of each Liquigas service; to provide a basic level of revenue for Liquigas to ensure its ongoing viability, despite the volume risk inherent in a tolling-based fee structure; and to ensure the fees charged reflected the value customers received from each service, irrespective of the actual costs to Liquigas of providing the service.

LIQUIGAS: CASE STUDY - 2

SOFTWARE AS A SOLUTION
The new Access Regime demonstrates innovation in the information technology field. The Liquigas Facilities Code is a set of complex rules which would have been very difficult to apply by an individual or group of individuals on a daily basis. To ensure consistent application of the rules with relative ease, Liquigas looked to Orbit Systems Ltd to develop a piece of software that would do this. This was named the Slate and Allocation Model (SAM).

SAM enables Liquigas and customers to quickly assess the implications of a change in forecast production (such as a reduction in supply caused by an unplanned field shutdown), changes to demand (perhaps as a result of unseasonal weather or an earthquake), or delays to planned shipments (often caused by bad weather conditions during winter). The forecasting component of SAM is an extremely powerful tool, enabling Liquigas to accurately and very quickly consider a wide range of what-if scenarios, and their impact on security of supply for the next 1-3 months. This allows the Supply team to make better decisions, provide much more detailed advice to customers, and ultimately improve the reliability of the LPG industry. SAM also has powerful reporting functionality, which enables Liquigas to design specific reports for each customer. These reports can be exported into an Excel format if required, and sent to the customer routinely and automatically, or on request when required. SAM is basically a one stop shop for monitoring Liquigas customers actual and forecast inventory levels. The quantity of information available and the ease of access to this information, means they are able to react to customers requests substantially quicker than their peers can in similar situations. The forecasting tools in SAM mean they are better equipped to predict and react to over-supply or under-supply situations. This enables Liquigas to optimise throughput at their facilities, reduces the risk of a stock outage and improves security of supply.

The front end of SAM is developed in Delphi Pascal and it runs on a Windows PC. It can be installed on any number of PCs and has been installed on the Liquigas Head Office Terminal Services server so it can be run remotely from the Liquigas depots without actually being installed on their PCs. The data for SAM is stored in Liquigas Head Office Microsoft SQL Server 2005 database. SAM is a multi-user system that allows any number of people to use it at the same time. The title of the Slate and Allocation Model software provides an indication of its functionality. SAM: is used to formulate the shipping slate which dictates when and where shipments of LPG are to be loaded and unloaded to meet appropriate demand and supply; tracks all truck and pipeline inputs and uplifts of all four of Liquigas facilities and allocates these to the correct customers; calculates customers capacity entitlements according to the inventory limit rules set out in the Facilities Code; calculates customers uplift entitlements according to the Shared Storage Maximum Uplift rule set out in the Facilities Code; and predicts customers stock situations in the future using forecast inputs and uplifts. SAM is the only modelling tool of its type in the New Zealand LPG industry. The amount of information SAM processes is well beyond the capabilities of any individual or an off-the shelf software package. Liquigas are able to apply the rules of the Facilities Code using SAM with much fewer resources than would otherwise have been required. This innovative software development has also allowed Liquigas to plan shipments, monitor and forecast inventory levels, and respond to customers with speed and accuracy. They can provide a wealth of information to their customers and look at as many varied scenarios as they require.

DEVELOPMENT CYCLE
An initial version of the SAM software was released in time for a transition period starting on 1 January 2010, during which SAM was used in parallel with Liquigas existing systems for cross-checking purposes. SAM then went live from 1 May 2010 when the Facilities Code moved out of the transition phase. During 2010 and 2011 it has seen substantial continued development, enhancing functionality and adding new features in response to feedback, suggestions and new requirements from users. During the implementation and transition phases, ongoing communication was vital, so issues could be discussed and dealt with. Liquigas visited each customer to conduct training sessions with all the staff affected by the new Regime, and several follow-up meetings have been held over the first year of operation. The success of the new Access Regime is due to the strong involvement of Liquigas customers throughout the entire process. It is a great example of competing companies within the LPG industry working together successfully on a project which has benefited all.

CHALLENGE MET
Despite the loss of 70% of pre-2010 revenue (profits from the sale of Maui LPG), implementing the new Access Regime and its associated pricing structure has allowed Liquigas to continue as a viable and profitable service provider to the LPG industry. The Code, and the improved relationships its development and operation have helped foster, provides a solid foundation for Liquigas to expand into other LPG-related services, with two major new services currently at the Feasibility Study stage.

LIQUIGAS: CASE STUDY - 3

Throughout the transition and as a result of the changes to the business model, customer service remained paramount. Here is a selection of customer comments from Liquigas 2010 customer survey: The Liquigas Facilities Code and SAM system has provided industry with peace of mind on supply and a framework for all market participants to (co)operate in. David Wilson, OnGas I have always found Liquigas staff very service oriented pleasingly no change on that front! The Liquigas Facilities Code provides a clear framework that pushed customers to jointly optimise the use of available storage capacity critical to the success of shared storage arrangements such as those managed by Liquigas. The SAM provides the necessary information in a user friendly and timely manner to ensure fully informed decision making. Combined, the Facilities Code and SAM ensure that supply chain costs are minimised and supply security is maintained for all users. Anthony Gilbert, Elgas SAM consistently surprises people with the wealth of information in it. It allows us to take a step back from the details of what it is doing and think about the big picture. Without it I know we would not have been able to cope with the complicated nature of multiple ownership of product. Victoria Jull, Liquigas Supply Analyst The Liquigas New Access Regime was a finalist in the Deloitte Energy Excellence Awards for Innovation.

Orbit Systems key Operations Research capabilities include: IT Systems design and implementation. Electricity Markets & Competition Warehousing & Logistics Planning & Systems Optimisation Systems Simulation & Heuristic Development Orbit Systems development of the Slate and Allocation Model highlights our expertise as leaders of a bespoke project that resulted in the true actualisation of business rules (The Facilities Code) in the information system (SAM) built for client and industry. Other industry applications have been built for major companies like Compaq, Procter & Gamble, Kraft and Nestl. See www.orbitsystems.co.nz and contact us for more information. References: The following references were used in the preparation of this whitepaper. 1. Liquigas Company Profile 2010 2. Orbit Systems Company Profile 2010 3. Liquigas Deloitte Innovation Awards Submission 2011 4. Liquigas Facilities Code 2009 5. Liquigas Facilities Access Rules 2009

ORBIT SYSTEMS
Orbit Systems is a New Zealand owned Operations Research and Information Technology consulting company providing solutions to complex business problems from around the world. Our ability to analyse, model and evaluate business problems from all industries means that we are able to assist businesses in getting to the best solution possible. The experience gained from over 20 years in the industry on a variety of assignments across a range of sectors in many countries has proved to be invaluable for the company which boasts many high-profile international clients including some of the largest companies in the world. We are one of the few companies in the world who can find the BEST solution to any number of problems. Problem solved. Capabilities Our particular strength is in Operations Research - providing organisational and analytical frameworks for problems normally regarded as too hard, and delivering solutions to these problems. We combine excellent problem solving skills with strong information systems delivery skills and provide services across a wide range of corporate and government clients both locally and internationally.

WELLINGTON
Orbit Systems Ltd Level 12 Orbit Systems House 94 Dixon Street P.O. Box 5403 Wellington 6145 New Zealand P: +64 4 381 0960 F: +64 4 381 0961 E: info at our domain

AUCKLAND
Orbit Systems Ltd Level 1 18 Broadway Newmarket P.O. Box 113-200 Broadway Post Centre Auckland New Zealand P: +64 9 523 5401 F: +64 9 523 5402 E: info at our domain

LIQUIGAS: CASE STUDY - 4