LEAP POINT OF VIEW: MASTER AGREEMENT MANAGEMENT AND NEGOTIATION

LEAP POINT OF VIEW: MASTER AGREEMENT
MANAGEMENT AND NEGOTIATION
BEST PRACTICES, LESSONS LEARNED, AND CHALLENGES IN
NEGOTIATING AND MANAGING MASTER AGREEMENTS
LEAP GENERAL MEETING – HOUSTON, TEXAS
SEPTEMBER, 2012
WHAT WE HOPE TO COVER TODAY
• “WHAT’S OUR ANGLE?” - BACKGROUND AND
PURPOSE
• PANEL INTRODUCTION
• MARKET OVERVIEW: MASTER AGREEMENT
ADMINISTRATION PRACTICES
• BEST PRACTICES AS SEEN FROM THE
“OUTSIDE” OF SUCCESSFUL COMPANIES
• WHAT MORE CAN LEAP DO?
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PANEL INTRODUCTION
Panel Facilitator: Kevin Jandora, LEAP project manager,
former head of Global Physical Oil Operations for Morgan
Stanley
Richard England – Contracts Team Lead, for Shell (STUSCO
Products)
Karen Mikkelborg – Senior North American Contract Negotiator
and Special Projects for Nexen
Vivian Ramos – Team Lead, Crude Contracts and Master
Agreements for Chevron
Marianne Ryan – Master Agreement Specialist for BP
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WHAT’S OUR ANGLE?
• LEAP has supported the use of electronic
confirmation by creating standardized documents…
…but we often collectively and individually have
faced barriers to increased adoption of these
documents for our markets
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WHAT’S OUR ANGLE? (continued)
• Previous LEAP meetings and advocacy efforts
have focused on the benefits of e-confirmation and
the use of bilaterally agreed master terms based on
industry-accepted templates.
– Simplify or eliminate individual transaction confirmations,
allowing staff to focus on disputes and mismatches of
commercial terms (as well as negotiate new agreements).
– Reduce or eliminate legal basis risk among transactions.
– May allow for netting of default risk across transactions.
– In some cases, allow for future changes to be agreed by
bilaterally-signed protocol letters
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OK…SO WHAT’S OUR ANGLE?
• Barriers to adoption of industry-standard master
agreements and GTCs for the US physical oil
market are related to its “maturity”
– Oil trading matured earlier in the US/Europe, and
historically “Sellers’ terms govern”, with few reasons for
Sellers to deviate from that practice
– Companies have largely “figured this out” for derivatives,
natural gas & power trading as the documentation “grew
up” along with the market; Commonplace for parties in
those markets to refuse to trade without a master
– Some say “It’s always been done that way for oil…”
• Bilateral masters are relatively “new” for physical oil
but best practices have evolved; LEAP members
are willing to share those emerging practices
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MARKET OVERVIEW: MASTER AGREEMENT
ADMIN PRACTICES VARY BY MARKET SEGMENT
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ELECTRONIC MATCHING OF PHYSICAL
OIL TRADES IS HAPPENING TODAY
• 2009: ICE’s eConfirm and LEAP members worked to create initial
service to support Colonial pipeline
• 2011-2012: eConfirm scope expanded with LEAP members’ help
to include NGLs, crude, and certain “date-based” pipelines
– Effort has included non-LEAP members from Exxon, Marathon,
ConocoPhillips, and Valero, among others
– Current scope includes Colonial, Plantation, Explorer, TEPPCO, Magellan,
KinderMorgan, West Shore, Wolverine
– A subset of this group is committed to working together to define
requirements for matching of RINs trades
• As of September, 2012:
– 13 Counterparties using eConfirm for NGLs (6 Live, 7 Click & Confirm “C&C”)
– 16 Counterparties using eConfirm for Refined Products (8 Live, 8 C&C)
– 21 Counterparts using eConfirm for Crude Oil (11 Live, 10 C&C)
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OBERVATION FROM THE ‘OUTSIDE’: BEST
PRACTICES HAVE EMERGED
• Companies who achieve scale with bilateral master
agreements and leveraging electronic confirmation
standards in the US Oil Market largely share some
practices in:
– Business Process
– Organizational Setup
– Technology
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POSSIBLE APPROACH TO MASTER AGREEMENT
MANAGEMENT FOR OIL TRADING
Review
Standard
Templates
Cross
Functional
Discussions
Develop
Cover
Sheets
Select
Elections
Establish
Priorities
Deal
Frequency /
Risk
Negotiate
Send /
Exchange
Cover Sheets
Change Master
Agreement Position
Change Master
Agreement
Priorities
POSSIBLE APPROACH TO MASTER AGREEMENT
MANAGEMENT FOR OIL TRADING
Review
Standard
Templates
Cross
Functional
Discussions
• Gather industry templates in the form of
counterparty GTCs, templates from
industry groups like LEAP; If possible
participate in their formation via industry
Committees
• Form ‘virtual’ team made up of:
– Contract Admin
– Trading
– Legal
– Tax
– Operations/Scheduling
– Credit
– Settlements
• Discuss 1-2 templates for each market
as a basis
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POSSIBLE APPROACH TO MASTER AGREEMENT
MANAGEMENT FOR OIL TRADING
Develop
Cover
Sheets
Select
Elections
• Flag internal points for preferred cover
sheet elections and amendments, where
necessary
• Segment discussions between
negotiable and “deal-killer” items,
depending on counterparty type and
other risk factors
• Create policies that “flag” individual
master agreements when negotiators
exceed agreed certain rules/boundaries
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POSSIBLE APPROACH TO MASTER AGREEMENT
MANAGEMENT FOR OIL TRADING
Establish
Priorities
Deal
Frequency /
Risk
• Establish a permanent negotiating team,
whether it is “virtual” or actual. (See
organizational considerations below).
• Establish goals and implement a
transparent method to track and report
progress to goals for “Top Priority
Counterparties” lists.
• Segment market focus by business
volume and “pain points” (related to
product, region, delivery mode, customer
type, etc).
• Develop “Top Priority Counterparties” list
on each market with input related to
credit concerns, operational challenges,
trade volumes, market focus, etc.
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POSSIBLE APPROACH TO MASTER AGREEMENT
MANAGEMENT FOR OIL TRADING
Negotiate
Send /
Exchange
Cover Sheets
• Establish a permanent negotiating team,
whether it is “virtual” or actual. (See
organizational considerations below).
• Reach out to Top Priority Counterparties,
keeping in mind that negotiations will likely have
a “hurry up and wait” element.
• Report potential “flagged” exceptions to policy
on a real-time basis.
• Open parallel negotiations with as many
counterparts as possible given team size; Team
should utilize previously established
amendments and negotiating guidelines.
• Execute a final review of ‘blacklined’ changes
prior to execution, and then ensure confirmation
practices are changed, including “turning on”
eConfirm.
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POSSIBLE APPROACH TO MASTER AGREEMENT
MANAGEMENT FOR OIL TRADING
Change Master
Agreement Position
• Establish an ongoing dialogue with the
original cross-functional team via bimonthly, monthly, or quarterly meetings
and transparent status reporting.
• Ensure that any trends in negotiating
points, and lessons learned from
Operational or marketplace events are
fed back for discussion.
Change Master
Agreement Priorities
• Where necessary, as market practice
and regulatory or statutory changes
occur, update templates accordingly and
consider renegotiating existing masters.
• Reprioritize Master Agreement target list
as the business focus and market
changes
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ORGANIZATIONAL BEST PRACTICES
• Separate but closely-collaborative “Negotiation
Team” and “Transactional Confirmation Team”
• Negotiation Team:
– Lends itself to regional, not global expertise
– Mix of junior operations skills and senior legal and
paralegal oversight
– Both a feeder from and to other departments like
Scheduling, Legal, Settlements, Projects, etc
– Lends itself to part-time and contractor resources, with
emerging trend of law firms providing secondment service
• How often are these resources “shared” across
derivative and physical functions? Across product
groups like Power, Natural Gas, Coal?
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TECHNOLOGY BEST PRACTICES
• Systems for storing executed masters along with
certain key terms for quick reference and reporting.
– Consider scenarios where documents would need to be
pulled at short notice (e.g. Credit Crisis in 2008, credit
downgrade of your own company, Hurricane FM Terms).
• Systems for tracking the “lifecycle” of negotiations
from initial contact to executed agreement. This
could be the same system for storing executed
master agreements and their terms.
• Tie-in references of signed master agreements with
trading and confirmations systems.
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WHAT CAN LEAP DO OTHER THAN
CREATING/MAINTAINING STANDARDS?
• Has performed a “Rolodex” function for parties
interested in contacting LEAP and non-LEAP
members for years
• Has performed an advocacy and education function
through industry functions such as the LEAP GMM,
Marcus Evans conferences and ISDA conferences.
• Stayed in touch with other industry organizations (e.g.
ISDA, NAESB, Energy Institute) on their docs.
• Has reached out to technology vendors to educate on
the latest available services in the market.
• Has assisted with requirements gathering related to
expansion of existing confirmation services.
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