ANNUAL REPORT 2011 - DONG Energy

RIsk AND RISK MANAGEMENT
risk and risk policy Exposure and hedging
Oil and gas price risks
Oil and gas price risks come primarily from equity production
of oil and gas and from differences in the indexation
of sales and purchase prices for gas.
DONG Energy’s production of oil contributes to reducing
its oil price exposure from oil price-indexed gas purchase
contracts. The integrated business model thus has
a stabilising effect on the company’s cash flows and overall
risk profile.
The risk to future cash flows from oil and gas price positions
is managed with a time frame of five years based
on a target for Cash-Flow-at-Risk. Oil and gas exposures
are hedged after adjustment for hydrocarbon taxation to
achieve the desired cash flow effect after tax.
The oil and gas exposure profile is expected to change
in the years to come, primarily due to rising equity production
of oil. DONG Energy will be affected financially
when oil and gas price trends diverge in the short term
(decouple), as was the case in 2009-2011.
The long-term purchase and sales contracts contain
embedded options, for example in the form of volume
flexibility and renegotiation clauses that may alter DONG
Energy’s risk profile in both the short and the long term.
price risks for thermal electricity generation
The electricity price is determined by fuel prices, weather
conditions, prices for CO emissions allowances and
2
general supply side and demand side characteristics. Risk
management of thermal electricity generation is based on
freezing the contribution margin for future electricity
generation by selling electricity and buying fuel and CO . 2
The spread-based price exposure for the Danish and
foreign electricity generation is managed with a time
frame of up to five years. The time frame reflects the given
liquidity conditions for trading in the forward market.
The strategic measures involving adaptation of Danish
thermal electricity generation and the establishment of
new gas-fired power stations in the UK (Severn) and the
Netherlands (Enecogen) will, in the years to come, reduce
DONG Energy’s electricity exposure to Nord Pool from
67% of the value in 2007 to an expected 12% in 2015. This
will contribute to a more diversified position in the market.
46
manaGEmEnt’s rEviEw – DONG ENERGY GROUP ANNUAL ANNUAL REPORT REPORT 2011 2011
Overall, DONG Energy’s oil and gas exposure consists of a
long gas position (positive effect if prices rise) and a short
oil position. As oil and gas prices have, historically, correlated
positively over long periods of time, the long gas exposure
will, to some extent, be offset by the short oil exposure,
reducing the direct gas price exposure. The net oil
and gas price exposure is treated as a spread risk.
In the very short term, the exposure profile may differ
from the normal profile. For example, this is the case for oil
exposure in 2012, which is marginally long as the proportion
of oil-indexed gas sales contracts that have been entered
into is higher than normal.
At the end of 2011, 28% of the expected oil exposure
and 91% of the expected gas exposure for 2012 had been
hedged, equivalent to a total hedging percentage of 79%
for oil and gas.
In 2012, a 10% decrease in the price of oil and gas
would reduce EBITDA after hydrocarbon tax by DKK 117
million.
Exposure profile for oil and gas in 2012, DKK billion
6
5
4
3
2
1
0
Commercial exposure Net exposure
Oil
Oil and gas
At the end of 2011, the price exposure relating to 56% of
expected generation in 2012 for Denmark, the Netherlands
and the UK had been hedged.
Exposure profile for thermal electricity generation in 2012,
DKK billion
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Denmark
Gas
Commercial exposure Net exposure
UK and The Netherlands
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Før afdækning
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