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Pwc

Pwc. A business of. Indian Oil Corporation Limited (IOC) Setting up an Oil Trading & Risk Management (OTRM) Desk AS SUBMITTED – Telcons on 4/22/02. rpc. Price Bid Submission, including: I. Price Bid and Key Assumptions II. Highlights of our Approach III. Plan for Completion of the Work

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Pwc

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  1. Pwc A business of Indian Oil Corporation Limited (IOC)Setting up an Oil Trading & Risk Management (OTRM) DeskAS SUBMITTED – Telcons on 4/22/02 rpc Price Bid Submission, including: I. Price Bid and Key Assumptions II. Highlights of our Approach III. Plan for Completion of the Work IV. Structure of the Team V. Hand-holding Support Recommendations April 22, 2002

  2. Introduction to PwC Price Bid Dear Mr Nayyar, In accordance with your letter dated 12th April, 2002 re: Setting up an Oil Trading and Risk Management (OTRM) Desk for IOC, we are pleased to submit our price bid. To meet your requirements and explain our approach the document is organized into 5 sections: I. Price Bid and Key Assumptions, II. Highlights of our Approach, III. Plan for Completion of the Work, IV. Structure of the Team and V. Hand-holding Support Recommendations This document supplements the PwC information given to IOC during the qualification review process in March. Based on conducting this type of engagement numerous times in the oil, gas & power industries, we have recommended that you consider three Supplementary Buying Options (SBO’s),described in Section I. These SBO’sare not included in our price bid but would, in our opinion, strengthen the ultimate OTRM design and expedite operational readiness. Because this is a fixed fee contract there are certain responsibilities that we have outlined for IOC in order to complete our aggressive timeline. Only you can say whether they are realistic. Essentially, we suggest that an internal sense of urgency is needed – Run this project as if it were a major refinery turnaround. From our side, we will provide a “design basis” for OTRM by week three, help initiate ongoing “handholding” activities before Phase 2 ends and make maximum use of “quick start” best practice templates to speed the design. We appreciate the opportunity to again work with IOC - on this very exciting project. PricewaterhouseCoopers, New Delhi, April 22, 2002

  3. Table of Contents I. Price Bid and Key Assumptions II. Highlights of our approach III. Plan for Execution of the Job IV. Structure of the Team V. Hand-holding Support Recommendations Appendix – Quick Start Templates: • Overview of Risk Policy & Control Manual • Trading Desk Best Practice Business Outline • Integrated Deal Flow Template • System & Reporting Best Practice

  4. Price Bid I. Price Bid & PwC Bid Assumptions * As Submitted PwC has assumed: a. Market deregulation as of 4/01/2002 is a fact… b. With Navratna status – effectively understating and routinely ongoing management of trading desk risks is of the highest priority to IOC senior management c. That IOC can create an internal sense of urgency and set a high priority project status – Run this project like the turnaround of a major refinery facility d. Any modifications and changes during the IOC six week ‘Approval Period’ will not require additional trips to India by the PwC international staff. If required, IOC will pre-approve and reimburse fees & expenses. e. IOC is responsible for any infrastructure costs (Office, Systems, Communication equipment, etc.) f. In Section III, we have set an aggressive timeline and are confident that the PwC consulting content for: - Phase 1 can be delivered in 5 weeks (*over an elapsed 8 week time frame) and - Phase 2 can be delivered in 12 weeks (*over an elapsed 16-18 week time frame).

  5. Price Bid I. Price Bid & IOC Responsibilities • However, to accomplish our aggressive this timeline, PwC needs commitments from IOC: • - No delays in the IOC internal approval process. • - Routine meetings of a top-level Steering Committee • In Phase 1, weekly is the best • In Phase 2, bi-weekly will do • - Immediate access to top IOC staff in all the related functions • - Operationalisation of a Risk Management Committee by Week 2 of Phase 1 • - IOC will be responsible for and expedite any necessary GOI department approvals

  6. Price Bid I. Price Bid Details * As Submitted In accordance with your letter request, here is our price bid, in Rupees, * inclusive of fees and taxes: Part 1: The lump sum Price Bid for Phase 1 is: 7,200,000 Rs ($144,000) for Fees * Rs at 50 to the $ 2,000,000 Rs ($*40,000) Expenses (Capped for Bid Evaluation) The lump sum Price Bid for Phase 2 is: 17,050,000 Rs ($341,000) for Fees 1,225,000 Rs ($*60,000) Expenses (Capped for Bid Evaluation) Part 2: The price bid quoted per month for 6 months is: 1,800,000 Rs ($36,700)/month *400,000 Rs ($8,000)/month Expenses (Capped for Bid Evaluation) We understand that in case the project does not proceed beyond Phase-1, then PwC shall only be paid for Phase 1. Payment schedule is agreed per your RFP.

  7. Price Bid I. Supplemental Buying Options (SBO’s) – not included in our bid Based on our experience, and with your 2-3 year strategic time horizon, we recommend that you consider budgeting for one/all of the following additions to your Scope of Work to expedite operational readiness. They are termed Supplemental Buying Options (SBO’s): SBO-1: Investigate applicability of electronic trading platforms such as PEPEX, ICE, and (up to two others). Additional Fees & Expenses - 700,000 Rs ($14,300) SBO-2: Produce a curriculum and course materials for a custom-tailored IOC Training Course and conduct a two-day seminar for up to 40 IOC-OTRM staff. Additional Fees & Expenses – 1,400,000 RS ($20,000) …Includes seminar & course materials SBO-3: Define a detailed wordbreak-down structure (WBS) to support the organogram and roles including Key Performance Indicators (KPI’s) for each role in the new ORTM organisation and (especially) the other IOC organisations that interface with OTRM Additional Fees & Expenses – 850,000 Rs ( $17,600)

  8. Approach II. Certain Principles are Imbedded in our Execution Plan... With deregulation a reality – begin to think in days & weeks , not months… • Commission a “quick start,” high-intensity, tight deadline project using work process templates which include best practices • Obtain senior management buy-in throughout the process with multiple reviews • Provide comprehensive project management • Transfer skills to enable continuous process change and improvements • Align with appropriate IOC internal business and IT initiatives • Train early to get required new OTRM culture Detailed plans are now presented for the Phase 1 and Phase 2 work.

  9. Approach II. Highlights of Our Approach To help IOC move decisions to days and weeks rather than months, the key principles embedded in our approach are as follows: • In-depth understanding of the challenges confronting IOC as they move into the liberalised environment. • Highly experienced team, who have set up similar trading functions across oil, gas and power in deregulating and mature markets. • Quick start, high-intensity, deadline driven project. This section now briefly discusses the key challenges, team credentials and project structure highlights.

  10. Approach II. Understanding the Key IOC Challenges Setting up a OTRM operation presents a number of challenges in terms of: • The new competencies that OTRM/IOC will need to develop. In addition to commercial and trading front office competencies in oil trading and shipping, this includes a number of capabilities such as the analytical skills needed to support ongoing deal evaluation and risk management, in-depth understanding of market fundamentals and the position/strategies pursued by the major market participants. • Establishing a robust framework for risk management and control that allows trading and origination activities to be executed effectively whilst ensuring compliance with GOI policies and IOC objectives. • The development of an effective business model and organisation covering not just the OTRM function itself, but also the allocation of responsibilities between this function and other parts of the IOC organisation. Achieving excellence in the interface between refining, marketing, S&D, shipping, finance and the trading operation will be critical. • Implementing a practical and “fit-for-purpose” infrastructure that ensure that the new function has accurate, up-to-date and routine information on, inter alia, positions, exposures, risks and mark-to-market P&L. • Dealing with the cultural differences which in our experience often arise when a (commercial) trading function is established within a public sector company. • Adhering to the context of the public policy and regulatory regime and the new changes in these that may result as the liberalisation of the domestic Indian oil market progresses.

  11. Approach Crude & Products Supply & Trading (Houston) Energy TradingRisk Management(London) Marine & Real Estate Expertise(London and Belgium) Local Market & DeregulationExpertise(London/India) II. Highly Experienced Team Our team combines deep market knowledge and practical experience in the Indian oil industry, downstream operations, marine and commodity trading and risk management activities: • Many of our advisors have held senior posts in crude, products, gas and power supply & trading functions with: BP, Conoco, Exxon, Statkraft, Seeboard, Scottish and Southern, TXU and Shell - as well as investment banks. • Other team experts are experienced in marine operations, facility selection and negotiation. • Over the past 18 months alone, ETRM has developed trading and risk policy manuals for six different energy companies ranging from global organisations to “stand-alone” trading operations. • Across the team, we have extensive experience in implementing practical solutions across a variety of operating environments. • Our ETRM practice is at the forefront of risk modelling and valuation of commodity positions. The work plan set out in Section III assumes that approximately half of all PwC contribution will come from global experts. • Last, but not least, we have gained real appreciation of your business and company culture during our work for IOC over the past 5 years.

  12. Approach II. Deadline Driven Project Delivering your OTRM objectives within the aggressive time line, requires: Practical and pragmatic approach: • Create a common OTRM vision and business strategy supported by all stakeholders • Provide comprehensive project management • Accelerated delivery through use of best practice templates • Design and implementation of “fit-for-purposes” solutions. Joint project decision structure: • IOC Management buy-in throughout the ;project with multiple reviews • Close alignment with appropriate IOC internal business and IT initiatives • Skills transfer to enable continuous improvement as the OTRM function matures • Early training to develop trading and risk management competencies. • Help staff adapt quickly to the move towards a market driven operation. Three parallel, but integrated work streams: • Governance • Operations • Infrastructure Our project structure is described graphically on the following page.

  13. Approach II. Project Structure – Sequential but iterative Weeks 0 5 10 15 20 Position & Risk Modelling Operationalise Risk management Committee Continues GovernanceTrack • Framing DocumentGovernance Policies • Qualitative • Risk • Commercial • Internal Control Procedures • Limits & Delegations • Roles • Credit Risk Test Final Reporting Requirements • Framing Document • Trading Scope • Marine & Scheduling • Org Size • Process & Org Details • Roles: Front, Middle Back Office • Reporting • Operating Manuals • Scope • WBS • Organise OperationsTrack Stretch Target “Go Live” 17 Weeks • IT Scoping Options • Org Size • Reporting • Detailed System Requirements • Communications • Interim Option • Final Option Install & Test System Infra-structure • Location Analysis • Tax • Regulatory • Facility Adapt Facility & Move In Train Staff Project management Stakeholder analysis Change Management

  14. Execution Plan III. Plan for Completion of the Work Our plan for delivering the OTRM project scope of work follows your definition of the phases. Phase I includes advice on: • Oil trading and oil price risk management activity • Infrastructure requirements • Organizational structure • Budget and implementation plan. Phase II includes advice on and design of: • Transaction processes • Operating manuals • Delegation of authority • Credit risk assessment and control • Management information systems This section now sets out our plan for completion. For each of the Phase I and Phase II work programmes, we set out a timeline, list of the key activities and outline of the final report document, cross referenced to RFP item defining your scope of work. Handholding support is described separately in Section V.

  15. Execution Plan III.Phase 1 - Plan for Completion of Work OTRM Project Steering Committee Reviews (1) Note: Level of IOC staff participation will be defined in Week 1

  16. Execution Plan III. Phase 1 - PwC Final Report Structure

  17. Execution Plan III. Phase 1 - PwC Final Report Structure

  18. Execution Plan III. Phase 2 - Plan for Completion of Work Bi-weekly OTRM Project Steering Committee Reviews (1) Note: IOC staff participation will be defined in Phase 1

  19. Execution Plan III. Phase 2 - PwC Final Report Structure

  20. Execution Plan III. Phase 2 – PwC Final Report Structure

  21. Execution Plan III. Phase 2 - PwC Final Report Structure

  22. Team Structure IV. Structure of the Team In structuring an effective OTRM project team… Wehave assembled an international and Indian team with combined extensive experience across the disciplines required to deliver this project on time and within budget: • The oil industry shipping and operations • Energy trading, risk management and control • Technology and management reporting We have gained an in-depth understanding of the IOC operating structure and culture from our previous assignments: • IOC Manthan reengineering & IT strategy project • IOC SAP implementation (ongoing) • IOC lubricants supply chain strategy We recommend that IOC establish a project team structure which mirrors that of PwC. In our experience it is critical to have a joint perspective on all aspects of the OTRM project as it proceeds. This section now outlines, our proposed joint team structure, the Phase I and Phase II PwC team nominees and profiles for each proposed individual.

  23. Team Structure IV. Joint PwC and IOC Team Structure • Chairman • Director – Finance • Director – Refineries • Director - Marketing • ED - International Trade and Treasury OTRM Steering Team PwC Engagement Ptnrs PwC Project Director OTRMProject Sponsor GOI & Regulatory Input OCC, APM (1) Global Advisors Staff Recruitment & Training Team Leaders Team Leaders Governance & Risk Governance • Policies & Procedures • Delegation Operations & Trading Operations • Marine Expert(s) • Trading & Scheduling Experts Infrastructure Infrastructure Special Items Special Items Note 1: PwC Global advisors will provide quality control reviews on the OTRM project team reports at no additional cost to IOC

  24. Team Structure PwC Project Partner – Neil McCormack IOC Relationship Partner - Anjan Majumdar IV. Phase 1- PwC Team Structure and Nominees Note: Corresponding IOC team nominees will be made at the end of Week 1

  25. Team Structure PwC Project Partner – Neil McCormack IOC Relationship Partner - Anjan Majumdar IV. Phase 2 - PwC Team Structure and Nominees Note: Corresponding IOC team nominees will be made at the end of Phase 1

  26. Team Structure IV. Profiles of PwC Team and Advisory Staff Marty Stetzer: Co- Project Team Project Director – Operations Team Member • Managing Director with over 12 years of Pwc consulting experience with a wide variety of supply, trading and downstream projects, in addition to 18 years of oil industry experience with Exxon, Superior Oil and Mobil • Led 3 major supply & trading improvement projects, including integrating front-middle-back office deal flow process for Shell USA- Equiva an operation handling over 7 million BCD of crude, products and feedstocks • Understands the Indian oil industry. Managed project with IOC to develop an IT and business strategy to cover crude & product supply operations, sales & distribution and the finance and HR support functions Education: BS in Mechanical Engineering from General Motors Institute and an MBA from Carnegie Mellon Soren Lautrup – Co Project Team Director – Risk Team Member • Director for Energy Trading and Risk Management for PwC consulting in Europe. Leads PwC's European ETRM team specialising in advising power and gas companies on issues such as trading strategy, development/implementation of risk management frameworks, risk valuation and systems integration. • Recently, directed PwC's work on energy trading and risk management for several large clients in the UK, Spain, Austria, the Nordic region and Brazil. Prior to joining PwC, led industry-wide negotiations on long term vesting contracts, which underpinned the subsequent privatisation of generators and distribution companies in the State of Victoria, Australia. Education:Master of Science - Macro Economics Copenhagen University

  27. Team Structure IV. Profiles of PwC Team and Advisory Staff Danny Burgess : Project Team Credit Policy & Risk Management Expert Team Member Principal Consultant with over 10 years consulting experience in international financial markets & risk managemnt • Has over 10 years of trading experience in the international financial markets and helped set up the global trading capability for a top Japanese investment bank. • Since joining PwC, Danny has been involved in the design of a new organisation structure for the energy trading activity of a major UK power company. • Specific knowledge in the field of credit risk and has undertaken a major overhaul of the credit risk management for a UK power company. Education:BSc Economics, Bristol University and Master of Business Administration (MBA) Cranfield University Andrew Chattrabhuti: Risk Management Expert Team Member Principal Consultant with over 8 years consulting experience in the energy sector • Has advised both UK and overseas clients on trading and risk management, commercial strategy and a range of contractual issues. His key experience includes advising a leading UK power company with key aspects of the restructuring of their trading organisation and the development of trading performance measures. • He has managed a trading organisation start-up implementation for Electricidade de Portugal. Education:BA Philosophy, Politics & Economics,Oxford and M Phil Economics, Cambridge University

  28. Team Structure IV. Profiles of PwC Team and Advisory Staff Ron Crean: Project Team Marine Expert Team Member Ron managed time charters/sale & purchase and contracts for a fleet of 24 product tankers and is a consultant based in Asia. • He has worked with PwC in development of gklobalmarinehub.com Developed sales and marketing infrastructure in the UK, Norway, USA and Australia including implementation & testing of an e-CRM/Account management sales solution (Maximiser). Contributed to marketing plan and global roll out plans • ·Delivered sales presentations to companies in Singapore, Hong Kong, Australia, Belgium & UK. Presented live internet trading demonstrations at board level around the world and sold the project for over multi-million dollars in Far East Qualifications: Fellow of the Institute of Chartered Shipbrokers (FICS), MBA, City University Business School, London, BsC, (Hons) Univ. of Plymouth, Institute of Marine Studies, UK Russell Pell: Supply Optimisation Expert Team Member Russell joined PwC from Esso in the UK where he had 10 years of experience in a variety of refining, supply and planning roles. He understands the crude selection process and is familiar with LP modelling technology. • He understands the Indian oil industry. Worked with IOC to develop an IT strategy in the area of defining target applications and best practices across crude & product supply operations. • Russell has conducted 3 major supply chain consulting projects with major European & national oil company clients. Education: Bachelors in Chemistry, major UK university.

  29. Team Structure IV. Profiles of PwC Team and Advisory Staff R. Yagnik: Project Team – India Oil Marketing Expertise Team Member Mr Yagnik is a Principal Consultant at PwC India. He has 25 years experience in working in the Downstream Industry with more than 2 years of consulting experience. He has worked in various capacities in Sales & Operations in the Indian Oil Corporation, handling the marketing of a diverse spectrum of Petroleum products from LPG to Lubes, worked in Indian Oiltanking Ltd as General Manager and Reliance as Asst. Vice President. • At Reliance, he evolved a marketing strategy for Petroleum Coke. • Presently, he is the Program Manager for Project Manthan. Qualifications: Post Graduate Diploma in Management from Delhi, Graduate in Mech. Engineering from Delhi. M. K. Shrikhande: Project Team – India Oil Trading Expertise Team Member Mr Shrikhande is a Principal Consultant at PwC India. He has 12 Years experience in Petrochemicals & Refining Industry. Major assignments including;setting up of an integrated LP model for the Reliance Jamnagar Complex, (comprising a 540KBPSD refinery and an 1.4 MTPA Aromatics Complex) and the 750,000 TPA Olefins and petrochemicals complex located at Hazira. • Worked in the Supply & Trading Division of Reliance Petroleum Limited as Deputy General Manager Economics, Planning & Supply group and subsequently as Crude Oil & Feedstock Trader. • Has completed training in Crude Oil Marketing & Valuation, Commercial & Economic Aspects of Refining, Supply & Trading and Logistics in Crude Oil Markets,and Advanced level LP training with AspenTech. Qualifications: Graduate in Chemical Engineering from Nagpur.

  30. Team Structure IV. Profiles of PwC Team and Advisory Staff Vikas Drolia: Project Team India Oil Refining Expertise Team Member Mr Drolia is a Principal Consultant at PwC India. • He has 10 Years experience in Refining Industry & Consultancy. Major assignments include the Detailed Feasibility Study of MRPL expansion (for additional 120,000 BPSD refinery capacity) and implementation of the same (1995 to 1998), Marketing Strategy study for MRPL, Crude selection, sourcing and Product Optimization studies, Refinery Economics Study, IT Strategy & Package Selection, Supply Chain Package Functionality, SAP-PM module implementation etc. • Vikas is the key member in the Manthan Project helped to define the add-on software functionality for Crude Selection, Scheduling and optimization, Lubes Supply Chain etc. other than leading the SAP Plant Maintenance team. Qualifications: Graduate in Chemical Engineering from Kanpur. Manish Joshi: Project Team - India Trading Finance & Accounting Expertise Team Member Manish is an Associate Director in the PwC India practice with over 11 years of consulting experience • Manish is a key member of the infrastructure advisory team of PwC in India. During his tenure with PwC he was seconded at PwC’s London office and has advised several public and private sector clients developing and managing infrastructure businesses in India, United Kingdom, Bhutan, Kenya, Tunisia and Poland. • He has been involved in financial / financing assessment and commercial structuring of energy (power, gas), water and transport (roads/ bridges, mass rapid transit, ports) projects.

  31. Team Structure IV. Profiles of PwC Team and Advisory Staff Mark Allen Smith: Crude Trading Desk Operations Advisor • Mark Joined PwC from 15 years with BP where he ran the USA crude desk and traded a portfolio of equity crude oil production, and purchased crude oil to supply refining system. Negotiated mix of spot, term, and exchange transactions with major oil companies, independent refiners, and trading companies. Responsible for making crude oil pricing decisions to optimise netback value of equity crude oil production. • As a principal consultant in the PwC Financial Risk Management practice • Led multiple projects involving review and validation of mark-to-market practices, and validation of energy trading positions the oil, natural gas, and power markets. Advised clients in the design of energy risk management strategies, valuation of financial derivatives, and implementation of FAS 133. • Designed trading risk management policies and procedures for multiple energy companies in the areas of front office, middle office, back office, credit risk, corporate governance, new product authorization, and trading controls. Education: B.S., Chemical Engineering – Case Western Reserve University,MBA, Finance, University of Chicago Kevin Waguespack: Crude Selection & Acquisition Advisor • Principal Consultant with over 17 years of experience in downstream oil, including 9 years as a consultant to the to the refining and marketing industry • Led the market analysis for a joint venture company in Venezuela that plans to launch a new crude grade in 2002. Advised marketing manager, general manager, and president on issues related to maximizing value from crude marketing. • Managed refining analysis for a integrated oil company involving potential markets and pricing for crude oil and refined products, and the optimal refinery system configuration Education: BS in Chemical Engineering from Louisiana State University

  32. Team Structure IV. Profiles of PwC Team and Advisory Staff Mark E. Fischer: Supply & Trading Systems Advisor • Mark has 12 years of consulting experience at PwC with a focus on the downstream supply chain. Projects have ranged from IT package evaluations & implementations to custom developments. • Mark managed multiple large PwC*STARS implementations with up to 50 people/$10MM (STARS is PwC's downstream crude and products supply software). Mark has 10 years of experience with STARS and he serves as Product Manager. Mark has extensive downstream petroleum industry skills inside and outside the refinery, from crude acquisition to retail fuel delivery. Mark has significant experience in E-Business and M-Business impacts on the downstream petroleum sector (including speaking engagements). Education: MBA, University of Georgia Terry School of Business, Honours BS, Business/Marketing, University of Colorado, Summa Cum Laude Shannon V. Johnson: Supply & Trading Systems Advisor • Leadership experience with up to 15 systems analysts with Exxon USA. Project Management experience with all phases of package, custom and integrated system development life cycle for client/server applications. • Ten years I.T. experience in supply & trading systems development & Implementation. Education: B.S., Information Science and Data Processing, University of Louisville,

  33. Hand Holding V. Phase III - Hand-holding Support In our experience, hand-holding support should concentrate initially on assistance in executing the IOC business strategy and effective control of the new OTRM function… Whilst the specific requirements for OTRM hand-holding will need to be assessed during Phase II, our work-plan and price bid anticipates support in the following areas: • Trading control • Support in risk and transaction valuation • Operational decision making and market pricing • Technology and management reporting PwC hand-holding support may take one or all of the following forms: • Day-to-day on-site experienced staff • Ongoing training • Post operational reviews and diagnostics The following diagrams suggest both the timing and high level content of our proposed hand-holding support.

  34. Hand Holding Training should starts as soon as the OTRM candidates are chosen. Training materials design should start at week 8. Sample PwC materials are attached. Initialsise Training Continues The Risk Management Committee is an operating group that continues to review and refine the risk management approach and policies as the Trading Desk organization matures. Operationalise Risk management Committee Continues Your Current Schedule - in weeks 6 months Stage 2 4 6 8 10 12 14 16 18 20 22 24 Ph 1: Outline manual, Org Structure, Infrastructure, Implementation plan Ph 2a: Detailed Design Implementation Policies & Procedures Hand Holding Ph 2b: Reporting & Systems Ph 3: Ongoing assistance • Three categories of PwC staff are recommended • To support OTRM in the first six months: • Crude trading expertise • Marine expertise and • Risk management expertise • PwC nominees are in the resumes. V. Phase III - Hand-holding Support Hand-holding support can start once the OTRM candidates are identified…

  35. Hand Holding I. Industry Overview II. Refining III. Terminaling & Distribution IV. Supply, Trading & Risk Management V. Marketing: Wholesale & Retail V. Phase III - Hand-holding Support: Training Example In 1994, PwC developed a Downstream Training Course which has been conducted throughout the world. The Course Outline and the Table of Contents for the Supply & Trading Module is shown below. The materials have been presented in India in can be adapted to suit the OTRM objectives. A SBO price estimate for course development has been included in our RFP response… PwC Downstream Training Course Outline - Modules Supply & Trading Table of Contents • Industry importance of risk management • Trading philosophy and types • SPOT market characteristics • Sources/uses of price information • Effective hedging concepts and instruments • Trading functions & organization EQUIVA Trading - Project Example

  36. Appendix – Quick Start Templates • Risk Policy and Control Manual • Trading Desk - best practice business outline • Integrated Deal Flow Template • System & Reporting Best Practice

  37. “Quick Start” TemplateRisk Policy and Control Manual - Overview Whilst the OTRM manual ultimately will reflect IOC business conditions and policies, we will speed up the process of developing this document by providing IOC with examples of how particular sections (and issues) possibly could be addressed.

  38. “Quick Start” TemplateRisk Policy and Control Manual - Overview For avoidance of doubt, we have drafted the detailed content listed on these two pages many times for a range of clients….

  39. Interfaces Audit Trail and Security • Physical: Interface to supply • Date/Time Stamps • As Of Reporting • Screen-Based Security • Function-Based Security • Physical: Interface to accounting “Quick Start” TemplateTrading Desk - best practice business outline Front, middle & back office responsibilities will follow best practices… Measure the Deal Plan the Deal Make the Deal Execute the Deal Settle the Deal Front Office Middle Office Back Office • Review Position • Set Strategies • Price Formulae • Futures - Options • Volatilites • Correlations • Schedule • Administer Contract • Exchanges • Mark-to-Market Measurement • Realized and Unrealized P&L • Value At Risk Reports • Liquidations • Confirmations • Invoices • Payments • Compliance Reports

  40. “Quick Start” TemplateIntegrated Deal Flow Template An integrated deal flow template will be used for the preliminary OTRM process analysis... Back Office Middle Office Front Office CT Actualize Track Document Movement Yes Determine / Schedule Transport Key:Two digit codes relate to PwCC database of best practices Transport ? Physical SO Settle Cash (including Invoice) Commit- ment Type? Tradeco Trades Physical Hedge Spec No Transfer Title Price Trading Management Review Physical or Forward BA AR CD Bookkeeping / Financial Accounting Identify Risk / Price Risk Absorption Capture Physical / Paper Deal DR Type? Measure Risk Paper or Paper Hedge Trading Status Report Decision Reporting • Position • MTM • Capital @ Risk CR Compliance Reporting MP Monitor / Reconcile Daily Activities Settle Paper Obligation AC Administer Contracts

  41. “Quick Start” Template System & Reporting Best Practice Management reporting and system requirements will adhere to the following design… Front Middle Back Key Market data feeds • Prices, news, fundamentals Option engine • Pricing & greeks, basic & exotic, swing/structured deals, scenario analysis Risk Measurement • MVaR, volume risk, scenario & stress tests Control • Limit setting & exception reporting, access control and audit trail 3rd party system Manual process Price warehouse Pricing engine • Cross-commodity indexation, floating prices, transfer prices, currency Position optimisation • Active decision support for contract, supply and arbitrage optimisation, automatic position adjustment Reference data • Counterparty, brokers, locations etc. Electronic trading systems • Futures, forwards, options, OCM etc Management reporting Deal warehouse Position management • Contract, nominated & actual volumes, what-if analysis Contract admin • Including confirmations Financial accounting OTC trades • Forwards, options, structured deals, physical & financial Credit exposure Deal capture • Vanilla, derivatives, structured, capacity and storage trades; supply plan, C&I demand; book structure Reporting • Position, mtm P&L and exposure, on line/real time plus end of day Settlement/ billing IOC inputs: • Including position management & aggregation Invoice production IOC Network operators • Pipeline and hub nominations, capacity booking Operations • Prompt balancing, up & downstream nominations & scheduling, allocation

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