Achieving Digitalization in a Document Intensive Energy Market by CTRM Center

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ACHIEVING DIGITALIZATION IN A DOCUMENT INTENSIVE ENERGY MARKET

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Achieving Digitalization in a Document Intensive Energy Market

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INTRODUCTION As energy companies seek to become more efficient and agile in a rapidly changing marketplace fraught with risks, digitalization - the process of evolving from manual or analog processes to more efficient and cost effective digital processes by reducing the number of times data is touched and ensuring greater accuracy and more rapid movement of data and information throughout the enterprise – continues to attract attention from CIOs across the energy value chain. Unfortunately, many of the digitalization efforts by energy firms to date have met with mixed results as much of the data in this industry, and particularly that passed between trading and/or service partners, is not available in a form that allows rapid capture and systematic integration, particularly that data that exchanged in the form of paper documents, pdf’s, faxes and emails. Though many of the processes of energy and commodity trading have become digitalized (exchange based trading, electronic pipeline nominations/ EDI, ISO interfaces, etc.), the reality is that in many ways the wholesale energy markets lag behind many others as manual processes and massive number of documents (both physical and electronically delivered) still exchanged among industry participants. These documents include: • • • • • • • • • • •

Invoices Energy services or trading contracts Broker statements Pipeline statements including EOM reports, cut reports and notifications Metals inventory reports and statements Truck tickets Vessel (ship and barge) nominations Inspection reports Complex, non-standard confirmations Trade finance documentation including LC’s And many more….

• Physical and electronic documents continue to create friction on the path toward digitalization for energy trading firms. • Advanced AI and OCR technologies, such as that from Aquilon, can enable firms to quickly consume and reconcile document-based data and reduce or eliminate manual tasks and rework in energy trading back offices. • Aquilon’s lightweight tools can achieve these benefits with no complex system integration or change of processes required. In addition to documents exchanged between parties to any transaction, many shops also continue to rely on manual paper-based processes internally – including deal sheets and printed reports. Each time a document is passed between companies, human interpretation and manual keying of that information into one or more systems is required, with the attendant costs and risks of introducing errors during the process.

Achieving Digitalization in a Document Intensive Energy Market

Why do these paper-based process continue to persist when even a cursory look at available technologies tells one that many could be replaced via modern web/ cloud enabled document management and workflow solutions, combined with relatively straight-forward business process changes? Perhaps one of the most compelling reasons to continue to use paper-based processes is control. This is particularly true in those instances where there is a vested financial interest in ensuring the accuracy of not only the transactional records, but also the terms and conditions underlying the transactions. For example, natural gas processing agreements can have highly customized terms and pricing arrangements that are difficult to model accurately even in a customized ETRM system, much less a non-industry specific document management and workflow solution. Other contracts, such as trade finance agreements have any number of covenants that may be written specifically to the financial characteristics of a single firm and require multiple levels of auditable review and analysis prior to being issued. Additionally, much of the current legal system is based on written legal agreements among two or more parties. Though digitally executed agreements are now commonplace, a paperbased contract document is still generally considered necessary to spell out the terms and conditions of the agreement. Setting aside contacts and similar agreements, the primary reason document or paper-based transactions persist appears to be simply the costs of adopting alternative processes and solutions. In essence, the question is “Is there a compelling reason to invest in

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replacing a paper-based process with a new processes and software?” In most cases such a replacement solution would entail one or more new software systems to record, manage workflows and track the new digital forms, including requisite security controls. On the surface, it would appear difficult to justify that scale of investment, particularly for entrenched processes and those in which errors could result in significant financial exposures. As previously mentioned, the energy markets are a good example of how this friction has slowed the adoption of fully digital processes. Even as exchange based trading, power market automation and pipeline EDI solutions have penetrated this market over the last 25 years, most if not all market participants still employ inefficient document-centric processes that require significant human effort, including, but not limited to, settlements/invoicing, pipeline reconciliation, and deal confirmations. These processes require dozens or if not hundreds of manhours of effort each month to review, input and reconcile the document data against that in internal systems. Pipeline statements alone can be dozens of pages in length and reconciling monthly volumes can require labor intensive matching of daily or intraday volumes against those recorded in an ETRM system to identify discrepancies. Though it is difficult to quantify the full benefit of becoming a more digital-enabled business by eliminating or otherwise automating these documentcentric processes, the ability to capture the “lowhanging fruit” such as pipeline reconciliation will clearly recoup dozens if not hundreds of man-hours each month for natural gas trading companies. Unfortunately, becoming a digital organization isn’t

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Achieving Digitalization in a Document Intensive Energy Market

as simple as mandating that your trading partners or service providers adhere to your vision of a new way of workingâ&#x20AC;Śthat is demanding that they move to a fully digital communications and exchange all digital information when conducting business with your organization. Few if any companies have the leverage to mandate such changes. Nor is it about making

wholesale changes to your critical systems, such as your ETRM solution, to accept new data formats, or developing complex integration strategies and systems that ultimately rely on constant updates or human intervention as electronic document formats change.

LEVERAGING NEW TECHNOLOGIES Though optical character recognition (OCR) solutions have been around for more than a decade, simply converting text to data, even if done with 100% accuracy, provides little benefit beyond enabling the user to manually parse, categorize or store the information in a database, and in a format that can be used by other applications. Unfortunately, OCR programs by themselves do not provide contextualization of data; rather they require the software user to understand or to make judgements regarding the nature of that data and how it might be used. However, advances in artificial intelligence (AI) and machine learning (ML) over the last several years have enabled the development of new solutions to address this shortcoming with traditional OCR solutions. Utilizing pattern recognition technologies, these systems are being used with good effect in some markets and industries, such as the medical industry for converting traditional medical records to e-records; in banking for reading data from check images to speed payments processing and eliminate man-handling of paper checks; or in various levels of government for

capturing, managing and archiving records. However, the scale and costs of the effort to code and deploy these AI-powered solutions had limited their adoption in markets with more limited economies of scale. Now, with the broader use of AI and ML, and the continuing advancement in supporting technologies, costs have fallen, and these solutions are now being increasingly adopted, and adapted, for use in the energy markets.

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Achieving Digitalization in a Document Intensive Energy Market

A NEW APPROACH FOR MANAGING DOCUMENT DATA Aquilon Inc. has leveraged these advances in technology to develop the Aquilon Network - a cloud-based platform that automates bilateral settlements in the wholesale natural gas and power markets. Using the Aquilon platform, more than 1000 companies have been able to more efficiently settle their trading transactions by securely exchanging invoices, exporting and comparing settlement details, and better communicate to resolve variances…all while capturing a full settlement audit trail. This rapid settlement capability is enabled by an advanced AI matching engine that reads and contextualizes transaction data and supporting information contained within each invoice document. With its proven success in energy settlements, Aquilon has expanded its reach to address other inefficient document-based processes in the energy markets, allowing energy market participants to overcome many the most difficult roadblocks that every company faces when trying to become a more digital enterprise.

document data into a single spreadsheet view; and then, using their AI-powered matching engine, match that data with source data from any number of systems, including ETRM, ERP or other databases, to identify variances in real-time. Using CARLI enables customers to optimize back office reconciliations of any type and achieve many of the benefits of digitalization, including: • Increased operational efficiency • Reduced costs of reconciliation and reconciliation errors • Improved data standardization • Enablement of common analytics

Regardless of the document type, Aquilon’s new platform, called CARLI (for Capture, Automate, Reconcile, Learn, Inform) can synthesize the report/

CARLI is a proven technology platform that has been deployed to address a number of common issues that arise when companies are faced with reconciling data in their internal systems (particularly ETRM systems) against documents provided by counterparties. These use cases include:

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Achieving Digitalization in a Document Intensive Energy Market

• A large multinational bank trading natural gas was unable to electronically match data provided in pipeline park-and-loan agreements against the records contained in their ETRM system as the formats of those agreements didn’t align with that ETRM system’s requirements. Using CARLI, the park-and-loan agreements were digitalized and via a quick mapping to the ETRM system data, the customer was able to quickly match and reconcile. And, with each new revision or statement associated with those park and loan agreements, CARLI, utilizing its native AI matching capabilities, was able to quickly recognize changes and provide updated reconciliation statements for that customer, saving hours of man effort compared to what was previously required. • Another banking customer was having difficulty managing the various metals trading reports they were receiving from their counterparties, exchanges, and inventory warehouses. These documents included inventory statements, movement tracking and assay/quality certificates. Using CARLI’s web native architecture, Aquilon was able to rapidly template the documents and enable to the customer to quickly reconcile each of these

various physical metals reports and documents against the data held in their internal systems. After a brief implementation, the customer was able to shave hours of effort from their daily and monthly reconciliation efforts. • Aquilon is working with several natural gas trading and marketing firms to expedite their monthly pipeline settlements processes by digitalizing the various pipeline statements they receive each month. Using CARLI’s web-based platform and advanced AI-enabled matching engine, these companies have been able to quickly reconcile those statements to the data held in their ETRM solutions, identifying and solving differences, and ensuring high levels of accuracy…all accomplished without the need to enhance or otherwise change their existing ETRM solution. As a cloud delivered platform, security is at the forefront of the Aquilon Network and CARLI. Operating from a SOC 1 compliant facility and hosted in Azure, all data into and out of the Aquilon Network is fully encrypted and has met the most strenuous requirements of the leading commodity banks with which Aquilon works.

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Achieving Digitalization in a Document Intensive Energy Market

SUMMARY As energy and commodity producers, traders and marketers seek to improve efficiency, become more agile and improve bottom-line performance through a digitalization strategy, the continued passing of documents in these markets, both physical and electronic, creates roadblocks to achieving those goals as these documents require hours of manual interpretation and reconciliation - along with the attendant risk of errors. Unfortunately, there is little that can be done to

eliminate these documents from your businessâ&#x20AC;&#x2122; day-today activities; however, accelerating the management of these documents and ensuring accuracy in reading and reconciling the data contained within them can move your organization much closer to becoming a fully digitalized business. Equally important, using the latest web technologies and AI such as those available from Aquilon and the CARLI platform, these benefits can be achieved without costly implementations of complex software or changes to your critical systems, such as your ETRM solution.

ABOUT AQUILON Aquilon Energy Services is a technology company and developer of the first collaborative, cloud-based platform to automate wholesale energy settlements. The Aquilon NetworkÂŽ enables buyers and sellers to easily identify exceptions and settle physical and financial power, oil, and natural gas transactions with their counterparties. The SaaS platform aligns with energy market participantsâ&#x20AC;&#x2122; major systems of record and helps them increase operational efficiency, and improve risk management and compliance.

Aquilon is a fast-growing firm with offices in the Chicago area and headquartered in Houston. For more information please visit https://aquiloninc.com/carli-technology/

ABOUT Commodity Technology Advisory LLC Commodity Technology Advisory is the leading analyst organization covering the ETRM and CTRM markets. We provide the invaluable insights into the issues and trends affecting the users and providers of the technologies that are crucial for success in the constantly evolving global commodities markets. Patrick Reames and Gary Vasey head our team, whose combined 60-plus years in the energy and commodities markets, provides depth of understanding of the market and its issues that is unmatched and unrivaled by any analyst group. For more information, please visit:

www.comtechadvisory.com ComTech Advisory also hosts the CTRMCenter, your online portal with news and views about commodity markets and technology as well as a comprehensive online directory of software and services providers. Please visit the CTRMCenter at:

www.ctrmcenter.com

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