Committee of Chief Risk Officers 8000 Research Forest Dr. info@ccro.org STE 115 #278 http://ccro.org The Woodlands, TX 77380 7 Advancing Our Energy Industry’s Risk &Compliance Best Practices Anderson: Number five was LNG transaction and LNG portfolio valuation. Some of the larger LNG companies are being pushed to mark to market very long dated, sometimes complex transactions. Complicating this is the fact that there may be no relevant forward curve, or certainly not a robust one. This goes back to the mark to model issues that we’ve dealt with in past work. Perhaps we could leverage some of our past work to establish best practices for these valuations? Maybe not promote any specific detailed methodology, but rather best practices or characteristics for valuation in these challenging transactions that lack a robust forward curve or other critical data parameters. …best practices for valuation of these challenging transactions lacking a robust forward curve or other critical data parameters. Perhaps we can bring industry advocacy to get better forward curves going? CCRO member Abbax is certainly trying, with its LNG exchange in Singapore. This would provide a physically deliverable contract that could help with risk measurement and subsequent valuation practices. In any case the challenge here is daunting for the risk officers in these companies. A big swing in mark to market valuation because of either a misstep in valuation practices or in underlying data like volatility or forward prices could have massive implications for reporting of earnings. This is again, an industry-wide issue. As a reference, valuation practices were subject for one of the CCRO’s original founding white papers… 5) Emerging Practices for Valuation of LNG Transactions/ Financial Statements implications • Current Accounting treatment and practice/ Desire to change? • Pressure to move long term transactions into the m-t-m category • Forward curve robustness falls-off after 1-year forward • Illiquid markets make position management a challenge • What needs to happen to facilitate better marks? • How can we help advance things? www.ccro.org 7 Objective: CCRO publishes recommendations, market benchmarks? …