Reservoir Simulation With ECLIPSE

ERP
2017
Learning Objectives
2017 Energy Risk Professional (ERP) Learning Objectives
ENERGY RISK PROFESSIONAL (ERP) PROGRAM

The Global Association of Risk Professionals (GARP) created the ERP Program to meet the growing demand for
professionals who understand the complexity of physical and financial energy markets and their related risks. Certified
ERPs are able to apply knowledge on a range of topics that includes: production, transportation and storage of
physical energy commodities; mechanics of financially-traded energy products and their practical application; data
assessment and modeling of energy prices; and tools for assessing and managing risk in the energy sector.
ERP EXAMINATION
Development of the ERP Exam and its underlying curriculum is guided by GARPs Energy Oversight Committee (EOC),
a panel of senior practitioners and academics with practical market experience and expertise. Readings and topics
covered in the ERP Study Guide and Learning Objectives are updated annually in conjunction with the EOC to ensure
the Exam remains a timely and accurate assessment of the knowledge and skills required of an energy risk practitioner.
Completion of the self-study curriculum culminates with candidates sitting for the ERP Exam, a two-part, multiple
choice exam that objectively benchmarks a candidates knowledge of important concepts within the following topics:
ERP EXAM PART I 80 QUESTIONS

Introduction to Energy Commodities and Risk Management
Crude Oil and Refined Product Markets
Natural Gas and Coal Markets
Electricity Markets and Renewable Generation
ERP EXAM PART II 60 QUESTIONS

Financial Energy Products.
Risk Assessment and Energy Price Modeling
Market Risk Valuation and Management
Credit and Counterparty Risk Assessment
Operational Risk and Enterprise Risk Management
To further align with industry needs, the ERP Exam is created in close consultation and collaboration with practicing
ERPs active across a variety of disciplines and geographies. Exam questions combine theory and real-world work
experience drawn from market insights shared by EOC members and practicing ERPs.
2017 ERP LEARNING OBJECTIVES AND STUDY GUIDE

The ERP Learning Objectives summarize specific knowledge points from each reading in the ERP curriculum. The
learning objectives are provided to aid candidates in their preparation for the ERP Exam and should be referenced in
conjunction with the ERP Study Guide, a separate document that outlines the core concepts and required readings
contained in the curriculum. All exam questions are developed from and directly reference a specific reading and
learning objective. Candidates are expected to be familiar with and able to apply the learning objectives on the ERP
Exam Part I and Part II, respectively.
2017 ERP STUDY GUIDE CHANGES

Returning 2016 ERP candidates should also review the ERP Study Guide Changes document which summarizes the
readings deleted from the 2016 curriculum, and the new required readings added for 2017.
2016 Global Association of Risk Professionals. 1

COMMONLY-USED CONTRACT SPECIFICATIONS

Exchange-traded energy commodity futures and options contracts are typically transacted in standardized lot sizes.
Unless otherwise noted, exam questions will assume the following standard volumetric terms:
Crude Oil: 1,000 barrels (equal to 42,000 gallons) per contract

Gasoline Futures: 42,000 gallons per contract
ULSD Futures: 42,000 gallons per contract
Gasoil (Diesel) Futures: 100 Metric Tons (MT) per contract
Natural Gas (Henry Hub) Futures: 10,000 MMBtu per contract

COMMONLY-USED ABBREVIATIONS AND ACRONYMS

The following is a list of commonly used abbreviations and acronyms that may appear on the exam:
ATC: Around-the-clock MtM: Mark-to-Market

Bbl: Barrel of MW: Megawatt
BOE: Barrel of Oil Equivalent MWh: Megawatt Hour
CCP: Central Counterparty NGL: Natural Gas Liquid
CDD: Cooling Degree Days NOC: National Oil Company
Cf: Cubic Feet NPV: Net Present Value
CFD: Contract for Differences NYH: New York Harbor
CIF: Cargo, Insurance, Freight NYMEX: New York Mercantile Exchange
CRO: Chief Risk Officer OPEC: Organization of the Petroleum Exporting
CSA: Credit Support Annex Countries
CVA: Credit Value Adjustment OTC: Over-the-Counter
DA: Day-Ahead PADD: Petroleum Allocation for Defense District
DAP: Delivered at Place PFE: Potential Future Exposure
DDP: Delivered Duty Paid PV: Photovoltaic
DDU: Delivered Duty Unpaid PSC: Production Services Contract
E&P: Exploration and Production RBOB: Reformulated Gasoline Blendstock for
EFP: Exchange for Physicals Oxygenate Blending
ERM: Enterprise Risk Management RFS: Renewable Fuel Standard
EWMA: Exponentially Weighted Moving Average RIN: Renewable Identification Number
FAS: Free Alongside Ship RTO: Regional Transmission Organization
FOB: Free on Board RVO: Renewable Volume Obligation
FTR: Financial Transmission Right ULSD: Ultra-low Sulfur Diesel
GARCH: Generalized AutoRegressive Conditional USGC: United States Gulf Coast
Heteroskedasticity VaR: Value-at-Risk
HDD: Heating Degree Days VPP: Volumetric Production Payment
ICE: Intercontinental Exchange WACC: Weighted Average Cost of Capital
IOC: Independent Oil Company WTI: West Texas Intermediate Crude Oil
IRR: Internal Rate of Return
ISDA: International Swaps and Derivatives Association
ISO: Independent System Operator
KPI: Key Performance Indicators
KRI: Key Risk Indicators
kW: Kilowatt
kWh: Kilowatt Hour
LMP: Locational Marginal Pricing
LNG: Liquefied Natural Gas
LSE: Load Serving Entity
MCf: Million Cubic Feet
MMBtu: One Million British Thermal Units
MT: Metric Tons

LEARNING OBJECTIVES
ERP Exam Part I

Physical Energy Markets
*This reading is freely available on the GARP website.

ERP Exam Part I
The 4-hour, Part I exam consists of 80 multiple choice questions. The exam structure
has been designed in conjunction with the EOC to assess learning outcomes
associated with the physical energy commodity markets based on the following
topics and weights:
Introduction to Energy Commodities and Risk Management 10% 8 questions

Crude Oil Markets and Refined Products 35% 28 questions
Natural Gas and Coal Markets 25% 20 questions
Electricity Markets and Renewable Generation 30% 24 questions
ERP Exam Part I Total 100% 80 questions


INTRODUCTION TO ENERGY COMMODITIES AND RISK MANAGEMENTPART I EXAM WEIGHT | 10%

The broad areas of knowledge covered in readings related to Introduction to Energy Commodities and Risk Management
include the following:
Physical energy commodity markets

Basis markets and pricing benchmarks
Fundamental price drivers
Physical vs. financially settled transactions
Basic risk types, measurement and management tools
Business ethics and the GARP Code of Conduct
READINGS FOR INTRODUCTION TO ENERGY COMMODITIES AND RISK MANAGEMENT | 8 QUESTIONS
1. Glen Swindle. Valuation and Risk Management in Energy Markets . (New York: Cambridge University Press, 2014).
Chapter 1 Context
Describe the unique characteristics that differentiate energy from other asset classes.
Define calendar strips (cal strip) and seasonal strips and understand their practical application.
Explain the impact of volatility on collateral postings, credit exposures, and capital requirements on energy
commodity trading operations.
Understand the seasonal patterns inherent in various energy commodity markets and how seasonality impacts
storage facilities, injection, and withdrawal.
Define basis and understand the primary drivers of basis differentials.
Understand the relationship between locational spreads, benchmarks, hubs, and market liquidity for commonly
traded natural gas spreads and global crude oil benchmarks.
2. S. Mohamed Dafir and Vishnun N. Gajjala. Fuel Hedging and Risk Management. (Hoboken, NJ: John Wiley &
Sons, 2016).
Chapter 1 Energy Commodities and Price Formation
Differentiate the characteristics of physically delivered vs. financially settled transactions.
Identify primary price drivers and understand how the various physical characteristics of energy commodities,
such as source, quality, or other specifications, impact the market valuation of those commodities.
Identify the primary benchmark contracts and their properties for various energy commodities.
Differentiate between the end use(s) of various energy commodities.
Summarize the key steps involved in the petroleum refining process and understand the distillation of crude oil
into various fractions; determine the primary use(s) of each oil product.
3. Michael Crouhy. The Essentials of Risk Management, 2nd Edition. (New York, NY: McGraw-Hill Education, 2014)
Chapter 1 Risk Management: A Helicopter View
Appendix 1.1 Typology of Risk Exposures
Understand the key classes of risks, explain how each type of risk can arise, and assess the potential impact each
type of risk can have on an organization.
Describe the risk management process and identify problems and challenges which can arise in the risk
management process.
Evaluate and apply tools and procedures used to measure and manage risk, including quantitative measures,
qualitative assessment, and enterprise risk management.

4. *Global Association of Risk Professionals (GARP). Code of Conduct.

Understand the responsibility each GARP member has to maintain professional integrity and ethical conduct,
avoid conflicts of interest, maintain confidentiality when required, and adhere to generally accepted best
practices in risk management.
Understand the potential consequences of violating the GARP Code of Conduct.

CRUDE OIL MARKETS AND REFINED PRODUCTSPART I EXAM WEIGHT | 35%

The broad areas of knowledge covered in readings related to Crude Oil Markets and Refined Products include
the following:

Physical properties of crude oil
Crude oil grades
Unconventional crude oils
Global benchmarks
Economic fundamentals
Exploration and production
Reserve identification
Project development
Fiscal regimes
Oil and gas lending and collateral evaluation
Economics of production
Transportation and storage economics
Crude oil refining
Distillation, blending and other refining processes
Refinery complexity
Refining margins and their determinants
Finished products and specifications
READINGS FOR CRUDE OIL MARKETS | 28 QUESTIONS
1. Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.
(Tulsa, Oklahoma: PennWell Books, 2011).
Chapter 3 Access, Leasing, and Exploration
Summarize the process of accessing new reserves and outline the steps involved in developing a petroleum project.
Identify key subsurface geological structures that impact oil and gas production; e.g., permeability vs. porosity.
Identify the owner of subsurface mineral and resource rights based on jurisdiction and market assumptions.
Compare and contrast the fiscal regimes of international petroleum agreements.
Describe the typical components of a lease agreement and methods used to establish royalty payments.
Understand reserve valuation and reporting requirements.
Compare and contrast the physical and economic factors associated with various reserve classifications (proved,
developed, undeveloped, P90, etc) and understand the difference between conventional and
unconventional reserves.
Define and calculate reserve replacement and reserve life given a set of market assumptions.
Chapter 4 Developing Oil and Gas Projects

Understand and apply the concept of unitization in the development of Joint Development Zones.
Calculate and interpret relative project economics using the following metrics: Net Present Value (NPV), Internal
Rate of Return (IRR), Weighted Average Cost of Capital (WACC), and Risk Adjusted Return.
Classify pre-completion, post-completion and macroeconomic risks and explain their impact on project
development decisions.
Summarize the key challenges, failures, or risks associated with the various case studies provided.
Identify the key elements of cash flow in an oil exploration and development project and their determinants,
including capital investment, wellhead price, gross revenue, and operating expenditures, as well as simple royalty
and tax payments.

Chapter 5 Production of Oil and Gas Products

Identify and describe the broad categories of upstream costs, understand how specific costs impact an energy
companys earnings, and explain why production costs may vary by location, creating a competitive advantage
for a specific crude oil field.
Assess the economic performance of an oil well, including: operating profitability, break-even price, working
interest and tax allocations.
Classify and describe the costs and factors associated with the enhancement and ongoing production of an oil
field, with particular focus on primary, secondary and tertiary recovery methods.
Assess terms of a partnership management agreement; determine how duties are shared and disputes are
settled within the framework of the arrangement.
Understand the nature of relationships, incentives, and potential conflicts among various stakeholders along the
oil and gas supply chain.
Identify and assess political risks that impact crude oil production decisions.
Chapter 6 Fiscal Regimes

Compare fiscal regimes associated with global production including, concession or royalty/tax systems,
production sharing, risk service arrangements, and oil leases.
Understand how the ownership of subsurface minerals relates to the type of fiscal regime applied.
Calculate the cashflow for a petroleum company under a royalty/tax financial system and a production
sharing agreement.
Interpret the use of secondary contractual features like signature bonuses, and identify the circumstances in
which they are used.
Assess the financial viability of a hydrocarbon project based on production volumes and petroleum prices.
Understand how the mineral rights for oil and gas fields were applied in the sub-Saharan case study.
Chapter 10 The Market for Crude Oil

Understand how crude oil pricing has evolved in recent decades due to market and political forces.
Differentiate between various grades of crude oil based on chemical composition and physical characteristics,
including sulfur content, gravity, viscosity, etc.
Distinguish various global benchmark crudes and understand the role of benchmark prices in the global crude
oil market.
Understand the distinction between spot, forward, and futures transactions in the crude oil markets.
Describe the factors that affect the valuation of a crude oil futures contract; perform a valuation of a crude oil
futures contract given a set of market assumptions.
Chapter 12 Refining
Compare and contrast the operational and economic differences between independent refiners and integrated
oil companies.
Describe steps in the physical refining process and identify the end-products typically produced.
Assess the economics of refinery operations including the relationship between the cost of crude oil and refinery
margins; describe the impact of a refinery's complexity on its optimal product mix and profit margin.
Calculate and interpret results of a crack spread given input and output prices.
Understand crack spread volatility, input and finished product values, technical value, netback value, netback
margin, gross margins, and net refining margins.
Explain how factors like location, technology, environmental mandates, capacity utilization, scheduling, and
refinery complexity/efficiency impact refining economics.

2. *An Introduction to Petroleum Refining and the Production of Ultra Low Sulfur Gasoline and Diesel Fuel. The
International Council on Clean Transportation. MathPro (October 2011).
Summarize the fundamentals and primary economic objectives of petroleum refining, processing and production.
Identify the major classes of refineries and explain the key characteristics that determine a refinerys product yield.
Differentiate between various units of the refinery complex and the primary inputs (feedstock) and product
outputs associated with each.
Interpret the carbon-to-hydrogen (C/H) ratio in refinery processing.
Understand the refining process, including separation, distillation, conversion, blending and finishing, and
maintenance scheduling.
Identify key blending properties of standard gasoline, diesel blendstocks, and the blending of ethanol
with gasoline.
Understand how the sulfur content of gasoline is reduced in the refining process.
Identify refined product classifications, including light distillates (LPG, gasoline, naphtha), middle distillates
(kerosene, jet fuel, diesel fuel) and heavy distillates and residuum (heavy fuel oil, lubricating oils, paraffin wax,
asphalt/tar, petroleum coke).
Understand the fundamentals and economics of petrochemical processing.
3. Charlotte Wright & Rebecca Gallun. Fundamentals of Oil & Gas Accounting, 5th Edition. (Tulsa, Oklahoma:
PennWell Books, 2008).
Chapter 15 Accounting for International Petroleum Operations
Differentiate among the characteristics of various fiscal systems used in global petroleum contracts,
including concessionary, contractual, and production sharing/service agreements.
Calculate the economic revenue generated from various global petroleum contracts given a set of inputs.
Understand how profit oil impacts project economics.
Illustrate the application of a joint operating agreement and the circumstances when it is used.
4. Vincent Kaminski. Energy Markets . (London, UK: Risk Books, 2012).

Chapter 16 Oil Transportation and Storage
Identify classes of oil tankers; understand the transport limitations (e.g., typical route and cargo specification) for
each class of tanker.
Understand and apply common types of charter contracts used for crude oil shipments (Incoterms).
Calculate the cost of transporting a shipment of oil using the Worldscale pricing system.
Understand the relative economics associated with pipeline, rail, tanker, and other transport methods.
Understand how pipeline shipment times and unexpected disruptions in shipments can impact commodity
traders and oil consumers.
Differentiate types of crude oil storage facilities, including above-ground, below-ground, tanker ship and
pipeline; explain how storage level reports are generated.
Apply primary inventory storage reports produced by different agencies, including the EIA, IEA, and
the JODI framework.

Chapter 17 Oil Pricing

Understand the physical and financial characteristics of Brent, the role of dated Brent, Brent complex, and the
use of Contracts for Differences (CFDs) in trading Brent.
Calculate and apply crude oil spreads or differentials; apply P-Plus price.
Understand the market factors that prompted the emergence of the Dubai-Oman benchmark and discuss the
issues associated with its adoption and operation.
Identify and differentiate crudes referenced in global trade, such as: WTI, WTI Houston, WTS, LLS, Brent, Dubai,
Urals, Saudi Light, Bonny Light, WCS, and Maya.
Identify global spot markets with active trade and benchmark prices, including Cushing/WTI, Brent, and Dubai.
Understand the differences between trade in spot and forward cargoes.
Understand the relationship between inventories and how the cost of storage shapes the forecast of spot prices.
Identify market fundamentals that drive changes in spreads of various types, including location spreads, quality
spreads and crack spreads.
5. *A Practical Guide to Incoterms 2010. (Livingston International).

Differentiate between the common types of charter contracts and understand the economics associated with
each including: FOB, CIF, DAP, and DDP, etc.
Compare the obligations, risks, costs, and ownership rights of each party under various charter contract
structures.
6. *Transporting Crude Oil by Rail in Canada. (Canadian Association of Petroleum Producers, March 2014).
Understand the market economics driving crude-by-rail shipments across North America, including the relative
geographic location of crude oil production and refining facilities.
Compare the different requirements for transporting light crude oil, heavy crude oil, and bitumen.
Identify the additional steps necessary to transport heavier grades of crude oil and why rail transport can be a
better alternative to pipelines.
Explain the operational risks associated with crude-by-rail transport and how recent accidents have prompted
new safety requirements.
7. *How Pipelines Make the Oil Market Work Their Networks, Operation, and Regulation. (Allegro Energy Group,
December 2001).
Understand how crude oil pipeline networks operate and are regulated; explain the scheduling and operational
challenges associated with balancing seasonal and regional consumption patterns.
Calculate pipeline economics given a set of market assumptions.
Differentiate the relative economics, advantages, and disadvantages of transporting crude oil via waterborne
shipments, railroad tank cars, trucks, and pipelines.
Identify the key differentiating characteristics of the five regional PADD districts; understand inter-regional flows
and how the oil markets infrastructure moves oil from producing regions to consuming regions.
Explain the central role of hubs and identify the major refined products pipelines across the national pipeline grid.
Understand the physical sequencing and scheduling of petroleum products pipeline flow given a set of
market assumptions.
Define nominated volumes and apportionment and explain their role in scheduling product flow.

8. *Deborah Gordon. Understanding Unconventional Oil. The Carnegie Papers (The Carnegie Endowment for Peace,
May 2012).
Understand the broad categories of unconventional oils, including those which are currently commercially viable
or more speculative.
Explain how oils are categorized as light or heavy; sweet or sour; and how these designations affect refining
decisions and refining profitability.
Interpret the differences between the carbon footprint of unconventional oils versus conventional oils and how
these differences shape governmental energy policy.
9. *Oil and Gas Exploration and Production Lending. (Office of the Comptroller of the Currency, March 2016).
Identify risk factors associated with oil and gas production lending and explain how these risks can arise.
Explain guidelines for the governance of production lending operations, including underwriting, financial analysis
and valuation of collateral, assessment of engineering reports, and equipment.
Explain guidelines and best practices for monitoring and documentation of a lending portfolio.
Describe guidelines for assigning a rating to oil and gas production loans.
10. *Christophe Barret. Brent Prices: Impact of PRA Methodology on Price Formation. (Oxford Energy, March 2012).
Identify the primary price reporting agencies (PRAs), understand how PRAs bridge physical and financial
markets, and summarize the price assessment process.
Explain the formation of physical oil prices, the role of futures prices in PRA assessments, and the links between
futures, forwards and spot prices resulting from the assessment process.
Describe the physical crude oil nomination and pricing procedure given a set of market assumptions.

NATURAL GAS AND COAL MARKETSPART I EXAM WEIGHT | 25%

The broad areas of knowledge covered in readings related to Natural Gas and Coal Markets include the following:
Natural Gas
Physical properties of natural gas
Types of natural gas, units of measure, and heat content
Natural Gas Liquids (NGLs) and condensates
Global natural gas markets and economic fundamentals
Market dynamics and pricing
Gas sales agreements and trading
Transportation and storage economics
Liquefied Natural Gas (LNG)
Market dynamics and pricing
Coal Markets
Physical properties of coal
Types of coal, units of measure, and heat content
Benchmarks, contract specifications and trading
Global coal markets and economic fundamentals
Transportation
READINGS FOR NATURAL GAS AND COAL MARKETS | 20 QUESTIONS
1. Vincent Kaminski. Managing Energy Price Risk, 4th Edition (London, UK: Risk Books, 2016).
Chapter 7 US Natural Gas Markets
Understand how recent developments in the US natural gas industry have impacted production, transmission,
distribution, consumption, and regulatory market trends.
Describe the primary drivers of seasonality observed in natural gas consumption and understand the impact of
seasonality on natural gas storage, injection, and withdrawal.
Define basis and understand the primary drivers of basis differentials.
Describe the key physical and financial components associated with the structure of US natural gas markets.
Identify US natural gas benchmark contract specifications and understand how these contracts are traded.
Understand the mechanics, application and valuation of natural gas swaps.
Structure and apply a fixed-for-floating, a floating-for-floating, and a natural gas basis swap; calculate a swap
settlement for each.
Chapter 12 Coal
Differentiate between various types of coal and the physical properties associated with each type of coal used in
different regions of the world.
Describe the features of popular coal contracts, including exchange-traded and OTC contracts.
Compare and contrast the economics of coal-fired and natural-gas fired power plants, and understand the
motivations for fuel-switching decisions.
Identify various modes of transportation available for coal delivery.
Identify global coal benchmarks, contract specifications, and trading.

2. *Reserve Bank of Australia. Developments in Thermal Coal Markets (June 2015).

Understand current trends in global coal trading and describe the underlying fundamental factors driving
these trends.
Explain Chinas role in global coal markets and describe policy initiatives to shift China towards cleaner sources
of energy.
3. Vincent Kaminski. Energy Markets. (2012).

Chapter 10 Natural Gas Transportation and Storage
Calculate pipeline shipping costs for a given set of market assumptions.
Identify the fixed and variable costs associated with natural gas pipeline charges, including tariffs and the
economics of pipeline pumping station fuel requirements.
Illustrate how and why a pipeline may be used to temporarily store natural gas (linepack).
Understand the nomination process, including balancing mechanisms, and the difference between interruptible
and firm delivery contracts.
Understand how natural gas storage inventories are reported and identify potential weaknesses in the
reporting process.
4. *International Gas Union. Wholesale Gas Price Formation: A Global View of Price Drivers and Regional Trends
(June 2011). Sections 1 to 5, and 8 to 10 only.
Differentiate between hub, citygate, and basis price; understand how each is applied in the pricing/valuation of
natural gas contracts.
Differentiate between the key mechanisms for pricing physical natural gas and identify the geographic regions or
market structure where each type of pricing mechanism is applied.
Interpret gas supply and demand curves and the factors that affect the shape of those curves.
Describe the relationship between a local gas pricing mechanism, the observed market price, and the
hypothetical market-clearing price.
Understand how volatility impacts natural gas prices and how oil-linked prices can help mitigate the impact
of volatility.
5. *Gas Storage Industry Primer. Niska (April 2010).

Define terms associated with natural gas storage, including cushion gas, working gas, deliverability, and
injection rate.
Compare the advantages and disadvantages of the following underground natural gas storage structures:
depleted reservoirs, aquifers, and salt caverns.
Understand the embedded optionality associated with gas storage capacity and the economic drivers that
influence the value of a gas storage facility.
6. *Oxford Energy: US NGL Production and Steam Cracker Substitution (September 2014).
Differentiate between the various types of NGLs (ethane, propane, butane, isobutane, natural gasoline) and
understand their primary applications and end-use products.
Understand the NGL economics associated with the surge in US shale production and explain their implications
for NGLs as a feedstock for the petrochemical industry.
Describe the implications of NGL exports on global trade patterns.

7. *Anthony J. Melling. Natural Gas Pricing and its Future: Europe as the Battleground. Carnegie Endowment (2010).
Chapter 1 The Development of European Gas Contracting
Understand the evolution of natural gas spot markets in Europe.
Understand why netback pricing is used and calculate a netback price from a set of inputs.
Explain the mechanics of clauses commonly found in European gas sales agreements, such as price review
and capacity charges.
Appendix Key Terms of Long-Term Oil-Indexed Take-or-Pay Contracts

Understand the mechanics and contractual terms contained in a gas sales agreement (GSA), including take-or-
pay obligations and nominations.
Understand and calculate Annual Contract Quantity clauses like minimum bill and take-or-pay, typically found in
a European gas sales agreement.
Understand the operational and financial implications of a take-or-pay clause to consumers.
Explain the role of a make-up bank in a GSA.
Understand how carry forward quantities (Carry Forward) will affect the economics of a GSA.
Explain the role of a price reopener and be able to list the GSA clauses covered by this term.
8. *Jonathan Stern and Howard Rogers. The Dynamics of a Liberalised European Gas Market Key Determinants of Hub
Prices, and Roles and Risks of Major Players. (Oxford Energy, December 2014) Sections 1.1 to 1.4 only.
Compare the price evolution and historical patterns of European wholesale natural gas prices to oil-indexed prices.
Explain factors driving the change from long-term contracts to hub-based trading and the steps taken by some
market participants to maintain oil-index pricing methods.
Understand why prices among European hubs have diverged during the past few years.
Understand the origin of natural gas supplies for European hubs, including price determinants for imported gas.
9. *Ministry of Economy, Trade and Industry. Strategy for LNG Market Development: Creating a Flexible LNG Market
and Developing an LNG Trading Hub in Japan (May 2016).
Understand volumetric measures, energy content, spot trading, and the economics of Liquefied Natural Gas (LNG).
Describe current LNG supply and demand fundamentals and their impact on global producers and development
of LNG trading hubs.
Explain Japans pivotal role in global LNG markets.
Identify potential risks that market participants may face in developing an LNG trading hub in Asia.
Compare and contrast various LNG pricing mechanisms and understand the motivation, benefits, and challenges
of each, including new LNG contract requirements.
Compare the fundamentals of regional LNG markets within the Asia-Pacific region.
10. Michael D. Tusiani and Gordon Shearer. LNG: Fuel for a Changing World - A Nontechnical Guide - 2nd Edition
(Tulsa, OK: PennWell Books, 2016).
Chapter 12 LNG Project Formation
Understand the basic operation of an LNG train and describe the steps in the LNG liquefaction process.
Understand the contractual arrangements used in LNG production, sale and transport.
Identify and describe the necessary components for the establishment and development of an LNG project;
understand the benefits and challenges of each.
Assess the development and impact of market pricing mechanisms, including the use of the JCC, S-curve, and
Henry Hub-linked formulas.
Describe the structure, advantages, and factors that mitigate risk in project finance transactions.

Chapter 13 Upstream Gas Supply Agreements

Describe the three categories of business structures associated with an LNG sales agreement; understand the
benefits and drawbacks of each.
Understand the typical terms found in a GSA (qualitative and quantitative specs).
Understand the role of feed gas in an LNG sales agreement.
Describe how LNG revenues are allocated along the LNG value chain and how the price of natural gas
is determined.
Chapter 14 LNG Sale and Purchase Agreements

Understand the historic evolution of LNG contracts and how these developments have caused the LNG pricing
methodology to evolve.
Explain the role of buildup provisions in long-term LNG contracts.
Describe annual contract quantity (ACQ) adjustments, including volume flexibility, roundup/rounddown
provisions, excess quantities, etc.
Explain the different LNG pricing formulas used in Asia (including S-Curve) and Europe (including Weighted
Average); be prepared to calculate each.
Understand why buyers in different geographic regions require different physical properties in the LNG
they purchase.
Chapter 15 LNG Tanker Contracts

Define bill of lading and charterparty and describe their practical application.
Understand the typical phases of waterborne transportation and describe the variety of charterparty contracts
utilized in practice.
Describe the considerations for owning and chartering an LNG tanker given a set of market assumptions.
Identify and describe key commercial terms in an LNG charterparty.

ELECTRICITY MARKETS AND RENEWABLE GENERATIONPART I EXAM WEIGHT | 30%

The broad areas of knowledge covered in readings related to Electricity Markets and Renewable Generation include
the following:
Physical properties of electricity

Types of power generation (fossil fuel and renewable)
Transmission and distribution
Electricity market economics
Base load, mid-merit, peak and off-peak generation
Capacity factor, heat rate, and spark spread
Market data and price discovery
Investing in generating capacity
Electric energy markets and trading
Power pools (ISOs and RTOs) and bilateral trading
Contracts and structured solutions for energy markets
Liberalized (deregulated) wholesale power market design
Energy markets (day-ahead vs. real-time) and balancing markets
Energy only vs. capacity markets
Ancillary services
Integration of renewable energy
Global electricity markets and economic fundamentals
Emission reduction programs and regulation
READINGS FOR ELECTRICITY MARKETS AND RENEWABLE GENERATION | 24 QUESTIONS
1. Darryl R. Biggar and Mohammad Reza Hesamzadeh. The Economics of Electricity Markets. (West Sussex, UK:
John Wiley & Sons, 2014).
Chapter 2 Introduction to Electric Power Systems
Understand the fundamental concepts related to the physical transmission of electricity and related terminology,
including volts, amps and watts.
Describe the factors that contribute to the physical loss of electric power in a grid system, including the effect of
reactive power on grid operations.
Explain the differences between transmission and distribution networks and describe the role each plays in
supplying power to end-users.
Understand the physical challenges that must be overcome in order to maintain the constant supply of electricity
to end-users within a power grid.
Understand how the efficient operation of a power grid is affected when photovoltaic (PV) solar, other
renewables, and smart devices are introduced.

Chapter 3 Electricity Industry Market Structure and Competition

Identify the required short-run and long-run tasks necessary to achieve an efficient electricity market.
Compare the single-buyer, wholesale competition, and retail competition approaches to electricity market reform.
Understand the mechanisms used in liberalized electricity markets to address distribution challenges, such as
physical constraints and maintaining supply and demand balance.
Explain the arguments for and against the use of a centralized control authority, such as a system operator, in a
liberalized market.
Explain the operation of the spot market in the Australian National Energy Market (NEM), including the use of
price caps, floors and the balancing market.
Understand the financial instruments used to manage risk exposures within the NEM and calculate a hypothetical
transaction from a set of inputs.
2. Daniel Kirschen and Goran Strbac. Fundamentals of Power System Economics (West Sussex, UK: John Wiley &
Sons, 2004).
Chapter 3 Markets for Electrical Energy
Understand how the spot (real time) market ensures the reliable operation of an electric grid.
Understand how the bidding process sets the wholesale price for electricity, including how the marginal
generating unit sets electricity prices.
Calculate the settlement of electricity contracts, including instances when imbalances exist.
Chapter 4 Participating in Markets for Electrical Energy (Sections 4 to 4.3.1.14 only)

Understand how the amount a customer is willing to pay for electricity is estimated, including the value of lost
load (VOLL).
Identify the economic factors that a power retailer considers, and understand demand forecasting.
Understand the relationship between the marginal cost of generation and the wholesale market price of
electricity.
Evaluate the profitability of a generating unit based on a given set of market parameters and operating factors,
including start-up costs.
Chapter 7 Investing in Generation

Apply the internal rate of return (IRR) and minimum acceptable rate of return (MARR) to assess the economic
viability of a plant; explain how a plants operating characteristics impact its IRR.
Identify the market factors used to determine power plant upgrade or retirement decisions.
Interpret a load-duration curve and its relevance in the decision to invest in generating capacity.
Understand the process for creating an auction bid for a peaker plant given a set of market assumptions.
3. Vincent Kaminski. Energy Markets (2012).

Chapter 22 Analytical Tools
Understand and apply the following terms: capacity factor, availability factor, load factor, and demand factor.
Differentiate between thermal efficiency, operating heat rate, and market implied heat rate; apply the heat rate
to calculate the marginal cost of electricity.
Calculate a spark spread, including clean and dark spreads, and understand how they are applied; explain
challenges associated with spark spread modeling.
Understand the supply stack and how different units are dispatched to ensure system reliability.
Identify sources of data for electricity generation and explain how emission estimates can be derived from
published data.
Understand how data about the electricity forward curve, cash market transactions, power/fuel price spreads,
and power outages is collected and reported by price reporting agencies.

Chapter 23 Electricity Market Transactions

Understand key challenges and considerations in the implementation of a capacity payments system.
Understand how transmission congestion/constraints and network losses can affect electricity prices; calculate
the economic settlement of a Financial Transmission Rights (FTR) transaction.
Explain the mechanics of power pool transactions in the US; identify frequently used block types and time buckets.
Understand the role of power marketers in the electricity market; explain the use of full requirements contracts
by power marketers and identify the associated risks.
Understand the rationale of using a tolling transaction and describe the settlement of a tolling transaction.
4. *ISO New England. Overview of New England's Wholesale Electricity Markets and Market Oversight (May 2014).
Distinguish between Day-Ahead and Real-Time markets and how they operate to balance the market.
Define locational marginal pricing (LMP) and explain the factors that cause LMP prices to diverge at
different locations.
Understand how prices are cleared in the day-ahead market and the role of virtual trading in risk management.
Understand the role of the forward capacity market and how forward capacity auctions operate.
Explain the role of the forward reserve market (FRM) and why FRM prices must be balanced against
potential LMPs.
Describe demand response and its application in electricity markets.
5. Barry Murray. Power Markets and Economics: Energy Costs, Trading, Emissions. (West Sussex, UK: John Wiley &
Sons, 2009).
Chapter 11 Ancillary Service Markets
Understand the objective of ancillary service markets in the operation of a power grid.
Differentiate between the types of ancillary services and their respective operational requirements
and/or limitations.
Determine the costs incurred by generators for providing ancillary services given a set of market assumptions.
6. Rafal Weron. Modeling and Forecasting Electricity Loads and Prices. (Hoboken, NJ: John Wiley & Sons, 2006).
Chapter 1 Complex Electricity Markets
Compare and contrast the operating characteristics of power pools and power exchanges, particularly the
methodology used to establish a market clearing price in each.
Define and explain the following electricity market terms: nodal, zonal, spot price, and balancing market.
Differentiate between the types of products and contract types used when buying electricity as a commodity.
Understand how prices are set in the UK electricity market, including the use of a contract for differences (CFD)
as a risk management tool.
Understand how prices are set within the Nord Pool and the two-sided auction; calculate a clearing price from a
given set of inputs.
Describe energy-only markets; understand the role of price spikes in energy-only markets.
Understand the market design weaknesses that led to price spikes in the California electricity market.
7. *Kenneth Skinner. Heat Rates, Spark Spreads and the Economics of Tolling Agreements (December 2010).
Explain the economic rationale for entering into tolling agreements, identify the risks associated with such
transactions, and understand the key terms associated with such transactions.
Define heat rates and spark spreads, and explain how the concepts of intrinsic and extrinsic value are applied in
tolling agreements.
Distinguish between operating heat rate, economic heat rate, and market implied heat rate.
Calculate a breakeven fuel cost for a given power-purchase price.

8. *Quadrennial Technology Review 2015. Chapter 4: Technology Assessments Solar Power Technologies.
(US Department of Energy, 2015).
Understand the key trends and objectives associated with solar technology development.
Describe the typical cost structure of photovoltaic (PV) solar installations and summarize trends in global solar
installations and system costs over time.
Compare and contrast photovoltaic (PV) and concentrating solar power (CSP) technologies.
9. Rebecca Busby. Wind Power: The Industry Grows Up. (Tulsa, OK: PennWell Books, 2012).
Chapter 6 Wind Farms: Developing and Operating Wind Power Plants
Understand the key considerations and challenges associated with the development of a wind farm, including
site development, grid interconnection, and energy sales agreements and financing.
Evaluate key factors that influence power production from a wind installation, including design class, availability,
and the capacity factor.
Understand how government incentives, including production tax credits, renewable energy credits, and feed-in
tariffs, impact the economics of wind and solar projects.
Identify the economic and operational risks that are typically associated with development of a wind farm.
Understand how the performance of a wind installation is monitored, and how unplanned maintenance and
operating shutdowns can be minimized.
10. *International Renewable Energy Agency (IRENA). Renewable Energy Integration in Power Grids (April 2015).
Explain how an increasing proportion of renewable power capacity on a power grid can impact the systems
operation, reliability, transmission, and distribution.
Understand the challenges and technological solutions associated with the integration of variable renewable
energy production into a power grid.
Identify global trends in renewable energy capacity and integration, and explain how different countries have
addressed challenges related to variable energy integration.
11. *Leibniz Information Center for Economics. The Future of the European Power Market (2015).
Understand the primary factors for the decline in European wholesale power prices from 2008 to 2014.
Examine the impact of renewable energy deployments on residual conventional generators in the merit order.
Compare market design structures for the various US ISOs and the two Australian markets.
Understand the processes RTOs and ISOs use to commit and dispatch resources in day-ahead and real-time
markets, including the market design challenges associated with physical and operational constraints.
Understand what impact market design has on capacity additions, reserve margins, and ancillary services.
Understand expected future changes in the European power market, and describe challenges which may arise as
a result of these changes.
12. *KU Leuven Energy Institute. The Current Electricity Market Design in Europe (2015).
Understand the key features of the Belgian energy-only electricity market, including the forward and future
market, the day-ahead market, the intraday market and the balancing market.
Explain methods for the procurement and activation of reserves and the settlement of imbalances.
13. *KU Leuven Energy Institute. Cross-Border Electricity Trading: Towards Flow-Based Market Coupling (2015).
Understand how electricity is traded on a cross-border basis.
Differentiate between the available transfer capacity and the flow-based approach used to determine cross-
border trading volumes, and describe advantages and disadvantages of each approach.
Understand how market coupling impacts electricity markets, including typical implementation challenges.

14. *KU Leuven Energy Institute. Capacity Mechanisms (2013).

Compare capacity markets to energy-only markets and explain how capacity mechanisms address the
challenges associated with energy-only markets.
Explain the advantages and disadvantages of capacity payments.
Describe the advantages and disadvantages of various quantity-based capacity mechanisms.
15. *KU Leuven Energy Institute. Negative Electricity Market Prices (2014).
Explain how negative electricity prices can arise in day-ahead, intraday, and balancing markets.
Describe the impact of renewable generation on electricity prices and the potential for negative electricity prices.
Identify potential solutions that can reduce the frequency of negative electricity prices.
16. *KU Leuven Energy Institute. Storage Technologies for the Power System (2014).
Describe the primary drivers behind the adaptation of storage technologies.
Compare different electricity storage technologies and assess the viability of each.
17. *Tim Buckley and Jai Sharda. Indias Electricity Sector Transformation. Institute for Energy Economics and
Financial Analysis (August 2015). Sections 1 to 6 only.
Understand the primary factors driving reform in Indias power generation and distribution sector.
Understand the financial challenges that are currently limiting the expansion of renewable power in India and the
alternatives being used to finance future projects.
Describe the solutions proposed by the Indian government to reduce inefficiencies in long distance
power transmission.
Understand issues surrounding the use of both domestic and imported coal and the effect it is having on the
expansion of coal-fueled power generation.
Understand how the economics of power generation in India have been influenced by changes in global
LNG markets.
18. Andrea Roncoroni, Gianluca Fusai, Mark Cummins, eds. Handbook of Multi-Commodity Markets and Products:
Structuring, Trading and Risk Management. (Hoboken, NJ: John Wiley & Sons, 2015).
Chapter 5 Emissions Markets and Products
Understand the key elements of various initiatives that have been introduced to limit the impact of global climate
change, including the UN Framework Convention and the Kyoto Protocol.
Describe the European ETS system, including covered industries, market participants, and criteria for allocating,
auctioning and trading allowances.
Compare regional and voluntary initiatives to reduce carbon emissions.
Identify drivers that can impact the price of carbon permits (allowances) and assess models of price formation
for ETS carbon allowances.
Describe the primary factors power generators assess when making a fuel-switching decision in a market with
carbon allowances.

LEARNING OBJECTIVES
ERP Exam Part II

Financial Energy Markets
and Risk Management

ERP Exam Part II
The 4-hour, Part II Exam consists of 60 multiple choice questions. The exam
structure has been designed in conjunction with the EOC to assess learning outcomes
associated with financially-traded energy products, probability and statistics, energy
price formation, and the assessment and management of physical and financial
energy risk based on the following topics and weights:
Financial Energy Products 30% 18 questions

Risk Assessment and Energy Price Modeling 20% 12 questions
Risk Management Tools 50% 30 questions
ERP Exam Part II Total 100% 60 questions


FINANCIAL ENERGY PRODUCTSPART II EXAM WEIGHT | 30%

The broad areas of knowledge covered in readings related to Financial Energy Products include the following:
Structure and operation of OTC and exchange markets

Central clearing
Energy derivative contracts
Forwards and futures
Swaps
Options and real options
Hedging mechanics and cash flows
Global regulatory framework for financially traded energy products
READINGS FOR FINANCIAL ENERGY PRODUCTS | 18 QUESTIONS
1. Jon Gregory. Central Counterparties. (West Sussex, UK: John Wiley & Sons, 2014).
Chapter 2 Exchanges, OTC Derivatives, DPCs and SPVs (Sections 2.1 and 2.2 only)
Describe the functions of exchanges and explain how an exchange can be used to mitigate risk.
Compare methods used for the clearing of contracts, and explain the counterparty risk associated with each
method of clearing.
Compare exchange-traded and OTC markets and understand their uses.
Identify risks associated with OTC markets and explain how these risks can be mitigated.
Chapter 3 Basic Principles of Central Clearing

Understand the mechanics of a central counterparty (CCP) and how a CCP clears financial transactions; describe
the effect a CCP has on risk allocation and its potential impact on systemic risk.
Describe advantages and disadvantages of central clearing of OTC derivatives.
Differentiate between initial and variation margin; identify factors used by a CCP to calculate the initial margin
requirement for a cleared transaction and explain how margin can mitigate risk.
Explain the concepts of novation, netting, and multilateral offset, and compare their use to a bilateral market.
Assess the impact of central clearing on the broader financial markets.
2. Robert McDonald. Derivatives Markets, 3rd Edition. (Upper Saddle River, NJ: Pearson Education, Inc., 2013).
Chapter 4 Introduction to Risk Management
Understand why firms manage risk and engage in hedging transactions.
Identify scenarios in which hedging activity adds value to a firm or when a firm may choose not to hedge a
risk exposure.
Compare and contrast the use of forward contracts and option strategies to hedge risk exposures; describe and
calculate the payoff function and cash flows for each strategy.
Understand the mechanics and payoff profiles of call and put options; identify when an option contract is in, at,
or out-of-the-money.
Understand how collar strategies are used to hedge market risk, including zero-cost and pay-later strategies.
Explain how firms apply cross-hedging strategies to aggregate risk, reduce risk and create value.
Understand how the price correlation between two assets affects the optimal hedge amount in a
cross-hedging strategy.

Chapter 6 Commodity Forwards and Futures (Sections 6.1 to 6.3, and 6.6 to 6.8 only)
Compare and contrast forward and futures contracts; understand how they are applied to hedge a market risk
exposure or an obligation to buy or sell a commodity.
Understand the economics of forward/futures positions; explain the basic equilibrium formula for pricing
commodity forwards.
Describe the relationship between spot, forward and futures prices, and identify challenges related to price
formation of energy futures.
Define a futures contract and contrast the mark-to-market value of a forward versus a futures position.
Understand basis risk and how it can be created when hedging the price risk on a commodity exposure.
Differentiate between a strip hedge and a stack hedge.
Provide examples of cross-hedging, such as assessing the process of hedging jet fuel with crude oil and using
weather derivatives.
Construct a synthetic commodity position, and use it to explain the relationship between the forward price and
the expected future spot price.
Calculate cooling degree days (CDD) and heating degree days (HDD); understand how CDDs and HDDs are
applied in transactions to hedge weather related risk.
3. Glen Swindle. Valuation and Risk Management in Energy Markets . (2014).

Chapter 2 Forwards and Carry
Define carry markets and calculate the forward price of a commodity with storage costs.
Understand how forward price curves are derived; differentiate between contango and backwardation.
Define convenience yield and describe how it can be used to explain contango in a forward price curve.
Understand the structure and economics of transactions used to store physical commodities, including a park-
and-loan storage transaction.
Summarize the variety of derivative instruments available for hedging and risk transfer activities.
Identify the abbreviations/identifiers for commodities futures contracts for each calendar month.
Compare the characteristics of physically delivered vs. financially settled transactions.
Define lot and open interest and explain the dynamics of NYMEX WTI futures contract expiration.
Explain the mechanics of an Exchange-for-Physical (EFP) transaction.
4. Vincent Kaminski. Energy Markets (2012).

Chapter 11 US Natural Gas Markets
Describe characteristics of the US natural gas market, interpret the shape of and relationship between elasticity
of supply and demand curves, and identify market factors that explain these characteristics.
Understand the market mechanism that maintains balance between supply and demand in the short-term natural
gas market.
Explain how physical basis transactions affect natural gas price formation and price reporting.
Understand how regional natural gas price indices are developed and reported.
Structure and apply a fixed-for-floating, a floating-for-floating, and a natural gas basis swap; calculate a swap
settlement for each.
Understand Exchange for Physicals (EFPs) transactions and their practical application.
Understand Volumetric Production Payments (VPPs) and identify the related risks borne by buyers and sellers.
Explain how natural gas processing plants can mitigate market risk through contracts that include fixed-fee,
percentage of proceeds, percentage of index, and keep-whole provisions.
Identify and compare the application of structuring solutions for mitigating volumetric risk, including swing
options, swaps with embedded call options, and weather derivatives.
Understand the mechanics of and applications for volume-based options, including swing options and
take-or-pay options.

Chapter 18 Transactions in the Oil Markets

Describe the mechanics and risks of a collar strategy, including costless collars, extendable collars, three-way
collars, and four-way collars; assess the economics of a collar strategy.
Construct and interpret a crack spread and identify potential risks that refineries face in using crack spreads.
Explain the mechanics and application of a participating swap used to hedge a crude oil position.
Identify and understand the application of available indices and derivative contracts typically used by shipping
companies to monitor and mitigate freight risk; apply a forward freight agreement (FFA).
5. Betty J. Simkins and Russell E. Simkins, eds. Energy Finance and Economics: Analysis and Valuation, Risk
Management, and the Future of Energy. (Hoboken, NJ: John Wiley & Sons, 2013).
Chapter 11 Real Options and Applications in the Energy Industry
Understand real options, including their practical application and valuation.
Define different types of real options (option to expand, option to exercise, etc.) and identify the circumstances
in which each may be employed.
6. S. Mohamed Dafir and Vishnun N. Gajjala. Fuel Hedging and Risk Management. (Hoboken, NJ: John Wiley &
Sons, 2016).
Chapter 2 Major Energy Consumers and the Rationale for Fuel Hedging
Understand the risks facing major fuel-consuming industries, such as airlines, shipping, oil refining, and power
generating industries.
Explain the potential benefits of hedging and understand how to minimize risk by structuring a hedge given a set
of market assumptions.
Classify commodity market participants based on their exposure to commodity prices and determine if they
would be categorized as hedgers, speculators, or arbitrageurs.
Identify the major participants in the energy markets and describe the motivations of each market participant.
Outline the stages involved in a typical physical spot transaction and understand the risks at each stage.
Understand the payoff profiles of call and put options; differentiate between American, European, and
Asian options.
Chapter 4 Shipping and Airlines Basics for Fuel Hedging

Understand the relationship between spot and forward prices for commodities.
Explain the fundamental characteristics and drivers of volatility in energy commodities.
Understand the mechanics and payoff profiles of call and put options; identify when an option contract is in, at,
or out-of-the-money.
Explain put-call parity and the principal of no arbitrage.
Understand and apply an option-based hedging strategy for an end-user.
Differentiate between historical and implied volatility and understand the Black-Scholes option pricing model
for commodities.
Interpret the metrics used to measure the sensitivity of option prices to changes in the underlying spot price,
volatility, interest rates, and time to maturity.
Understand the application of and calculate the payout on the following types of options: American, European,
Asian, binary (cash-or-nothing), and call/put spread, collar, calendar spread, straddles, strangles, and butterflies.
Understand the underlying assumptions used in the Black-Scholes option pricing formula.

7. *Gordon Goodman. Swaps: Dodd-Frank Memories (July 2013).

Understand how Dodd-Frank regulations have affected the use of swap hedges.
Describe the financial limits and other obligations that counterparties must meet to qualify for the end-user
exemption, including the de-minimis threshold and major swap participant (MSP) test.
Summarize the reporting process under Dodd-Frank; identify when a counterparty is obligated to report a
transaction to a swap data repository (SDR).
8. *Gordon Goodman. Dodd-Franks Impact on Financial Entities, Financial Activities and Treasury Affiliates (Oct 2013).
Understand and apply the definition of a financial entity under the Dodd-Frank Act; explain how this
designation affects mandatory clearing requirements.
Construct or identify scenarios in which the end-user exemption can be applied to organizations that are
deemed to be financial entities.

RISK ASSESSMENT AND ENERGY PRICE MODELINGPART II EXAM WEIGHT | 20%

The broad areas of knowledge covered in readings related to Risk Assessment and Energy Price Modeling include
the following:
Quantitative tools for risk analysis

Probability theory
Statistics
Regression analysis
Energy commodity price formation
Fundamental drivers
Technical properties and time series analysis
Modeling energy prices
Correlation and volatility estimation
READINGS FOR RISK ASSESSMENT AND ENERGY PRICE MODELING | 12 QUESTIONS
1. Michael Miller. Mathematics and Statistics for Financial Risk Management, 2nd Edition. (Hoboken, NJ: John
Wiley & Sons, Inc., 2013).
Chapter 2 Probabilities
Differentiate between continuous and discrete random variables.
Differentiate between independent and mutually exclusive events.
Distinguish between the probability density function, the cumulative distribution function, and the inverse
cumulative distribution function.
Calculate the probability of an event given a discrete probability function.
Calculate joint probability using a probability matrix.
Define and differentiate between conditional and unconditional probabilities, and calculate the conditional
probability using assumptions for a given scenario.
Chapter 3 Basic Statistics (Averages to Kurtosis only)

Apply and interpret the mean, standard deviation, and variance of a random variable.
Calculate and interpret the covariance and correlation between two random variables.
Calculate the mean and variance of sums of variables.
Understand and interpret the minimum variance hedge ratio.
Describe the four central moments of a statistical variable or distribution: mean, variance, skew, and kurtosis.
Interpret the skew and kurtosis of a statistical distribution.
Chapter 4 Distributions (Parametric to Students t Distribution only)

Identify the distinguishing characteristics of parametric and nonparametric distributions.
Differentiate between the following distributions: normal, standardized normal, lognormal, and uniform.
Describe the properties of independent and identically distributed (i.i.d.) random variables.
Describe and apply the Central Limit Theorem.

2. Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management. (Sydney, AUS: Lacima
Publications, 2000).
Chapter 2 Understanding and Analyzing Spot Prices
Understand characteristics associated with energy spot price behavior, including mean reversion, jumps,
and seasonality.
Understand the weaknesses associated with using a Geometric Brownian Motion process to model energy prices.
Modify assumptions used in the Black-Scholes Merton model to replicate the behavior of energy commodity
spot prices.
Chapter 3 Volatility Estimation in Energy Markets (Sections 3.1 and 3.2 only)
Summarize the practical challenges of modeling energy price behavior.
Estimate volatility for a set of price return data; scale volatility for a specific time horizon, and understand the
volatility term structure.
Understand how implied volatility is derived, interpret a volatility smile and understand how it relates to
implied volatility.
3. Rafal Weron. Modeling and Forecasting Electricity Loads and Prices. (2006).
Chapter 2 Stylized Facts of Electricity Loads and Prices (Sections 2.1 to 2.4 and 2.7 only)
Understand why price spikes occur in electricity markets and describe their characteristics.
Identify seasonal patterns in electricity prices and explain modeling approaches to test a series of price returns
for seasonal behavior.
Explain methods to remove or decompose seasonal trends from a data series.
Chapter 3 Modeling and Forecasting Electricity Loads

Describe factors that impact load patterns and understand how they are incorporated in forecasting models;
differentiate between statistical methods applied in short-term load forecasting.
Understand the factors used to create a load forecasting model and understand how results are applied.
Compare and contrast the autoregressive (AR), the moving average (MA) and the autoregressive moving
average (ARMA) models.
Understand how a time-series analysis can be applied to forecast trends in market data.
Understand time-series analysis and the steps used to identify and apply a time-series model, including
estimating model parameters, determining goodness of fit, and performing diagnostic tests to determine if a
model is appropriate.
4. Vincent Kaminski. Managing Energy Price Risk, 4th Edition (2016).

Chapter 8 Managing Oil Price Risk: Dealing with the Time-Varying Relationship between the Price of Oil
and Fundamentals
Understand price elasticity of demand and supply; distinguish between short and long-run elasticity.
Differentiate between macroeconomic, geopolitical, and technological drivers that impact supply and demand
forecasts and increase forecasting complexity.
Describe factors that impact the price of oil and explain the relationship between each factor and the oil price.
Assess the factor-based predictive model of oil price returns and explain how the factor betas are derived.
Explain how to incorporate time-varying relationships into a factor-based predictive model of returns.
Summarize techniques to estimate changes in parameters over time.

RISK MANAGEMENT TOOLSPART II EXAM WEIGHT | 50%

The broad areas of knowledge covered in readings related to Risk Management Tools include the following:
Market Risk Measurement and Modeling

Value-at-Risk (VaR) and other risk measures
Liquidity risk and liquidity adjusted VaR
Expected shortfall
Option Greeks
Delta-gamma hedging
Model control and price validation
Credit and Counterparty Risk

Credit risk measurement
Credit ratings and scoring
Counterparty risk measurement and management
Expected loss, loss given default, and probability of default
Potential future exposure
Credit valuation adjustment (CVA)
ISDA Master and Credit Support Annex
Collateralization and netting agreements
Country and sovereign risk metrics and management
Political, economic, social, and security risks
Financial market indicators
Operational Risk
Principles for sound operational risk management
Evaluation and management of operational risk
Key Risk Indicators (KRIs)
Key Performance Indicators (KPIs)
Liquidity/funding risk
Liquidity stress testing
Contingency funding
Enterprise Risk Management (ERM)

Risk governance
Development and communication of risk appetite and risk tolerance
Integration of risk management in strategic decisions
Economic capital frameworks and capital allocation
Risk-adjusted return on capital (RAROC)
Stress testing and scenario analysis
Case studies in ERM implementation

READINGS FOR RISK MANAGEMENT TOOLS | 30 QUESTIONS
1. Glen Swindle. Valuation and Risk Management in Energy Markets . (2014).

Chapter 16 Control, Risk Metrics and Credit
Understand and distinguish between the volume and tenor of actively traded commodities.
Identify standard risk metrics, and explain methods of modeling risk metrics for liquid assets, illiquid basis
positions, and seasonality in price returns.
Describe the typical model control framework, the process for validating pricing inputs, and the role of
consensus service providers.
Understand how seasonality poses a challenge for firms which trade in multiple asset classes.
Understand how credit risk is typically managed in energy portfolios and the role of the CVA desk.
Explain the use of credit default swaps in hedging credit risk; compare right-way risk with wrong-way risk.
2. John C. Hull. Risk Management and Financial Institutions, 4th Edition. (Hoboken, NJ: John Wiley & Sons, 2015).
Chapter 8 How Traders Manage Risk
Understand the "Option Greeks" and market risk associated with linear and nonlinear financial products.
Define delta hedging and explain its application in the immunization of market risk associated with linear and
nonlinear financial products.
Construct a delta hedge for an option contract or portfolio of options; assess and rebalance a delta hedge for a
given set of price changes.
Define gamma and explain the relationship between delta and gamma; construct a gamma hedge and a delta-
gamma hedge by using a combination of options and the underlying asset.
Define vega and construct a vega-neutral position; calculate the quantity of options necessary to make a
portfolio gamma-neutral and vega-neutral.
Define theta and rho as they relate to individual options and option portfolios.
Understand how dynamic hedging of delta, gamma, vega, theta, and rho is typically done in practice.
Chapter 10 Volatility
Calculate the volatility of an asset return over various time periods.
Understand and apply the Exponentially Weighted Moving Average (EWMA) and the GARCH (1,1) model to
forecast volatility.
Chapter 12 Value-at-Risk and Expected Shortfall

Understand the parameters for a VaR calculation and identify the strengths and weaknesses of using VaR.
Calculate VaR for a single position or a portfolio using different time horizons and confidence levels.
Calculate the expected shortfall (ES) and differentiate between ES and VaR.
Summarize the four conditions required for a risk measure to be coherent; explain why VaR is not a coherent
risk measure.
Estimate the marginal VaR, component VaR, and incremental VaR for a given position in a portfolio or for a
potential addition to a portfolio.
Understand the process of backtesting VaR and interpret results from backtesting a VaR model.

Chapter 24 Liquidity Risk

Describe market liquidity and identify factors that impact the liquidity of an asset and its liquidity trading risk.
Understand how market liquidity can be measured using spreads; calculate the liquidation cost and liquidity-
adjusted VaR of a position to be liquidated in the market.
Explain liquidity funding risk and identify and compare sources of liquidity for a financial institution.
Identify factors that cause feedback loops in financial markets and explain how feedback loops can amplify price
dislocations and impact market liquidity.
Understand how changes in leverage, investor sentiment, regulation, and modeling practices can impact
market liquidity.
3. Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management (2000).
Chapter 10 Value-at-Risk
Differentiate between the Simple Moving Average (SMA) and Exponentially Weighted Moving Average (EWMA)
methods for calculating historical volatility.
Understand how the decay factor affects output from an EWMA model; explain considerations for selecting the
decay factor.
Describe limitations in applying VaR as a risk management tool for energy assets.
Calculate VaR for a two-security energy portfolio given the correlation coefficient between assets; understand
the relationship between correlation and VaR.
Differentiate between delta VaR, delta-gamma VaR, historical simulations, and Monte Carlo simulations.
Understand the methodologies for backtesting VaR.
4. Kevin Dowd. Measuring Market Risk, 2nd Edition. (Hoboken, NJ: John Wiley & Sons, 2005).
Chapter 13 Stress Testing
Understand the benefits of stress testing and identify situations in which stress tests are an effective
assessment of risk.
Compare stress test results to VaR or expected shortfall.
Identify the challenges in the design and implementation of stress tests.
Understand scenario analysis, its application, and the potential impact on stress test results.
5. Markus Burger, Bernhard Graeber, and Gero Schindlmayr. Managing Energy Risk: An Integrated View on Power
and Other Energy Markets, 2nd Edition. (Hoboken, NJ: John Wiley & Sons, 2014).
Chapter 3 Risk Management (Section 3.4 Credit Risk only)
Differentiate between settlement risk and replacement risk, calculate settlement and replacement risk for an
energy commodity transaction based on a given a set of assumptions.
Understand and interpret external credit ratings, rating migration, default probabilities, internal ratings, and
credit risk models.
Identify common quantitative internal rating factors, explain their application and how they differ from external
credit ratings.
Explain the important credit risk measures used to quantify credit risk, including Risk-at-Default, Expected Loss,
Potential Exposure and Credit VaR; perform a simple calculation of each measure given a set of market inputs.
Understand and apply expected loss, loss given default, probability of default, potential exposure, and expected
return for a credit risk exposure.
Understand and apply credit exposure, credit migration, recovery, mark-to-market, replacement cost, default
probability, loss given default and the recovery rate.
Understand the methods used to reduce credit risk in energy transactions.

6. Jon Gregory. Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial
Markets, 2nd Edition. (Hoboken, NJ: John Wiley & Sons, 2012).
Chapter 3 Defining Counterparty Credit Risk
Differentiate between counterparty risk and lending risk.
Identify transactions with counterparty risk and explain how counterparty risk is created in each transaction.
Differentiate between settlement risk and pre-settlement risk.
Define credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss
given default and the recovery rate.
Identify and describe the different tools available to manage or mitigate counterparty risk.
Chapter 4 Netting, Compression, Resets and Termination Features

Understand the purpose of an ISDA master agreement and identify standard terms found in an ISDA.
Understand and apply netting and close-out procedures (including multilateral netting) to reduce counterparty
credit exposures.
Describe the mechanics of termination provisions and explain their advantages and disadvantages.
Define walkaway features and identify the disadvantages in using walkaway features.
Chapter 5 Collateral
Define collateralization and explain the mechanics of the collateralization process.
Describe the role of a valuation agent, the types of collateral that are typically used, and the process for
reconciling collateral disputes.
Understand and apply margin call frequency, thresholds, independent amount, minimum transfer amounts,
rounding, haircuts, interest, and re-hypothecation.
Identify standard terms found in a Credit Support Agreement (CSA) and Collateralization Agreement (CA), and
differentiate between a two-way and one-way CSA agreement.
Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through
collateralization.
Chapter 8 Credit Exposure (Sections 8.1 to 8.4 only)

Describe and interpret frequently used metrics to quantify credit exposure, including expected mark-to-market,
expected exposure, potential future exposure, expected positive exposure, effective exposure, and
maximum exposure.
Understand how counterparty credit exposures arise and compare credit exposure to VaR; identify typical credit
exposure profiles for swaps, options, and credit derivatives.
Explain how payment frequencies and exercise dates affect the exposure profile of various securities.
Identify factors that impact the credit exposure profile, and summarize the impact of collateral and correlation
on exposure profiles and netting.
Chapter 10 Default Probability, Credit Spreads and Credit Derivatives (Sections 10.1 and 10.2 only)
Distinguish between cumulative and marginal default probabilities.
Calculate risk-neutral default probabilities, compare the use of risk-neutral and real-world default probabilities in
pricing derivative contracts.
Compare the various approaches for estimating default probabilities: historical data approach, equity based
approach, and risk neutral approach.
Describe how recovery rates can be estimated.
Understand credit default swaps (CDS) and their general underlying mechanics.

Chapter 12 Credit Value Adjustment (Section 12.1 only)

Understand the motivation for and the challenges related to pricing counterparty risk.
Understand and apply Credit Value Adjustment (CVA), and calculate the CVA spread assuming no wrong-way
risk, netting or collateralization.
7. * Aswath Damodaran: Country Risk Determinants, Measures and Implications 2015 Edition (July 2015)
Pages 1 to 39 only.
Identify sources of country risk; understand how the economic life cycle, political climate, legal system, and
economic structure of a country can affect its risk exposure.
Compare instances of sovereign default in both foreign currency debt and local currency debt, and explain
common causes of sovereign defaults.
Identify factors that influence the level of sovereign default risk; explain and assess how rating agencies measure
sovereign default risks.
Understand the consequences of sovereign default.
Describe the advantages and disadvantages of using the sovereign default spread as a predictor of defaults.
8. *Operational Risk Management in the Energy Industry. (Management Solutions, 2014).

Differentiate between various classifications of operational risk; describe approaches used in the identification
and management of operational risks.
Understand the three lines of defense and explain tools used in risk governance, including risk maps, risk
appetite and the role of IT support systems.
Compare approaches to assess operational risk, including expert judgment and scenario analysis.
Understand how internal and external loss data is used to model operational losses, and describe the loss
distribution approach.
Understand how a company can optimize insurance protection against operational risks, and calculate the total
cost of risk assuming insurance coverage exists.
Describe the relationship between cost of insured risk, pure premium, and total cost of risk, and explain their use
in determining a set of acceptable insurance scenarios.
9. Shyam Venkat and Stephen Baird. Liquidity Risk Management A Practitioners Perspective. (Hoboken, NJ:
John Wiley & Sons, 2016).
Chapter 3 Liquidity Stress Testing
Differentiate between types of liquidity, including funding, operational, strategic, contingent and
restricted liquidity.
Explain how a liquidity stress testing model is built, including the development of scenarios.
Understand how changes in different assumptions can impact the result of a liquidity stress test model.
Understand how metrics from a liquidity stress test should be reported and integrated into results from other
risk models.
Describe best practices for the governance and control of stress testing frameworks.
Chapter 7 Contingency Funding Planning

Describe considerations for a firm in designing an effective contingency funding plan (CFP).
Describe elements of a CFP framework.
Identify examples of contingent actions a firm can take, challenges in performing these actions, and potential
consequences of taking contingent actions.
Explain how a CFP should be monitored and escalated, including the use of early warning indicators and liquidity
health measures.

10. John Fraser and Betty Simkins. Enterprise Risk Management: Todays Leading Research and Best Practices for
Tomorrows Executives. (Hoboken, NJ: John Wiley & Sons, 2010).
Chapter 8 Identifying and Communicating Key Risk Indicators
Understand Key Risk Indicators (KRIs) and explain their application in risk management.
Differentiate between Key Risk Indicators (KRIs) and Key Performance Indicators (KPIs); understand how they
are typically applied to support the risk management process.
Describe the parameters for creating effective KRIs and how KRIs can be aligned to support an organization's
risk management strategy.
Explain how KRIs are used to monitor risk exposures on an ongoing basis and how KRIs help to calibrate risk
management strategies.
Analyze the stakeholders, metrics and risk appetite inputs within an organization and explain how they are used
to create a set of KRIs.
Differentiate between risk appetite and risk tolerance, evaluate the characteristics of an effective risk
appetite statement.
Explain challenges to the adoption of KRIs for risk management within an organization.
11. *James Lam. Implementing an Effective Risk Appetite. (The Association of Accountants and Financial
Professionals in Business, August 2015).
Compare and contrast risk appetite, risk capacity and risk tolerance, provide examples of each, and explain how
an organization can align its risk tolerance to its risk appetite.
Describe goals and elements of a risk appetite framework and explain the role of each element in establishing an
effective risk appetite framework.
Explain steps in the process of developing a risk appetite statement.
Describe the roles and responsibilities of different business functions in developing and monitoring a risk
appetite framework.
Explain best practices for monitoring a risk appetite statement and reporting it to different groups
across an organization.
12. Michel Crouhy, Dan Galai, and Robert Mark. The Essentials of Risk Management, 2nd Edition (2014).
Chapter 17 Risk Capital Attribution and Risk-Adjusted Performance Measurement
Define, compare, and contrast risk capital, economic capital and regulatory capital, and explain methods and
motivations for using economic capital approaches to allocate risk capital.
Understand the RAROC methodology and its use in capital budgeting; use RAROC to compare the performance
of different business units.
Explain the challenges that can arise when using RAROC for performance measurement, including choosing a
time horizon, measuring default probability, and choosing a confidence level.
Calculate the hurdle rate for a project and use this benchmark to determine the viability of a project.
Compute the adjusted RAROC for a project to determine its viability.
Understand and calculate various risk-adjusted performance measures, including RORAC (return on risk adjusted
capital), return on capital, and economic value added.
13. John Fraser, Betty Simkins, and Kristina Narvaez. Implementing Enterprise Risk Management: Case Studies and
Best Practices (Hoboken, NJ: John Wiley & Sons, 2015).
Chapter 4 Value and Risk: Enterprise Risk Management at Statoil
Describe how senior management can support the implementation of Enterprise Risk Management (ERM)
across a firm.
Identify the primary objectives of Statoils ERM framework and describe challenges in its implementation.
Understand how firms can optimize total risk in a given scenario.
Identify and describe key risk metrics and performance indicators typically used to measure and quantify risk.
Apply lessons learned from the Statoil ERM case study to a given scenario.

Chapter 20 Implementing Risk Management within Middle Eastern Oil and Gas Companies
Understand cultural and operational challenges associated with implementing a sustainable ERM program using
the MECO case as an example.
Identify and describe key metrics used to consolidate, measure and prioritize business line and
corporate-level risks.
Apply lessons learned from the MECO ERM case study to a given scenario.

2017 Energy Oversight Committee Members
Richard Apostolik Global Association of Risk Professionals
Dr. Lawrence Austen Trafigura
Ben Baglin, ERP EDF Trading
Gordon E. Goodman NRG Energy
Dr. Vince Kaminski Rice University
Glenn Labhart, EOC Chair Labhart Risk Advisors
Alessandro Mauro MKS (Switzerland) SA
Peter ONeill Uniper Global Commodities
Dr. John Parsons Massachusetts Institute of Technology
Michael Sell Global Association of Risk Professionals
Jonathan C. Stein Hess Corporation
Andrew Sunderman Direct Energy
Dr. Chris Strickland Lacima Group
Dr. Glen Swindle Scoville Risk Partners
Gary Taylor British Petroleum

Creating a Culture of Risk Awareness
About GARP | The Global Association of Risk Professionals (GARP) is the leading globally recognized association
dedicated to the education and certification of risk professionals, connecting members in more than 190 countries
and territories. GARPs mission is to elevate the practice of risk management at all levels, setting the industry
standard through education, training, media, and events.
Main Office London Office

111 Town Square Place 2nd Floor
14th Floor Bengal Wing
garp.org Jersey City, New Jersey 9A Devonshire Square
07310, U.S.A. London, EC2M 4YN, U.K.
2016 Global Association of Risk Professionals. All rights reserved. (11.16.16) +1 201.719.7210 +44 (0) 20 7397 9630

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ERP

ENERGY RISK PROFESSIONAL (ERP) PROGRAM

ERP EXAM PART I 80 QUESTIONS

ERP EXAM PART II 60 QUESTIONS

2017 ERP LEARNING OBJECTIVES AND STUDY GUIDE

2017 ERP STUDY GUIDE CHANGES

2016 Global Association of Risk Professionals. 1

COMMONLY-USED CONTRACT SPECIFICATIONS

Crude Oil: 1,000 barrels (equal to 42,000 gallons) per contract

2016 Global Association of Risk Professionals. 2

COMMONLY-USED ABBREVIATIONS AND ACRONYMS

ATC: Around-the-clock MtM: Mark-to-Market

2016 Global Association of Risk Professionals. 3

ERP Exam Part I

*This reading is freely available on the GARP website.

2016 Global Association of Risk Professionals. 4

ERP Exam Part I

Introduction to Energy Commodities and Risk Management 10% 8 questions

ERP Exam Part I Total 100% 80 questions

2016 Global Association of Risk Professionals. 5

INTRODUCTION TO ENERGY COMMODITIES AND RISK MANAGEMENTPART I EXAM WEIGHT | 10%

Physical energy commodity markets

READINGS FOR INTRODUCTION TO ENERGY COMMODITIES AND RISK MANAGEMENT | 8 QUESTIONS

2016 Global Association of Risk Professionals. 6

4. *Global Association of Risk Professionals (GARP). Code of Conduct.

*This reading is freely available on the GARP website.

2016 Global Association of Risk Professionals. 7

CRUDE OIL MARKETS AND REFINED PRODUCTSPART I EXAM WEIGHT | 35%

READINGS FOR CRUDE OIL MARKETS | 28 QUESTIONS

Chapter 4 Developing Oil and Gas Projects

2016 Global Association of Risk Professionals. 8

Chapter 5 Production of Oil and Gas Products

Chapter 6 Fiscal Regimes

Chapter 10 The Market for Crude Oil

2016 Global Association of Risk Professionals. 9

4. Vincent Kaminski. Energy Markets . (London, UK: Risk Books, 2012).

*This reading is freely available on the GARP website.

2016 Global Association of Risk Professionals. 10

Chapter 17 Oil Pricing

5. *A Practical Guide to Incoterms 2010. (Livingston International).

*This reading is freely available on the GARP website.

2016 Global Association of Risk Professionals. 11

*This reading is freely available on the GARP website.

2016 Global Association of Risk Professionals. 12

NATURAL GAS AND COAL MARKETSPART I EXAM WEIGHT | 25%

READINGS FOR NATURAL GAS AND COAL MARKETS | 20 QUESTIONS

2016 Global Association of Risk Professionals. 13

2. *Reserve Bank of Australia. Developments in Thermal Coal Markets (June 2015).

3. Vincent Kaminski. Energy Markets. (2012).

5. *Gas Storage Industry Primer. Niska (April 2010).

*This reading is freely available on the GARP website.

2016 Global Association of Risk Professionals. 14

Appendix Key Terms of Long-Term Oil-Indexed Take-or-Pay Contracts

*This reading is freely available on the GARP website.

2016 Global Association of Risk Professionals. 15

Chapter 13 Upstream Gas Supply Agreements

Chapter 14 LNG Sale and Purchase Agreements

Chapter 15 LNG Tanker Contracts

2016 Global Association of Risk Professionals. 16

ELECTRICITY MARKETS AND RENEWABLE GENERATIONPART I EXAM WEIGHT | 30%

Physical properties of electricity

READINGS FOR ELECTRICITY MARKETS AND RENEWABLE GENERATION | 24 QUESTIONS

2016 Global Association of Risk Professionals. 17

Chapter 3 Electricity Industry Market Structure and Competition