Dow Chemical, from Multiple Spreadsheets to Commodity Trading Technology

How the petrochemical giant adopted a CTRM solution to prepare for the sector’s challenges.

This article was written by Michael Hinton, Chief Customer Officer and Senior Vice President Product and Solutions at Allegro.

The petrochemical sector is not immune to the volatility that has been defining energy markets for a while now. Cheap oil, even cheaper gas, renewables’ intrinsic unpredictability and baseline shifts in the global dynamics of supply and demand have raised the risk profile of energy trades.

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Still, the level of uncertainty that defines – and will continue to define – energy markets in the near term should eliminate any complacency around trends that dominated during normal conditions. The best approach for petrochemical companies to prepare for both today’s challenges and hurdles to come is to implement the best available risk management technology now.

Take the case of the Dow Chemical, a global Fortune 50 petrochemical company combining the power of science and technology to innovate what is essential to human progress. The company is driving innovations that extract value from the intersection of chemical, physical and biological sciences to help address many of the world’s most challenging problems, such as the need for clean water, clean energy generation and conservation, and increasing agricultural productivity.

Dow’s integrated, market-driven, industry-leading portfolio of specialty chemical, advanced materials, agro sciences and plastics businesses delivers a broad range of technology-based products and solutions.

Back in 1997, Dow Chemical selected a commodity trading and risk management (CTRM) system to increase visibility into daily risk and to react to change more promptly. More recently, the company undertook a comprehensive upgrade of the system to the latest version of the software.

The upgrade moved Dow’s Hydrocarbons and Energy business, including its U.S. and Canadian Natural Gas, U.S. and European Feedstocks, and Global Risk Group, from the legacy to the new platform in under eight months, significantly improving the company’s P&L reporting capabilities.

A short delivery timeframe and large project scope made the transition a challenge, but close collaboration between software provider and integrator, along with a proven implementation toolkit employed on the case, enabled Dow to accomplish its objectives.

How the Dow Chemical story began

Dow’s Hydrocarbons and Energy business has long been a world leader in the production of crude oil and styrene. It is responsible for the procurement of fuels and crude oil-based raw materials, and supplying products and power for use in the company’s global operations.

Hydrocarbons and Energy also purchase natural gas liquid feedstocks to produce products such as butadiene, styrene, ethylene, propylene, power and steam. Dow needed to manage the risk of the natural gas and natural gas liquids commodities, since the purchases of these products directly impact its profitability.

Prior to 1997, the business was executing its risk management function with multiple spreadsheets to monitor pricing, trading, transactions and risk management. Reliance on spreadsheets was limiting visibility into the daily risks affecting its portfolio, affecting its ability to react and adapt to changes quickly.

They needed to replace spreadsheets with a state-of-the-industry trading, transaction and risk management system that could manage its highly complex operations, including global transportation of raw material and risk management strategies.

Dow began the search for a CTRM platform to streamline business processes and improve operational efficiency. Specifically, it required decision support tools that could provide a wide range of valuation analyses — value at risk, mark to market, and credit value at risk – which could integrate with all business processes, ranging from deal capture to settlement.

With company growth and changes in FAS and SOX regulations, Dow also needed a system that could be flexible enough to be modified when necessary and could lower costs of regulatory, tax, and corporate compliance.

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After a rigorous vendor evaluation process Dow purchased a CTRM platform to manage its feedstocks portfolio. Dow then upgraded to add treasury functions and global risk management. In 2005, Dow upgraded again, implementing key components, including connect, settlement, trade, accounts payable, general ledger, and hedge.

The company had worked with the CTRM platform successfully for years, but in 2015, new business challenges compelled another evaluation of its risk management tools and capabilities.

The challenge: a comprehensive upgrade, with the clock ticking

With near-term plans to sunset its internal IT infrastructure, Dow was facing an urgent need to upgrade its legacy CTRM system.

Internal headcount at Dow had also been reduced due to business consolidation and many manual processes needed to be automated, especially in risk reporting, P&L reporting and tracking of daily changes across Dow’s business lines.

The budget was approved for a like-system replacement, with a full review of requirements and processes to be included as part of the upgrade. All businesses were to be upgraded concurrently, with a deadline for delivery set at eight months.

After a quick review of CTRM market and given Dow’s successful 19-year track record with its legacy system, the decision was made to go forward without further vendor evaluation.

The solution

The implementation team began by establishing requirements in collaboration with Dow’s internal IT and business leads. The analysis included a full process review, business scenario modeling exercise, and systems integration roadmap. During the implementation, custom class events were created in order to replace older, stored procedures and address key gaps.

A small group of highly skilled and experienced CTRM consultants was formed to discern the business and technical challenges, and to prioritize mission-critical tasks to meet the deadline and program objectives.

One area of concern that bore out during the review was Dow’s existing P&L reporting process. To streamline it, data was extracted from the CTRM system and sent to an array of access databases to create a global risk book. By leveraging the CTRM system’s core functionality, combined with enhancements for calculating MTD, QTD, and YTD P&L for realized and unrealized positions, Dow is now able to produce its risk book directly out of the CTRM, without going through a network of spreadsheets or data manipulation.

Measurable and transparent business benefits

Successfully completing the project ahead of time and within budget was only the first of many accomplishments. The upgrade, affecting three separate business units within Dow, proved to enhance position and P&L reporting, while eliminating much of the manual labor associated with these tasks in the past.

Class events associated with risk and data management can now be handled using the CTRM’s class-event architecture, simplifying the way grid-based jobs and key user interface (UI) enhancements are created and maintained.

The new system continues to provide Dow with sophisticated analytics on its complete portfolio, and interfaces directly to legacy SAP® applications to ensure that general ledger updates occur in real-time. The platform also provides alignment via a common system of configuration across Dow Hydrocarbons and Energy’s three separate geographically dispersed business groups.

Basic counterparty information is still maintained, and the system still manages contract terms, schedules all physical commodities, actualizes volumes, invoices counterparties, performs inventory valuation/tracking, and settlement of all commodity-based transactions. Also, the CTRM platform supports derivatives trading, valuation, settlement, hedge and derivative accounting.

Conclusion

From sinking oil prices to regulatory over-reach, today’s petchems are exposed to wave after wave of margin killing risks. The Dow Chemical journey teaches us that having the right technology to manage price volatility in essential feedstocks can make the difference between pushing ahead of the competition or watch profitability slide.

 

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