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2019
ERP
Learning
®
Objectives
2019 Energy Risk Professional (ERP®) Learning Objectives
ERP EXAM
PART I
The four-hour ERP Exam Part I 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:
1. Andrew Inkpen and Michael H. Moffett, The Global Oil and Gas Industry: Management, Strategy and
Finance. (Tulsa, OK: 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.
• Explain how key subsurface geological structures affect oil and gas production, e.g., permeability
versus porosity.
• Identify the ownership of subsurface mineral and resource rights based on jurisdiction and market assumptions.
• Compare the fiscal regimes used in international petroleum agreements.
• Describe the typical components of a lease agreement and methods used to establish royalty payments.
• Compare and contrast the physical and economic characteristics associated with various reserve classifications
(e.g., proved, developed, undeveloped, P90), including conventional and unconventional reserves.
• Define reserve replacement and reserve life; determine their values given a set of market assumptions.
• Describe the effect of various field value assumptions on bidding strategies in lease auctions.
• Explain the evolution of crude oil pricing in recent decades due to market and political forces.
• Differentiate between various grades of crude oil based on chemical composition and physical
characteristics that include sulfur content, gravity, and viscosity.
• Distinguish between various global benchmark crudes and understand the role of benchmark prices in
the global crude oil market.
• Distinguish between spot, forward, and futures transactions in the crude oil markets.
• Describe the factors that affect a crude oil futures contract and determine its value given a set of
market assumptions.
2. The International Council on Clean Transportation, An Introduction to Petroleum Refining and the
Production of Ultra Low Sulfur Gasoline and Diesel Fuel. (MathPro, Oct 2011).*
• Identify the major classes of refineries and explain the key characteristics that determine a refinery’s
product yield.
• Differentiate between various units of the refinery complex and the primary inputs (feedstock) and the
product outputs associated with each.
• Explain the refining process, including separation, distillation, conversion, blending and finishing, and
maintenance scheduling.
• Identify and describe key blending practices for standard gasoline and diesel blendstock, including the use
of ethanol.
• Explain why and how the sulfur content of gasoline is reduced in the refining process.
• Identify and describe the primary characteristics of refined product classifications including light distillates
(liquefied petroleum gas, 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).
3. Charlotte Wright, Fundamentals of Oil & Gas Accounting, 6th Edition. (Tulsa, OK: PennWell Books, 2017).
Chapter 15. Conveyances (to page 582)
• Define conveyances and the types of interests covered under a conveyance, including working interests,
royalty interests, production payment interests, and net profits interests.
• Describe the circumstances in which a farm-in or farm-out arrangement is used.
• Define the term sole risk, under what circumstances sole risk can arise, and its financial implications.
• Understand how a working interest may be sold to a third party; calculate the payouts distributed under a
working interest.
• Explain how working and nonworking interests are affected by pooling or unitization decisions and how the
interests are valued after pooling or unitization.
• Understand the specific categories of information that must be included in the financial statements of oil and
gas companies.
• Describe and calculate the factors that make up the reserve life, reserve replacement, and net wells to gross
wells ratios.
• Calculate the reserve cost ratios and their application in the financial analyses of oil and gas companies.
• Explain why lifting costs per BOE is a popular performance indicator and how it is applied to depreciation,
depletion, and amortization calculations.
6. Incoterms 2010, Australian Customer and Border Protection Service (Australian Customer and Border
Protection Service, 2010).*
• Describe the risk profile associated with various Incoterms, including CIF, DDP, DAP, DES, EXW, FAS,
and FOB.
• Understand how a buyer or seller’s responsibility may increase or decrease, depending on the type of
Incoterm used in a shipping contract.
7. How Pipelines Make the Oil Market Work: Their Networks, Operation, and Regulation. (Allegro Energy
ERP EXAM PART I
8. 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 documenting performance of a lending portfolio.
• Describe guidelines for assigning a rating to oil and gas production loans.
NATURAL GAS
• Physical properties of natural gas
• Types of natural gas, units of measure, and heat content
• NGLs and condensates
• Global natural gas markets and economic fundamentals
• Market dynamics and pricing
• Gas sales agreements and trading
• Transportation and storage economics
COAL
• 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
1. Vincent Kaminski, Managing Energy Price Risk, 4th Edition (London, UK: Risk Books, 2016).
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 the economics of coal-fired and natural gas-fired power plants; assess the economic motivation for
fuel-switching decisions under various scenarios.
• Explain the methods used in the physical transportation of coal around the world.
• Identify global coal benchmarks, contract specifications, and key global markets.
2. Jane Nakano and Sarah Ladislaw, A Tale of Three Coal Markets: US, China, and India. (Center for
Strategic & International Studies, 2018).*
• Compare recent trends and market dynamics in the U.S., Chinese, and Indian coal markets.
• Explain the impact of local market factors, such as regulations, trade dynamics, and economic trends, on the
U.S., Indian, and Chinese coal markets.
3. Richard Lassander and Glen Swindle, Natural Gas Trading in North America. (Princeton, NJ: Scoville Risk
Partners, 2018).
Chapter 3. Natural Gas Markets
• Understand the types of market participants who constitute “natural” long and shorts.
• Describe the risk exposure faced by various market participants.
• Explain the factors affecting natural gas prices in the forward markets, including the impact of seasonality.
• Describe the composition of a typical natural gas trading desk, including the following elements: origination,
regional desks, and exchange desks.
• Understand how a typical natural gas transaction is handled by a natural gas trading desk.
• Understand why storage capacity is needed for the natural gas market to function effectively.
• Differentiate between the types of natural gas storage facilities and identify key characteristics, such as: base
gas percentages and injection/withdrawal rates, for each.
• Understand the difference between firm and interruptible capacity on a pipeline network, and the process
and associated costs to secure access to a pipeline for shipment.
• Describe the process for scheduling a gas day on a pipeline, including the procedure for dealing with cuts and
balancing decisions.
• Explain the effect shale gas production has had on established natural gas supply and demand trends in the
North American market.
4. William Leffler, Natural Gas Liquids: A Non-Technical Guide. (Tulsa, OK: PennWell, 2014).
Chapter 6. Refineries and the Unnatural Gas Liquids
• Explain how the various units within a refinery complex produce NGLs and which NGLs are produced by a
specific unit.
• Describe how each type of NGL is applied, both within the refinery, and by external consumers.
• Understand why some NGLs are more volatile than others and the steps a refinery will take to safely
manage them.
Chapter 7. Logistics
• Understand the basic methods of transporting NGLs by land and the common sizes of transportation vehicles.
• Explain the different methods for moving NGLs by pipeline, including batch shipments, and the challenges
involved with pipeline shipment of NGLs.
• Understand how NGLs are stored in both above-ground and underground facilities, and the rationale for the
use of each.
• Understand the commercial uses for propane and the circumstances in which it competes with electricity.
• Describe the relative advantages and disadvantages of the use of propane as a motor vehicle fuel.
• Explain the rationale for blending butane into gasoline.
• Describe the situations in which gasoline is used as a diluent.
5. Anthony J. Melling, Natural Gas Pricing and its Future: Europe as the Battleground. (Carnegie Endowment,
2010).*
Chapter 1. The Development of European Gas Contracting
• Describe the structure of natural gas spot markets in Europe.
• Explain 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.
6. 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 – 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.
• Explain why prices among European hubs have diverged during the past few years.
• Describe the origin of natural gas supplies for European hubs, including price determinants for imported gas.
7. Chris Le Fevre, Gas Storage in Great Britain (Oxford Energy, January 2013).*
ERP EXAM PART I
• LNG
• Market dynamics and pricing
• Contracts and shipping
1. 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
• Explain the basic operation of an LNG train and the steps in the LNG liquefaction process.
• Describe the contractual arrangements used in LNG production, sale, and transportation.
• 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 factors that mitigate risk in a project finance venture.
2. Perspectives on the Development of LNG Market Hubs in the Asia Pacific Region. (US Energy Information
Administration, March 2017)*
• Understand the physical, economic and regulatory factors needed for the creation of a fully-liquid natural gas
trading hub; describe the steps involved in the process of becoming a liquid hub.
• Explain the factors and stakeholders involved in establishing spot and futures prices at a natural gas
trading hub.
• Describe why LNG plays a much larger role in the development of a natural gas trading hub in Asia than it
does in the operation of European or North American natural gas hubs.
• Discuss how LNG transactions have typically been priced in Asia (including the JCC) and the factors
influencing the evolution of price discovery in Asia.
• Understand the steps governments in Asia are currently taking to liberalize their national natural gas markets,
including imported LNG.
• Identify the indexes actively tracking LNG prices in the Asia-Pacific region, and understand their basic price
formation formulas.
Electricity Markets
(includes Renewables Generation)
PART I EXAM WEIGHT | 35%
1. John E. Parsons, Introduction to Electricity Markets. (Jersey City, NJ: GARP, September 2017).
Chapter 1. Industry Overview
• Compare the roles of generation, transmission, and distribution in an electricity market.
• Identify different types of electricity markets and compare the roles of different market participants.
Chapter 2. Load
• Define load and explain the characteristics of electricity demand patterns across different time periods.
• Compare baseload generating units, intermediate units, and peaker plants.
• Calculate and interpret the load factor, and explain how the load factor can impact the cost of electricity.
• Interpret a load-duration curve and relate this curve to the economics of electricity generation.
• Describe the process of load forecasting and explain how to account for uncertainty when forecasting loads
over different time periods.
• Describe characteristics of electricity demand (including demand elasticity), construct a demand and supply
curve for electricity, and compare factors that influence short-run and long-run demand elasticity.
• Describe and calculate the VOLL.
• Compare electricity demand patterns for retail and industrial consumers.
• Compare different types of demand management and demand response programs.
Chapter 3. Generation
• Describe the operating characteristics of the following generation technologies: coal-fired; natural gas-fired,
including combustion turbine and combined cycle gas turbine units; oil-fired and dual-fired generation;
nuclear; hydropower; wind power; and solar, including PV and CSP.
• Calculate and relate the heat rate and the thermal efficiency of a generating plant, and explain factors that
can impact a plant’s heat rate and its thermal efficiency.
• Construct and interpret both a short-term and a long-term operating cost curve; explain factors that impact
the operating cost of a generating plant.
• Apply the heat rate and other cost factors to calculate the marginal cost of electricity for a generating plant.
• Compare and calculate the capacity factor and availability factor, and explain how these factors vary for
different types of generating plants.
• Describe the role of and challenges related to energy storage, and compare different energy
storage technologies.
Chapter 4. Transmission
• Describe the role of a transmission system and explain the challenges related to electricity transmission.
• Compare and explain how different factors can determine the capacity of a transmission line, including
thermal limits, voltage limits, and angle stability limits.
• Describe active and reactive power and understand their role in voltage control.
• Apply binding constraints to determine the capacity of a transmission line and describe considerations in
determining a safety margin for each type of limit.
• Describe Kirchhoff’s Laws and use these laws to calculate the feasibility of dispatching power on each line in a
hypothetical system with two generators and two transmission lines.
• Describe the role of ancillary services and compare characteristics of different types of ancillary services.
• Define losses in an electrical system and explain different ways in which losses can arise.
• Describe a supply stack and explain the typical role of each type of electrical generator in the supply stack.
• Determine the marginal generator and the amount of electricity produced by each generator in a supply stack
under the following conditions:
-- Each generator has a constant marginal cost.
-- The marginal cost of each generator increases with the quantity of power produced.
-- Losses, transmission constraints, and dispatch constraints exist.
-- Define and calculate the system lambda for a supply stack.
• Summarize the process of unit commitment, and explain the impact of different types of dispatch constraints
on the unit commitment process.
• Describe resource adequacy and planning reserve margins, and relate these concepts to the decision to invest
in new generating capacity.
• Define, interpret, and calculate the levelized cost of electricity.
• Apply the levelized cost of electricity, the load duration curve, and the value of lost load in deciding which
types of incremental generating capacity to build in an existing power grid.
• Explain how energy is traded over an exchange, including the use of an order book, and describe special
considerations that arise when the exchange acts as a central counterparty.
• Explain how power pools operate and explain how the SMP is determined within a power pool.
• Evaluate a complex bidding strategy, describe the motivations for complex bids, and determine the system
marginal price given a set of complex bids.
• Describe a multi-settlement market; summarize the steps a system operator can take to allocate generating
capacity at different time steps to meet forecast and actual demand.
• Explain interactions between the day-ahead market and the balancing market in a multi-settlement market.
• Compare a uniform price system, a zonal price system, and an LMP system.
• Explain how prices are determined at each node within an LMP system, and calculate the LMP at each node
and the congestion surplus.
2. Rafal Weron, Modeling and Forecasting Electricity Loads and Prices. (Hoboken, NJ: John Wiley &
ERP EXAM PART I
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.
• Explain how prices are set in the UK electricity market, including the use of a CFD as a risk management tool.
• Explain 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.
• Identify the market design weaknesses that led to historical price spikes in the California electricity market.
3. 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 associated key terms.
• Define heat rates and spark spreads; explain how the concepts of intrinsic and extrinsic value are applied in
tolling agreements.
• Distinguish between operating, economic, and market-implied heat rates.
• Calculate a breakeven fuel cost for a given power purchase price.
4. Quadrennial Technology Review 2015. Chapter 4: Technology Assessments – Solar Power Technologies.
(US Department of Energy, 2015).*
• Describe the key trends and objectives associated with solar technology development.
• Describe the typical cost structure of PV solar installations and summarize trends in global solar installations
and system costs over time.
• Compare and contrast PV and CSP technologies.
5. Rebecca Busby, Wind Power: The Industry Grows Up. (Tulsa, OK: PennWell Books, 2012).
Chapter 6. Wind Farms: Developing and Operating Wind Power Plants
• Identify and explain 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.
• Describe how government incentives, including production tax credits, renewable energy credits, and feed-in
tariffs affect the economics of wind and solar projects.
• Identify the economic and operational risks that are typically associated with development of a wind farm.
• Explain the monitoring process for wind power generation system performance and how unplanned
maintenance and operating shutdowns can be minimized.
6. International Renewable Energy Agency (IRENA), Renewable Energy Integration in Power Grids.
ERP EXAM PART I
(April 2015).*
• Explain how an increasing proportion of renewable power capacity on a power grid can impact the system’s
operation, reliability, transmission, and distribution.
• Describe the challenges and technological solutions associated with the integration of variable renewable
generation into a power grid.
• Identify global trends in renewable energy capacity and integration; explain how different countries have
addressed challenges related to variable energy integration.
7. The World Bank, Financing Renewable Energy: Options for Developing Financing Instruments Using Public
Funds. (April 2015).*
• Explain risks and challenges to the financing of renewable energy projects.
• Compare different financial instruments that can be used to finance renewable energy projects and describe
their advantages and disadvantages.
• Explain how different financial intermediaries can be used to provide funds to renewable project companies,
and describe the associated risks of using each type of intermediary.
8. KU Leuven Energy Institute, The Current Electricity Market Design in Europe. (2015).*
• Describe 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.
11. 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.
12. 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.
13. German Federal Ministry for the Environment, Emissions Trading Basic Principles and Experiences in
ERP EXAM PART I
14. World Economic Forum, The Future of Electricity New Technologies Transforming the Grid Edge (March
2017).*
• Describe the opportunities provided by the increasing adoption of electric vehicles and digital smart grid
technologies, and challenges to more widespread adoption of these technologies.
• Compare distributed generation, distributed storage, energy efficiency, and demand response; describe
their impact of each technology on electricity demand, and explain challenges to their implementation.
• Explain and assess market design structures designed to encourage the integration of distributed
energy resources.
• Explain challenges in developing policies, necessary infrastructure, and customer business models to support
distributed generation and digital energy technologies.
ERP EXAM
PART II
The four-hour ERP Exam Part II consists of 60 multiple choice questions. The exam structure has been designed in
conjunction with the EOC to assess learning outcomes associated with financial energy products; probability, statistics,
data analysis and energy price modeling; and the identification, measurement, and management of energy-related
market, counterparty credit, and operational risks, based on the following topics and weights:
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.
• 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.
• Differentiate between independent and mutually exclusive events.
• Calculate joint probability using a probability matrix.
• Define and differentiate between conditional and unconditional probabilities; calculate the conditional
probability using assumptions for a given scenario.
2. John C. Hull, Risk Management and Financial Institutions, 5th Edition. (Hoboken, NJ: John Wiley & Sons,
ERP EXAM PART II
2015).
Chapter 8. How Traders Manage Risk
• Understand the market risk (Greeks) 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; calculate the quantity of options necessary to make a portfolio gamma-neutral
and structure a delta-gamma hedge 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 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.
• Explain how an exotic option can be hedged and how scenario analysis can supplement monitoring Greek risks.
• Explain best practices for managing model risk in the development, calibration, and validation of a model, and
when using models provided by third-party vendors.
• Explain how model risk and poor risk governance contributed to the large financial losses in the London
Whale scenario and at Kiddler Peabody.
• Describe examples of financial assumptions and model building practices that can introduce model risk.
• Explain how model risk can arise when using the Black-Scholes model to value options and when models are
used for hedging purposes.
3. Les Clewlow and Chris Strickland, Energy Derivatives: Pricing and Risk Management. (Sydney, AUS: Lacima
Publications, 2000).
Chapter 2. Understanding and Analyzing Spot Prices
• Identify and describe characteristics associated with energy spot price behavior, including mean reversion,
jumps, and seasonality.
• Explain 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.
4. Rafal Weron, Modeling and Forecasting Electricity Loads and Prices. (Hoboken, NJ: John Wiley & Sons,
2006).
Chapter 2. Stylized Facts of Electricity Loads and Prices (Sections 2.1-2.4 and 2.7 only)
• Explain 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.
• Identify and describe factors that impact load patterns and that are used to create load forecasting models;
differentiate between statistical methods utilized in short-term load forecasting; explain how load forecasts
are applied.
• Compare, contrast, and apply the autoregressive, the moving average, and the autoregressive moving average
(ARMA) models.
• Explain how a time series analysis can be applied to forecast trends in market data.
• Describe 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.
LIQUIDITY RISK
• Liquidity risk management
• Liquidity stress testing
• Contingency funding planning
1. Jon Gregory, The xVA Challenge: Counterparty Credit Risk, Funding, Collateral and Capital, 3rd Edition.
(Hoboken, NJ: John Wiley & Sons, 2015).
Chapter 4. Counterparty Risk (Sections 4.1 to 4.3 only)
• Differentiate between counterparty risk and lending risk, and identify situations where counterparty risk
can arise.
• 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.
• Compare the use of CVA and credit limits in managing and quantifying counterparty risk.
Markus Burger, Bernhard Graeber, and Gero Schindlmayr, Managing Energy Risk: An Integrated View on
ERP EXAM PART II
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.
3. Aswath Damodaran, Country Risk Determinants, Measures and Implications – 2018 Edition. (July 2018).
(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.
4. Shyam Venkat and Stephen Baird, Liquidity Risk Management – A Practitioner’s 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.
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 such as clearings rings and complete clearing; explain
the counterparty risk associated with each method of clearing.
• Compare exchange-traded and OTC markets and explain their uses.
• Identify risks associated with OTC markets and explain how these risks might be mitigated.
2. Robert McDonald, Derivatives Markets, 3rd Edition. (Upper Saddle River, NJ: Pearson Education, Inc., 2013).
Chapter 4. Introduction to Risk Management
• 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.
• Explain 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.
• Describe the mechanics and payoff profiles of call and put options; identify when an option contract is in-, at-,
or out-of-the-money.
• Explain 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.
• Describe 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)
• Describe forward and futures contacts, including their economics and how they are used to hedge market risk or
an obligation to buy or sell a commodity; explain the basic equilibrium formula for pricing commodity forwards.
• Explain the relationship between spot, forward, and futures prices, and identify challenges related to price
formation of energy futures.
• Describe and compute no arbitrage pricing, with and without storage, for forward and futures positions.
• Describe 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 and explain the market conditions that favor
implementing one versus the other.
• Provide examples of cross-hedging, such as assessing the process of hedging jet fuel with crude oil and using
weather derivatives.
• Calculate CDDs and HDDs; understand how CDDs and HDDs are applied in transactions to hedge weather-
related risk.
• Construct a synthetic commodity position, and use it to explain the relationship between the forward price and
the expected future spot price.
4. 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
• Define and apply the concepts of real options, including their practical application and valuation.
• Describe different types of real options, e.g., option to expand, option to exercise, and identify the
circumstances in which each may be applied.
5. 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
• Describe the risks facing major fuel-consuming industries such as airlines, shipping, oil refining, and power
generating industries.
• Explain the potential benefits of hedging and identify how to minimize risk by structuring a hedge given a set
of market assumptions.
• Classify energy market participants based on their economic motivations and exposure to commodity prices;
determine how each would be categorized as a hedger, speculator, or arbitrageur.
• Outline the stages involved in a typical physical spot transaction and explain the risks at each stage.
• Understand the payoff profiles of call and put options; differentiate between American, European, and
Asian options.
• Describe the relationship between spot and forward prices for commodities.
• Explain the fundamental characteristics and drivers of volatility in energy commodities.
• Describe 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.
• Discuss and apply an option-based hedging strategy for an end-user.
• Differentiate between historical and implied volatility and explain the Black-Scholes option pricing model
for commodities.
• Interpret the metrics (i.e., the “Greeks”) used to measure the sensitivity of option prices to changes in the
underlying spot price, volatility, interest rates, and time to maturity.
• Explain the application of and calculate the payout on the following types of options: American, European,
Asian, and call/put spread, collar, calendar spread, straddles, strangles, and butterflies.
• Discuss the underlying assumptions used in the Black-Scholes option pricing formula.
6. Richard Lassander and Glen Swindle, Natural Gas Trading in North America. (Princeton, NJ: Scoville Risk
Partners, 2018).
Chapter 6. Price Level Trading
• Explain typical trading activity in Natural Gas futures market, the effect benchmarks have on trading activity,
and how the spot price is determined.
• Explain the typical market conditions that lead to contango and backwardation and incentives for market
participants when the futures curve posseses the aforementioned shapes.
• Explain the conventions and elements associated with the execution of a swap contract.
• Explain the mechanics of a forward (and futures) transaction’s embedded risks, purpose (role) of the
exchange; and the terminology used to describe types of contracts.
• Define and explain the risk profile of the swap contracts including LD3, Gas Delivery Swing, and
penultimate swaps.
7. Glen Swindle, Valuation and Risk Management in Energy Markets. (Cambridge University Press, 2014).
ERP EXAM PART II
1. James Lam, Implementing Enterprise Risk Management – From Methods to Applications. (Hoboken, NJ:
John Wiley & Sons, 2017).
Chapter 7. The ERM Framework
• Explain the rationale for developing an ERM framework and describe elements of an ERM framework.
• Compare the 2004 COSO framework, the Australia-NZ ERM framework, and the Continuous ERM model and
describe characteristics of each framework.
• Describe recommended practices for the development and governance of an ERM framework.
2. Glen Swindle, Valuation and Risk Management in Energy Markets. (Cambridge, UK: Cambridge University
Press, 2014).
Chapter 16. Control, Risk Metrics and Credit
• Describe the typical model control framework, the process for validating pricing inputs, and the role of
consensus service providers.
• Identify standard risk metrics, and explain methods of modeling risk metrics for liquid assets, illiquid basis
positions, and seasonality in price returns.
• 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.
3. Michel Crouhy, Dan Galai, and Robert Mark, The Essentials of Risk Management, 2nd Edition. (New York, NY:
ERP EXAM PART II
McGraw-Hill, 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.
• Calculate various risk-adjusted performance measures, including RAROC, return on capital, and economic
value added; compute the adjusted RAROC for a project to determine its viability.
4. World Energy Council, World Energy Perspectives: The Road to Resilience 2016 - Managing Cyber Risks.
(World Energy Council, 2016).*
• Define cyber risks, their components, and potential impact cyber risks can cause.
• Identify how energy organizations can build resilience to cyber risks.
• Describe how organizations serving the energy industry can contribute to mitigating cyber risks.
5. 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 ERM across a firm.
• Identify the primary objectives of Statoil’s 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
• Describe 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.
6. Betty Simkins, and Russell Simkins, eds, Energy Finance and Economics. (Hoboken, NJ: John Wiley &
Sons, 2013).
Chapter 9.Financial Statement Analysis for Oil and Gas Companies
• Understand the relationship between commonly used financial statements including the balance sheet,
income statement, statement of cash flows, and statement of retained earnings.
• Describe the process of competitive benchmarking and use this process to compare an energy company’s
financial ratios against those of similar competitors.
• Define and calculate free cash flow and operating cash flow.
• Calculate and interpret common metrics used to assess liquidity, debt coverage, profitability, and return
on equity.
• Calculate and interpret common metrics used to assess the value of hydrocarbon assets, reserves, and the
efficiency of exploration and production activity.
7. International Risk Governance Council (IRGC), IRGC Guidelines for Emerging Risk Governance. (2015).*
ERP EXAM PART II
• Describe characteristics of emerging risks and compare emerging risks with familiar risks.
• Describe best practices for the government and management of emerging risk exposures.
• Explain methods of developing scenarios to assess potential emerging risk exposures.
• Compare the different approaches a firm can use to manage an emerging risk exposure and explain how a
firm should decide which strategy to use to manage that risk.
8. SPE International, SPE Technical Report: Guidance for Decision Quality for Multicompany Upstream
Projects. (2016).*
• Describe and apply tools and metrics used in the decision quality (DQ) process.
• Explain the process of decision framing and describe best practices in the process of framing and
sequencing decisions.
• Explain how a firm can generate alternatives to a decision under consideration and how to group these
alternatives into strategies.
• Describe best practices in communicating information needed to make a decision, including the
communication of uncertainties, ensuring reliability, and identifying and avoiding potential biases.
• Explain methods a firm can use to understand the consequences and trade-offs in making a potential decision.
• Describe how a firm can ensure that the decision analysis is logical; apply techniques used in facilitating
decisions and committing a decision to action.
• Explain best practices and challenges in implementing a decision quality program.
garp.org
About GARP | The Global Association of Risk Professionals (GARP) is a non-partisan,
not-for-profit membership organization serving the risk management industry.
Founded in 1996, GARP advances the profession through education, research and
promotion of best practices through the GARP Risk Institute, GARP Benchmarking
Initiative and an array of informational and certification programs. GARP has
200,000 members in more than 190 countries and territories, and has certified more
than 50,000 professionals.