Oil and gas production
The risks of spreadsheets
Spreadsheets are popular, but oil and gas companies are taking on risk by letting people use them so
much, because it makes it much harder to manage data across the organisation, writes Michael Schwartz
of Triple Point Technology.
The general trend towards rising energy prices Risk
over the last few years has been accompanied by This has an obvious impact on performance, but
a more insidious risk: price volatility. With global perhaps more significantly, it also negatively af-
demand growing faster than supply, and predic- fects risk management procedures. Effective risk
tions of a forthcoming oil crunch from the IEA, management is compromised when organisations
that volatility shows no signs of diminishing. either cannot answer, or give a negative response
The problem will be compounded moving to the following set of questions.
forward by more stringent environmental regula- Is there one set of numbers across divisions,
tions, greater demands for robust corporate gov- products and geographies? Are we sure of the in-
ernance and continuing instability in prime oil- tegrity of all data input into the system, and of
producing regions. that generated by it? Do we have appropriate
In this kind of environment, operating an toolset in place to monitor our operation? Do we
energy trading operations is rather akin to swim- adhere routinely to a business process that asserts
ming with sharks. One sign of weakness, one false our true financial position? Is a detailed audit trail
move and suddenly you are the center of some for all documents readily available?
very unwelcome attention. If the organisation is overly dependent on
spreadsheets then the answer to all of theses ques-
Relying on spreadsheets tions is likely to be ‘we don’t know’ at best, and a
Yet far too many organisations are relying on flat ‘no’ at worst. Without and aggregated, enter- “Far too many organisations are relying
spreadsheets to steer them through these choppy prise-wide view on risk an organisation has no vis- on spreadsheets to steer them through these
waters. ibility into natural hedges between commodities choppy waters” -Michael Schwartz of Triple
Spreadsheets are deployed within their organ- and business units, for example, and risks enter- Point Technology.
isations for tracking and monitoring operational ing a hedge in one part of the company that actu-
processes and analytical decision support. In cer- ally causes them to be unhedged at the corporate
tain circumstances, spreadsheet-based models are level. One such example is the TransAlta Corp. in
beneficial in terms of the flexibility and reporting The risk management issues are compounded Toronto, which reported a $24m charge to earn-
capacity for individual users. by the sheer volume of data that is now a standard ings after a cut-and-paste error in a spreadsheet
However spreadsheets tend to be private part of the trading day, and which managers must resulted in it paying far higher prices for their elec-
tools, that are neither synchronized across the or- comprehend to make sound trade, risk and sched- tricity hedging contracts.
ganisation, nor shared with the rest of the trading uling decisions. In fact, statistics exist revealing that as many
floor. as 94 percent of spreadsheets in use contain errors
They tend to fall apart when used as an en- Complex data (source: What we know about spreadsheet errors,
terprise tool because they are neither designed nor The data explosion has been accompanied by in- Raymond R Panko, University of Hawaii, January
developed with the rigour of application develop- creasingly complicated deal structures that must 2005), including input errors, logic errors, inter-
ment. be modeled by software, and a correlation between face errors, and wrong cell range errors that put
The material losses caused by inappropriate commodities that didn’t exist before. decisions and dollars at risk.
use of spreadsheets can be significant, since they This is most clearly demonstrated by the
are generally built by non-programmers, and in developing relationship between the prices of ag- Better tools
many cases by users who are self-taught. ricultural products, such as corn and sugar, and Given the nature and prevalence of spreadsheet risk
As a result, errors creep into formulae because traditional energy sources as the focus on renew- and the exponential rise in concern over corporate
of mistakes in formatting or incorrect links to oth- able fuels, including biodiesel and bioethanol in- control and regulatory compliance, it is clear that
er documents. In some instances, the ‘error’ may creases. such an important function as risk management
actually be due to fraudulent activity on behalf of cannot rely on non-specialist tools to provide the
the spreadsheet developer and so it is often dif- Errors can be expensive basis of the system. While an excellent personal
ficult to ensure data integrity. If the demands of this new world are not enough productivity tool, spreadsheets are by no means an
Whatever the cause, errors are often not to convince enterprises of the deficiencies of adequate method for enhancing, maintaining and
pricked up because of the lack of thorough proce- spreadsheets, the precedent is certainly there to protecting enterprise productivity.
dures in use to check the accuracy of spreadsheets prove the point. There are numerous cases of Aside from the inherent problems with
or to test multiple runs of data through them as spreadsheet risk leading to a loss of both money spreadsheets themselves, is that they are often
would be done in conventional programming. and credibility for the firms involved. used within a patched together network of home-
36 digital energy journal - June/July 2008
Oil and gas production
grown and packaged applications that silo off both are designed to be as user-friendly as possible. In time, correlation and FX rates.
information and functionality. so doing they ensure that users have no wish to But what of the faithful spreadsheet? Well
Triple Point studies have shown that nine out find a short cut through the system, defying all then can still be used as personal productivity
of ten companies do not have a real-time, straight- corporate governance and risk management and tools. But the best enterprise systems are able to
through processing system but are relying on these risk management policies in the process. integrate them into the system, which performs
creaky and cumbersome software equivalents of Organisations should therefore look for sys- all the necessary computational tasks, and takes
an auto cut-and-shut job. Indeed the reliance on tems that integrate the world’s favourite personal a company-wide view. Individual users can there-
spreadsheet use is usually a sound indicator that productivity tool, with the specialist applications fore work with the application they understand
the underlying systems are due for an overhaul. that offer the necessary breadth of function to and prefer, for specific tasks, while ensuring the
manage risk effectively. needs of the enterprise are equally well-supported.
Popular and simple That means a real-time multi-commodity
But there is a problem with simply doing away platform that offers enterprise-wide aggregated
with spreadsheets: people like using them. They risk management, straight through processing and
are familiar, user friendly, and almost universal. the ability to manage the ever-changing complexi- About Triple Point Technology Inc.
Although this familiarity – and the accom- ties of the physical and financial markets. Triple Point Technology is the leader in trading,
panying widespread belief among users that they These systems provide the best of breed func- risk management, scheduling and logistics solu-
are experts in spreadsheet use – is, in large part, tionality for the supply, trading, marketing and tions for commodities, including power, oil, gas,
responsible for the problem it is a positive that movement of commodities on a single platform coal, metals, agricultural products, biofuels and
cannot, or rather should not, be underestimated. – something spreadsheets cannot hope to emulate. freight. Triple Point Commodity XL profitably
The history of technology implementations, They also have the breadth of function to meet integrates the physical and financial markets from
and IT-led change projects provides plenty of evi- specific commodity trading requirements and the front-to-back office for all commodities on a
dence that, time and time again, individuals have provide a single view of supply and delivery and single, real-time, next generation platform.
an uncanny ability to by-pass the complex in fa- market exposure either in a single market or across
vour of the simplest available route. If it’s a choice all commodities and all markets. Triple Point’s award winning solutions are used by
between a common, recognizable spreadsheet, or They can also model what if scenarios and more than 25 percent of both Global 500 com-
a complex and unknown system, the spreadsheet slice and dice data to transform it into valuable in- modity trading companies and Global 500 energy
is likely to win out each time. formation. For example, instead of collecting and companies. Founded in 1993 and headquartered
sifting through data for hours, or even days, to in Westport, Connecticut, USA, Triple Point
Friendly systems figure out root causes of P&L changes, managers serves clients from five development and support
Successful technology developments take this fun- are presented pre-analysed information, including centers located around the globe. More informa-
damental lesson to heart and ensure that systems shifts in market prices, volatility, interest rates, tion is available at www.tpt.com.