ERP Practice Exam2 7115

2015

ERPPractice Exam 2AM SessionPhysical—25 Questions

© 2015 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material iin any format without prior written approval of GARP, Global Association of Risk Professionals, Inc.

ERP® Practice Exam 2

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

ERP Practice Exam 2 Candidate Answer Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

ERP Practice Exam 2 Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

ERP Practice Exam 2 Answer Sheet/Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

ERP Practice Exam 2 Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

TABLE OF CONTENTS

© 2015 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material 1in any format without prior written approval of GARP, Global Association of Risk Professionals, Inc.


IntroductionThe ERP Exam is a practice-oriented examination. Its ques-

tions are derived from a combination of theory, as set forth

in the core readings, and “real-world” work experience.

Candidates are expected to understand energy risk man-

agement concepts and approaches and how they would

apply to an energy risk manager’s day-to-day activities.

The ERP Exam is also a comprehensive examination,

testing an energy risk professional on a number of risk man-

agement concepts and approaches. It is very rare that an

energy risk manager will be faced with an issue that can

immediately be slotted into just one category. In the real

world, an energy risk manager must be able to identify any

number of risk-related issues and be able to deal with them

effectively.

The ERP Practice Exam 2 has been developed to aid

candidates in their preparation for the ERP Exam. This

practice exam is based on a sample of actual questions

from past ERP Exams and is suggestive of the questions

that will be in the 2015 ERP Exam.

The ERP Practice Exam 2 contains 25 multiple choice

questions. The 2015 ERP Exam will consist of a morning

and afternoon session, each containing 70 multiple choice

questions. The practice exam is designed to be shorter to

allow candidates to calibrate their preparedness for the

exam without being overwhelming.

The ERP Practice Exam 2 does not necessarily cover

all topics to be tested in the 2015 ERP Exam. For a com-

plete list of topics and core readings, candidates should

refer to the 2015 ERP Exam Study Guide. Core readings

were selected in consultation with the Energy Oversight

Committee (EOC) to assist candidates in their review of the

subjects covered by the exam. Questions for the ERP Exam

are derived from these core readings in their entirety. As

such, it is strongly suggested that candidates review all core

readings listed in the 2015 ERP Study Guide in-depth prior

to sitting for the exam.

Suggested Use of Practice ExamsTo maximize the effectiveness of the practice exams, candi-

dates are encouraged to follow these recommendations:

1. Plan a date and time to take the practice exam. Set dates appropriately to give sufficient study/review

time for the practice exam prior to the actual exam.

2. Simulate the test environment as closely as possible. • Take the practice exam in a quiet place.

• Have only the practice exam, candidate answer

sheet, calculator, and writing instruments (pencils,

erasers) available.

• Minimize possible distractions from other people,

cell phones, televisions, etc.; put away any study

material before beginning the practice exam.

• Allocate two minutes per question for the practice

exam and set an alarm to alert you when a total of

50 minutes have passed Complete the entire exam but

note the questions answered after the 50-minute mark.

• Follow the ERP calculator policy. Candidates are only

allowed to bring certain types of calculators into the

exam room. The only calculators authorized for use

on the ERP Exam in 2015 are listed below, there will

be no exceptions to this policy. You will not be allowed

into the exam room with a personal calculator other

than the following: Texas Instruments BA II Plus

(including the BA II Plus Professional), Hewlett Packard

12C (including the HP 12C Platinum and the Anniversary

Edition), Hewlett Packard 10B II, Hewlett Packard 10B II+

and Hewlett Packard 20B.

3. After completing The ERP Practice Exam 2 • Calculate your score by comparing your answer

sheet with the practice exam answer key. Only

include questions completed within the first 50

minutes in your score.

• Use the practice exam Answers and Explanations to

better understand the correct and incorrect answers

and to identify topics that require additional review.

Consult referenced core readings to prepare for

the exam.

• Remember: pass/fail status for the actual exam is

based on the distribution of scores from all candi-

dates, so use your scores only to gauge your own

progress and level of preparedness.

Energy RiskProfessional(ERP®) ExamPractice Exam 2

Answer Sheet



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Questions



1. The table below summarizes the projected crude oil production and annual expenses related to the develop-ment of a new oil reserve:

(Expenses in USD millions) Year 0 (now) Year 1 Year 2 Year 3

Exploration 10 0 0 0

Upstream Development 8 25 8 0

Operating and Transportation 3 30 15 12

Crude Oil Production (in BBLs) 0 800,000 350,000 200,000

Use the following assumptions to calculate the project’s NPV assuming that all cash flows occur at the end ofeach year:

• Projected average price of crude oil produced: USD 88/bbl • Risk-adjusted discount rate: 12%

a. USD -1,486,000b. USD -1,338,000c. USD 2,751,000d. USD 2,954,000

2. Engineers at an oil and gas company are modeling the value of an option to expand production of an oil fieldover a 3-year time horizon using a 5-step lattice. The current NPV of the field is USD 50,000,000 and fore-casted future cash flows have an implied annual volatility of 15%.

What best approximates the projected upper NPV of the field at step two of the lattice assuming 0.60 time steps?

a. USD 56,160,000b. USD 59,861,000c. USD 63,080,000d. USD 67,493,000

6 © 2015 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material in any format without prior written approval of GARP, Global Association of Risk Professionals, Inc.


3. A foreign petroleum company operates in a host country under terms of a production sharing contract (PSC).During a royalty holiday, the company will:

a. Have the ability to re-allocate amortized recovery costs from lower to higher producing projectsb. Be exempt for taxes owed to other jurisdictions on local production revenuec. Be able to invest additional capital in oil exploration and developmentd. Have the opportunity to ease crude oil shortages in the domestic market by selling additional volumes

of oil

4. A newly discovered offshore natural gas field extends across the territorial waters of two countries. Bothnations seek to develop the field in order to meet domestic demand and earn LNG export revenues. How canthe two countries best maximize the future commercial viability of the natural gas reserve while minimizingthe potential for a conflict over mineral rights?

a. Establish independent drilling rights on the reserve and designate a third-party arbitrator to settle future production disputes

b. Establish a sliding scale production arrangement based on a pro-rata allocation of the total projected recoverable gas volume per square nautical mile

c. Establish a joint development zone that includes the shared portion of the reserve before either country begins exploitation

d. Establish a proportional claim on mineral rights development based on the United Nations Convention on the Law of the Sea

5. Consider a very complex refinery with long-term crude oil supply contracts established with several producersin the Persian Gulf, Venezuela, and West Africa. What type of shipping arrangement offers the refinery thegreatest economic flexibility and control over its product inventory?

a. CIFb. DESc. EFPd. FOB

6. Which of the following legal structures will most evenly allocate risk among a group of individual investorswho participate in the development of an LNG liquefaction terminal that is attached to a natural gas field withan expected life of 30 years?

a. Joint venture agreementb. Master limited partnershipc. Project bondd. Unitization contract



Questions 7-8 use the information below.

The following data summarizes basis differentials and current refining margins in the Asian market (marginsare based on the entire range of products produced by the refinery):

Crude Basis to Simple Complex Very ComplexGravity/Sulfur Brent Refinery Margin Refinery Margin Refinery MarginContent (USD) (USD) (USD) (USD)

42.3° / 0.18% 0.89 0.19 6.55 10.25

33.1° / 0.44% -3.10 -3.10 7.34 15.11

28.4° / 2.56% -7.65 -0.45 4.00 16.43

1 6.8° / 1.89% -8.85 -1.65 4.85 18.91

7. Under current market conditions, the complex refinery will receive the highest margin by processing:

a. Light sweet crudeb. Intermediate sweet crudec. Light sour cruded. Heavy sour crude

8. Brent crude oil is expected to trade in a narrow range around USD 108/bbl with basis differentials and refiningmargins projected to remain stable over the next several years. What type of refining technology will a simplerefinery most likely invest in to maximize its current economic output?

a. Coker unitb. Condensate splitter unitc. Hydroskimmer unitd. Hydrotreater unit

9. An African nation exports domestically-produced crude oil with an API of 36° and a sulfur content of 0.73%.Assuming the London ICE Brent futures contract is the benchmark, how will the country’s crude oil exportsmost likely be priced?

a. At a discount to the Brent crude oil contractb. At parity with the Brent crude oil contractc. At a premium to the Brent crude oil contractd. Crude oil of this grade will have little price correlation with Brent making the Brent futures contract a

poor benchmark



10. A state-owned electric power company in China operates several coal-fired steam generation plants. The generator purchases its fuel supply from a local coal mine that produces moist coal with a low heating value.What type of coal has the power company most likely purchased?

a. Anthraciteb. Bituminousc. Lignited. Sub-Bituminous

11. An LNG export terminal has negotiated a long-term supply contract with a utility company in Asia.What contractual arrangement will best protect the LNG producer against economic loss if the utility refusesdelivery of the contracted volume of LNG?

a. A credit support annexb. A force majeure clause c. A quick sale provision with liquidated damagesd. A take-or-pay provision

12. The production manager for a natural gas producer is evaluating a range of potential storage options for sev-eral recently discovered reserves. Which natural gas storage option provides the greatest flexibility and easeof use during extraction?

a. Above-ground tank storageb. Aquifer storagec. Depleted reservoir storaged. Salt cavern storage

13. A producer sells 300,000 MMBtu of natural gas to a power generator at USD 4.81/MMBtu. The gas is scheduled for transport along a pipeline network that has a fuel requirement equal to 2.6% of the total delivery volume. How will the fuel requirement be accounted for in the economics of the transaction?

a. As a flat tolling charge of USD 0.250/MMBtu for pipeline accessb. As a fuel consumption fee of USD 15,600 for the total volume shippedc. As a reduction of 7,800 MMBtu on the total volume deliveredd. As a surcharge of USD 0.125/MMBtu on the purchase price



14. What is the expected production pattern for a well drilled into a field believed to contain sizeable quantitiesof crude oil and associated natural gas?

a. The well will primarily produce oil initially, but as it matures, oil production will decline and natural gas production will increase

b. The well will primarily produce natural gas initially, but as it matures, gas production will decline and oil production will increase

c. The well will produce both oil and gas in roughly the same proportion throughout the duration of its operating life

d. The well can only be configured to produce either oil or gas due to the impact unique subsurface structures have on well configuration and oil or gas production

15. Four natural gas storage facilities with the following characteristics are currently available in the market:

Facility A Facility B Facility C Facility D

Volume (mcf) 150 200 300 250

Injection (mcf/day) 5.2 1.2 1.8 2.4

Withdrawal (mcf/day) 8.0 2.4 3.2 7.8

Based on the data above, which storage facility represents the best option for peak shaving?

a. Facility A b. Facility Bc. Facility Cd. Facility D

16. Consider the following prices for prompt month power and natural gas contracts:

• Around-the-Clock (ATC) PJM West Hub: USD 52/MWh • NYMEX Henry Hub: USD 4.25/MMBtu.

What is the expected monthly profitability for a 500 MW gas-fired generator bidding into the PJM with a heatrate of 8.5MMBtu/MWh and an expected ATC capacity factor of 80% during a 30-day month?




17. Use the data below to calculate the implied market heat rate for a power grid supplied by a series of naturalgas-fired generators.

• Grid load: 240,000 MWh• Market clearing price: USD 65.85/MWh• Natural gas price (daily average): USD 4.60/MMBtu

a. 8.87 MMBtu/MWhb. 12.91 MMBtu/MWhc. 14.32 MMBtu/MWhd. 16.15 MMBtu/MWh

18. Ocean Wind Authority (OWA) is the project sponsor for High Cliffs Wind (HCW), a new 1,000 MW offshorewind turbine installation. HCW has a BBB credit rating based on the results of an initial feasibility study. OWAhas secured a Power Purchase Agreement (PPA) from Acme Power and Light (APL), a AA rated local electricutility. Under terms of the PPA, APL has made a firm ten year commitment to purchase up to 90% of thepower generated by the facility after its expected completion in five years. Assuming OWA arranges bankloans to fund the project, what will most likely be the terms of the lending arrangement?

a. A fifteen year amortizing term loan with recourse to the assets of HCW, priced as a BBB credit b. A five year construction loan that converts to a ten year fully amortizing term loan, priced as a AA credit

with recourse to the assets of HCWc. A fifteen year amortizing, non-recourse term loan, priced as a AA credit d. A five year construction loan that converts to a ten year fully amortizing, non-recourse term loan, priced

as a AA credit

19. In the electricity markets, a financial tolling agreement is most similar to what type of contract?

a. An Asian-style option on electricity futuresb. A fixed-for-floating swapc. An option on a commodity spreadd. A strip of sequentially-dated futures



20. The equilibrium price for electricity on a power grid with total demand of 450 MW is USD 52/MWh. Assuming amerit order curve is used to set the equilibrium price, which of the following plants will be dispatched?

Plant Variable Cost Capacity

A USD 51/MWh 300 MW

B USD 56/MWh 150 MW

C USD 45/MWh 200 MW

a. Plant B onlyb. Plant C onlyc. Plant A and Plant Cd. All plants are dispatched

21. What makes a hedging strategy based on purchasing options a more efficient risk management tool for producersand end-users than forwards, futures, or swaps?

a. Certainty of cash outflowsb. Counterparty netting arrangementsc. Minimal collateral thresholdsd. Physical settlement

22. NuPower Electric purchased a 50 MW Financial Transmission Right (FTR) to mitigate the potential economicimpact of transmission congestion between Node A (Injection) and Node B (Sink). The purchase price of theFTR is USD 5/MW.

LMP = USD 40/MW LMP = USD 20/MW

A B

At settlement, the Locational Marginal Price (LMP) for power at Nodes A and B is USD 40/MW and USD20/MW respectively. Calculate the net profit or loss NuPower realized on the transaction.

a. - USD 9,000,000b. - USD 1,000,000c. USD 1,000,000d. USD 9,000,000




The three-bus power grid below illustrates the amount of power supplied and consumed, along with the marginalprice of power generated at each node on the grid:

23. Maximum generation capacity at each node is 500 MW and a 200 MW transmission constraint exists betweennodes A and B. In order to keep the generator at node C offline, the transmission line from node B to node Cmust have a minimum capacity of: (solve for X)

a. 100 MWb. 150 MWc. 300 MWd. 400 MW

24. What is the current price for electricity (in USD/MWh) at node C?

a. 34b. 37c. 40d. 42

50 MW3 200 MW50 MW 200 MW

200 MW X

h/MWUSD 40 0/MWB

200 MW X

SD U

500 MW

h A/MWUSD 50

500 MW

250 MW

/MWC USD 50

400 MW

0 MW

h/MW



25. A generator has submitted the following four offers to the day-ahead (DA) market in the PJM. Assuming that thefollowing volumes shown below were cleared in the real-time (RT) market, what is the generator’s economicprofit or loss based on the prices described?

MW DA RT

HE6 950 USD 45.30 USD 47.00

HE7 950 USD 47.50 USD 58.90

HE8 970 USD 48.20 USD 53.50

HE9 1,000 USD 49.00 USD 38.00

a. - USD 183,914b. - USD 6,586c. USD 6,586d. USD 183,914


Answers



a. b. c. d.

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Explanations



1. The table below summarizes the projected crude oil production and annual expenses related to the develop-ment of a new oil reserve:

(Expenses in USD millions) Year 0 (now) Year 1 Year 2 Year 3

Exploration 10 0 0 0

Upstream Development 8 25 8 0

Operating and Transportation 3 30 15 12

Crude Oil Production (in BBLs) 0 800,000 350,000 200,000

Use the following assumptions to calculate the project’s NPV assuming that all cash flows occur at the end ofeach year:

• Projected average price of crude oil produced: USD 88/bbl • Risk-adjusted discount rate: 12%

a. USD -1,486,000b. USD -1,338,000c. USD 2,751,000d. USD 2,954,000

Answer: d

Explanation: The correct answer is d. We must first figure out the total cash inflow or outflow expected for the four year period, as follows:

Year 0 Year 1 Year 2 Year 3

Total Income (USD/millions) 0 70.4 30.8 17.6

Total costs (USD/millions) 21 55 23 12

Cash flow -21 +15.4 +7.8 +5.6

The discount factors for the four years would be: Year 0: 1, Year 1: 1/(1+0.12) or 0.901, Year 2: 1/(1+0.12)2 or0.812, and Year 3: 1/(1+0.12)3, or 0.731. Then multiply each cash flow by the discount factor and sum theresults to get NPV: NPV = -37 + (15*0.893) + (8*0.797) + (6*0.712) = USD 2,954,000.

Reading reference: Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management,Strategy and Finance, chapter 4, p. 142-143.



2. Engineers at an oil and gas company are modeling the value of an option to expand production of an oil fieldover a 3-year time horizon using a 5-step lattice. The current NPV of the field is USD 50,000,000 and fore-casted future cash flows have an implied annual volatility of 15%.

What best approximates the projected upper NPV of the field at step two of the lattice assuming 0.60 time steps?


Answer: c

Explanation: Correct answer is c.

The formula for up and down moves at step one can be derived from the information in the stem using thefollowing formulas:

u = exp(s÷DT) = 1.12321d = 1/u = 1/1.12321 = 0.89031

Using the factor values for an up and down move (1.12321 and 0.89031) the projected NPV at step one are:

Up: USD 56,160,435Down: USD 44,515,325

The NPV for an up move at step two of the lattice is USD 56,160,435 * 1.12321 = USD 63,079,962. Alternatively,USD 50,000,000 * (1.12321)^2 = USD 63,080,035

All other answers apply the factor formula incorrectly.

Reading reference: Bailey, et al., Unlocking the Value of Real Options.



3. A foreign petroleum company operates in a host country under terms of a production sharing contract (PSC).During a royalty holiday, the company will:

a. Have the ability to re-allocate amortized recovery costs from lower to higher producing projectsb. Be exempt for taxes owed to other jurisdictions on local production revenuec. Be able to invest additional capital in oil exploration and developmentd. Have the opportunity to ease crude oil shortages in the domestic market by selling additional volumes

of oil

Answer: c

Explanation: The correct answer is c. Royalty holidays (along with tax holidays) are incentives that countriesmay offer to foreign petroleum companies to help maximize their investment in domestic oil/gas projects.The rationale is that if the contractor does not have to pay royalties for a period of time, they will have addi-tional capital to invest in the exploration and development of the oil/gas field.

Reading reference: Charlotte Wright and Rebecca Gallun. Fundamentals of Oil & Gas Accounting, Chapter 15,pages 688-689.

4. A newly discovered offshore natural gas field extends across the territorial waters of two countries. Bothnations seek to develop the field in order to meet domestic demand and earn LNG export revenues. How canthe two countries best maximize the future commercial viability of the natural gas reserve while minimizingthe potential for a conflict over mineral rights?

a. Establish independent drilling rights on the reserve and designate a third-party arbitrator to settle future production disputes

b. Establish a sliding scale production arrangement based on a pro-rata allocation of the total projected recoverable gas volume per square nautical mile

c. Establish a joint development zone that includes the shared portion of the reserve before either country begins exploitation

d. Establish a proportional claim on mineral rights development based on the United Nations Convention on the Law of the Sea

Answer: c

Explanation: Answer c is correct. The best strategy, and one that has been used successfully in many occa-sions, is for the two nations to establish a joint development zone (JDZ) that encompasses the portions of thereserve in both country’s territorial waters. The JDZ will include definitions of each nation’s claim and a uniti-zation agreement to maximize production for the entire reserve.

Reading reference: Andrew Inkpen and Michael Moffett. The Global Oil and Gas Industry: Management,Strategy and Finance, Chapter 4, pages 138-141.



5. Consider a very complex refinery with long-term crude oil supply contracts established with several producersin the Persian Gulf, Venezuela, and West Africa. What type of shipping arrangement offers the refinery thegreatest economic flexibility and control over its product inventory?

a. CIFb. DESc. EFPd. FOB

Answer: d

Explanation: The correct answer is d: under the terms of the FOB contract, the buyer is responsible forarranging shipping and insurance charges providing flexibility in making these arrangements in the mannerthat they wish and allowing for the possibility of saving money.

Reading reference: Andrew Inkpen and Michael Moffett. The Global Oil and Gas Industry: Management,Strategy and Finance, Chapter 9, pages 346-347.

6. Which of the following legal structures will most evenly allocate risk among a group of individual investorswho participate in the development of an LNG liquefaction terminal that is attached to a natural gas field withan expected life of 30 years?

a. Joint venture agreementb. Master limited partnershipc. Project bondd. Unitization contract

Answer: a

Explanation: The correct answer is a, a joint venture structure is typically used in large scale oil and gas projects to share risk among project participants.

Reading reference: Andrew Inkpen and Michael Moffett, The Global Oil & Gas Industry: Management, Strategyand Finance, Chapter 9, pages 351-356.




The following data summarizes basis differentials and current refining margins in the Asian market (marginsare based on the entire range of products produced by the refinery):

Crude Basis to Simple Complex Very ComplexGravity/Sulfur Brent Refinery Margin Refinery Margin Refinery MarginContent (USD) (USD) (USD) (USD)

42.3° / 0.18% 0.89 0.19 6.55 10.25

33.1° / 0.44% -3.10 -3.10 7.34 15.11

28.4° / 2.56% -7.65 -0.45 4.00 16.43

1 6.8° / 1.89% -8.85 -1.65 4.85 18.91

7. Under current market conditions, the complex refinery will receive the highest margin by processing:

a. Light sweet crudeb. Intermediate sweet crudec. Light sour cruded. Heavy sour crude

Answer: b

Explanation: The correct answer is b. According to the chart, the complex refinery will have its highest margin(USD 7.34) from refining the 33.1° / 0.44%, or intermediate sweet, grade of oil. Note: none of the choices listedare for light sour.

Reading reference: Inkpen and Moffett, The Global Oil and Gas Industry: Management, Strategy and Finance, Chapter 12.

8. Brent crude oil is expected to trade in a narrow range around USD 108/bbl with basis differentials and refiningmargins projected to remain stable over the next several years. What type of refining technology will a simplerefinery most likely invest in to maximize its current economic output?

a. Coker unitb. Condensate splitter unitc. Hydroskimmer unitd. Hydrotreater unit

Answer: a

Explanation: Answer a is correct. According to the table the heaviest oils are trading at a steep discount tothe light crudes (-7.85 and -8.10) while producing a higher return (17.98 and 18.65). If projections are thatthese margins will persist over the medium/long term, then the investment in a coker unit to process heavycrudes makes economic sense.

Reading reference: Inkpen and Moffett, chapter 12.



9. An African nation exports domestically-produced crude oil with an API of 36° and a sulfur content of 0.73%.Assuming the London ICE Brent futures contract is the benchmark, how will the country’s crude oil exportsmost likely be priced?

a. At a discount to the Brent crude oil contractb. At parity with the Brent crude oil contractc. At a premium to the Brent crude oil contractd. Crude oil of this grade will have little price correlation with Brent making the Brent futures contract a

poor benchmark

Answer: a

Explanation: Benchmark crudes serve as a pricing standard against which the value of other crude oils can beset. This crude oil would be classified as intermediate crude with a sulfur level slightly higher than Brent,making it likely to sell at a small discount to Brent.

Reading reference: Vincent Kaminski, Energy Markets, Chapter 17.

10. A state-owned electric power company in China operates several coal-fired steam generation plants. The generator purchases its fuel supply from a local coal mine that produces moist coal with a low heating value.What type of coal has the power company most likely purchased?

a. Anthraciteb. Bituminousc. Lignited. Sub-Bituminous

Answer: c

Explanation: The correct answer is c; lignite is a type of soft coal with the lowest carbon content of the fourmajor types and a high moisture content.

Reading reference: Vincent Kaminski, Energy Markets, Chapter 26, p. 798.



11. An LNG export terminal has negotiated a long-term supply contract with a utility company in Asia.What contractual arrangement will best protect the LNG producer against economic loss if the utility refusesdelivery of the contracted volume of LNG?

a. A credit support annexb. A force majeure clause c. A quick sale provision with liquidated damagesd. A take-or-pay provision

Answer: d

Explanation: The correct answer is d. A take-or-pay provision forces the customer to either take the volumeof gas specified by the contract — whether it is needed or not — or pay for the gas, even if it is never deliv-ered. Answer c is incorrect because while a spot market is developing for LNG, it cannot be considered fullyliquid in that the exporter cannot be guaranteed that there would be a buyer available for this cargo.

Reading reference: Andrew Inkpen and Michael Moffett. The Global Oil and Gas Industry: Management,Strategy and Finance, Chapter 9, page 336.

12. The production manager for a natural gas producer is evaluating a range of potential storage options for sev-eral recently discovered reserves. Which natural gas storage option provides the greatest flexibility and easeof use during extraction?

a. Above-ground tank storageb. Aquifer storagec. Depleted reservoir storaged. Salt cavern storage

Answer: d

Explanation: The correct answer is d. Since salt caverns allow for the quickest withdrawal of stored gasamong all of the underground storage options, withdrawal can begin much more quickly than either aquifersor depleted reservoirs. Above ground tanks are typically not used for the storage of natural gas.

Reading reference: Vivek Chandra. Fundamentals of Natural Gas: An International Perspective, Chapter 2,pages 72-73.



13. A producer sells 300,000 MMBtu of natural gas to a power generator at USD 4.81/MMBtu. The gas is scheduled for transport along a pipeline network that has a fuel requirement equal to 2.6% of the total delivery volume. How will the fuel requirement be accounted for in the economics of the transaction?

a. As a flat tolling charge of USD 0.250/MMBtu for pipeline accessb. As a fuel consumption fee of USD 15,600 for the total volume shippedc. As a reduction of 7,800 MMBtu on the total volume deliveredd. As a surcharge of USD 0.125/MMBtu on the purchase price

Answer: d

Explanation: The correct answer is d. The cost of the gas used as fuel by the pipeline pumps can be calculat-ed as 0.026 x 4.81 = USD 0.125/MMBtu. This is then added to the cost of the natural gas charged by the shipper to the power plant (for a total cost of USD 4.935/MMBtu)

Reading reference: Vincent Kaminski. Energy Markets. (London: Risk Books, 2012), Chapter 10, pages 372-373.

14. What is the expected production pattern for a well drilled into a field believed to contain sizeable quantitiesof crude oil and associated natural gas?

a. The well will primarily produce oil initially, but as it matures, oil production will decline and natural gas production will increase

b. The well will primarily produce natural gas initially, but as it matures, gas production will decline and oil production will increase

c. The well will produce both oil and gas in roughly the same proportion throughout the duration of its operating life

d. The well can only be configured to produce either oil or gas due to the impact unique subsurface structures have on well configuration and oil or gas production

Answer: a

Explanation: The correct answer is a. Typically oil will flow from such a well first, but as the oil begins tobecome depleted, natural gas within the reservoir will expand, and will come out of the well in greater volumes. Answer d is incorrect because wells in associated fields typically produce natural gas along with oil; this gas can either be collected for sale or “flared” — burned on-site as a waste product.

Reading reference: Vivek Chandra. Fundamentals of Natural Gas: An International Perspective, Chapter 1, page 17.



15. Four natural gas storage facilities with the following characteristics are currently available in the market:

Facility A Facility B Facility C Facility D

Volume (mcf) 150 200 300 250



Based on the data above, which storage facility represents the best option for peak shaving?

a. Facility A b. Facility Bc. Facility Cd. Facility D

Answer: a

Explanation: The main characteristic of a peak shaving storage is low number of injection and especially with-drawal days (how quickly gas can be put into or taken out of storage). In the table below storage site A hasthe lowest number of injection and withdrawal days.

Storage A B C D

Volume (mcf) 150 200 300 250



Injection days 29 167 139 100

Withdrawal days 19 83 78 36

Reading reference: Fundamentals of a Natural Gas: An international perspective, Vivek Chandra, chapter 2, p.67.



16. Consider the following prices for prompt month power and natural gas contracts:

• Around-the-Clock (ATC) PJM West Hub: USD 52/MWh • NYMEX Henry Hub: USD 4.25/MMBtu.

What is the expected monthly profitability for a 500 MW gas-fired generator bidding into the PJM with a heatrate of 8.5MMBtu/MWh and an expected ATC capacity factor of 80% during a 30-day month?


Answer: c

Explanation: The correct answer is c.The expected output of the generator is: 500 MW x 30 days x 24 hrs x 80% = 288,000 MWhThe Spark spread formula is: USD 52/MWh – 8.5 x USD 4.25/MMBtu = USD 15.875/MWhThis results in a P&L calculation of: 288,000 MWh x USD 15.875/MWh = USD 4,572,000

Reading reference: Energy Markets, Vincent Kaminski, Chapter 22, page 802, 810.

17. Use the data below to calculate the implied market heat rate for a power grid supplied by a series of naturalgas-fired generators.

• Grid load: 240,000 MWh• Market clearing price: USD 65.85/MWh• Natural gas price (daily average): USD 4.60/MMBtu

a. 8.87 MMBtu/MWhb. 12.91 MMBtu/MWhc. 14.32 MMBtu/MWhd. 16.15 MMBtu/MWh

Answer: c

Explanation: The correct answer is c. The implied market heat rate is calculated by dividing the cost of thenatural gas into the market clearing price for electricity: USD 65.85 / USD 4.60 = 14.32

Reading reference: Vincent Kaminski, Energy Markets, Chapter 22.



18. Ocean Wind Authority (OWA) is the project sponsor for High Cliffs Wind (HCW), a new 1,000 MW offshorewind turbine installation. HCW has a BBB credit rating based on the results of an initial feasibility study. OWAhas secured a Power Purchase Agreement (PPA) from Acme Power and Light (APL), a AA rated local electricutility. Under terms of the PPA, APL has made a firm ten year commitment to purchase up to 90% of thepower generated by the facility after its expected completion in five years. Assuming OWA arranges bankloans to fund the project, what will most likely be the terms of the lending arrangement?

a. A fifteen year amortizing term loan with recourse to the assets of HCW, priced as a BBB credit b. A five year construction loan that converts to a ten year fully amortizing term loan, priced as a AA credit

with recourse to the assets of HCWc. A fifteen year amortizing, non-recourse term loan, priced as a AA credit d. A five year construction loan that converts to a ten year fully amortizing, non-recourse term loan, priced

as a AA credit

Answer: d

Explanation: Project finance lending structures typically include an initial construction loan that converts to aterm loan. As a separate project company, the execution of a PPA with Acme Power and Light would be typi-cal of a project finance agreement, a benefit to OWA is that they may then be able to use the utility’s highercredit rating to reduce their own borrowing costs. The basic premise of a project finance agreement is thatthe loan is based on the future cash flows of the project (in this case the PPA) and that lenders have little orno recourse in the case of a default.

Reading reference: Chris Groobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer forRenewable Energy and Clean Tech Projects.

19. In the electricity markets, a financial tolling agreement is most similar to what type of contract?

a. An Asian-style option on electricity futuresb. A fixed-for-floating swapc. An option on a commodity spreadd. A strip of sequentially-dated futures

Answer: c

Explanation: The correct answer is c. In a financial tolling agreement, no physical delivery of electricity isrequired, the contract is instead settled against the market prices of fuel (usually natural gas) and electricityand a formula within the contract. The tolling agreement is therefore essentially an option on the heat ratespread between the input and output of the generator.

Reading reference: Vincent Kaminski. Energy Markets. Chapter 23, Electricity Market Transactions, pages 860-862.



20. The equilibrium price for electricity on a power grid with total demand of 450 MW is USD 52/MWh. Assuming amerit order curve is used to set the equilibrium price, which of the following plants will be dispatched?

Plant Variable Cost Capacity

A USD 51/MWh 300 MW

B USD 56/MWh 150 MW

C USD 45/MWh 200 MW

a. Plant B onlyb. Plant C onlyc. Plant A and Plant Cd. All plants are dispatched

Answer: c

Explanation: The merit order curve dispatches generation in order of variable operating costs until totalcapacity for the system is met. The last plant dispatched that fulfills the capacity requirement will set theequilibrium price. In this case, Plant C’s entire capacity will be dispatched plus 125 MW of capacity from PlantA in order to fulfill total grid demand.

Reading reference: Daniel Kirschen and Goran Strbac, Fundamentals of Power System Economics, Chapter 3.

21. What makes a hedging strategy based on purchasing options a more efficient risk management tool for producersand end-users than forwards, futures, or swaps?

a. Certainty of cash outflowsb. Counterparty netting arrangementsc. Minimal collateral thresholdsd. Physical settlement

Answer: a

Explanation: The correct answer is a. Producers and end-users have shown an increasing interest in usingoption-based strategies. This trend can be explained by the relative certainty of cash outflow offered byoptions versus the ongoing margining and collateralization requirements associated with forwards, futuresand swaps. After an initial upfront cash flow (option premium), there are typically no other financial obliga-tions related to an option contract.

Reading reference: Vincent Kaminski. Energy Markets, Chapter 18, Page 667-668.



22. NuPower Electric purchased a 50 MW Financial Transmission Right (FTR) to mitigate the potential economicimpact of transmission congestion between Node A (Injection) and Node B (Sink). The purchase price of theFTR is USD 5/MW.

LMP = USD 40/MW LMP = USD 20/MW

A B

At settlement, the Locational Marginal Price (LMP) for power at Nodes A and B is USD 40/MW and USD20/MW respectively. Calculate the net profit or loss NuPower realized on the transaction.

a. - USD 9,000,000b. - USD 1,000,000c. USD 1,000,000d. USD 9,000,000

Answer: a

Explanation: The correct answer is a: a total loss of USD 9,000,000. Financial Transmission Rights (FTRs) are financial instruments which pay the difference between prices at twolocations; in this case NuPower will receive the Node B price and pay the Node A price, so the FTR payout is20 – 40, or - $ 20 per MWh. NuPower already spent USD 5/MW to buy the FTR, so therefore, the net loss perMW is - USD 25. Total MWh for June 2014 = 30 * 24 * 50 = 36,000 MWh. Therefore, the total loss forNuPower is 36,000 * (-25) = - USD 9,000,000.

Reading reference: Vincent Kaminski, Energy Markets, chapter 23, p. 849.




The three-bus power grid below illustrates the amount of power supplied and consumed, along with the marginalprice of power generated at each node on the grid:

23. Maximum generation capacity at each node is 500 MW and a 200 MW transmission constraint exists betweennodes A and B. In order to keep the generator at node C offline, the transmission line from node B to node Cmust have a minimum capacity of: (solve for X)

a. 100 MWb. 150 MWc. 300 MWd. 400 MW

Answer: b

Explanation: The correct answer is b. There is a 400 MW load at node c and no power currently being added tothe grid at that point. There is an injection of 500 MW at node A with a load of 250; this means that 250 MWcan be sent to node c. If we subtract 250 from 400, there is a remainder of 150 MW that must be supplied fromnode B; therefore transmission line between nodes B and C must be capable of carrying at least 150 MW.

Reading reference: Daniel Kirschen and Goran Strbac Fundamentals of Power System Economics, Chapter 3.

50 MW3 200 MW50 MW 200 MW

200 MW X

h/MWUSD 40 0/MWB

200 MW X

SD U

500 MW

h A/MWUSD 50

500 MW

250 MW

/MWC USD 50

400 MW

0 MW

h/MW



24. What is the current price for electricity (in USD/MWh) at node C?

a. 34b. 37c. 40d. 42

Answer: c

Explanation: The correct answer is c. The 400 MW load at node C can be met with 250 MW of power fromnode A and 150 MW of power from node B. This means that the cost for power at node C will be set by themarginal cost for power at node B, or USD 40/MWh.

a = Price at Node Ab = avg of A and B costsd = avg of A and C marginal costs

Reading reference: Daniel Kirschen and Goran Strbac. Fundamentals of Power System Economics, Chapter 3



25. A generator has submitted the following four offers to the day-ahead (DA) market in the PJM. Assuming that thefollowing volumes shown below were cleared in the real-time (RT) market, what is the generator’s economicprofit or loss based on the prices described?

MW DA RT

HE6 950 USD 45.30 USD 47.00

HE7 950 USD 47.50 USD 58.90

HE8 970 USD 48.20 USD 53.50

HE9 1,000 USD 49.00 USD 38.00

a. - USD 183,914b. - USD 6,586c. USD 6,586d. USD 183,914

Answer: b

Explanation: The correct answer is b. It can be derived by filling in the values on the table shown below.

MW DA RT DA- RT P&L

HE6 950 USD 45.30 USD 47.00 USD (1.70) USD (1,615.0)

HE7 950 USD 47.50 USD 58.90 USD (11.40) USD (10,830.0)

HE8 970 USD 48.20 USD 53.50 USD (5.30) USD (5,141.0)

HE9 1,000 USD 49.00 USD 38.00 USD 11.00 USD 11,000.0

USD (6,586.0)

Reading reference: Steven Stoft. Power System Economics: Designing Markets for Electricity. Chapter 3.6.

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ERP Practice Exam2 7115

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