ERP Practice Exam1 7115

2015
ERP
Practice
Exam 1
AM Session
Physical25 Questions
ERP Practice Exam 1
TABLE OF CONTENTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ERP Practice Exam 1 Candidate Answer Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ERP Practice Exam 1 Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
ERP Practice Exam 1 Answer Sheet/Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ERP Practice Exam 1 Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
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.
ERP Practice Exam 1
Introduction
1. Plan a date and time to take the practice exam.
The ERP Exam is a practice-oriented examination. Its ques-
Set dates appropriately to give sucient study/review
tions are derived from a combination of theory, as set forth
time for the practice exam prior to the actual exam.
in the core readings, and real-world work experience.

Candidates are expected to understand energy risk man-
2. Simulate the test environment as closely as possible.
agement concepts and approaches and how they would
apply to an energy risk managers day-to-day activities.
erasers) available.
testing an energy risk professional on a number of risk man
material before beginning the practice exam.
immediately be slotted into just one category. In the real
Allocate two minutes per question for the practice

exam and set an alarm to alert you when a total of
number of risk-related issues and be able to deal with them
50 minutes have passed Complete the entire exam but
eectively.
note the questions answered after the 50-minute mark.
The ERP Practice Exam 1 has been developed to aid

candidates in their preparation for the ERP Exam. This
Minimize possible distractions from other people,

cell phones, televisions, etc.; put away any study
energy risk manager will be faced with an issue that can

world, an energy risk manager must be able to identify any
Have only the practice exam, candidate answer

sheet, calculator, and writing instruments (pencils,
The ERP Exam is also a comprehensive examination,

agement concepts and approaches. It is very rare that an
Take the practice exam in a quiet place.
Follow the ERP calculator policy. Candidates are only
practice exam is based on a sample of actual questions
allowed to bring certain types of calculators into the
from past ERP Exams and is suggestive of the questions
exam room. The only calculators authorized for use
that will be in the 2015 ERP Exam.
on the ERP Exam in 2015 are listed below, there will

be no exceptions to this policy. You will not be allowed
The ERP Practice Exam 1 contains 25 multiple choice
into the exam room with a personal calculator other
questions. The 2015 ERP Exam will consist of a morning

and afternoon session, each containing 70 multiple choice
than the following: Texas Instruments BA II Plus
questions. The practice exam is designed to be shorter to
(including the BA II Plus Professional), Hewlett Packard
allow candidates to calibrate their preparedness for the
12C (including the HP 12C Platinum and the Anniversary
exam without being overwhelming.
Edition), Hewlett Packard 10B II, Hewlett Packard 10B II+

and Hewlett Packard 20B.
The ERP Practice Exam 1 does not necessarily cover

all topics to be tested in the 2015 ERP Exam. For a complete list of topics and core readings, candidates should
refer to the 2015 ERP Exam Study Guide. Core readings
3. After completing The ERP Practice Exam 1
Calculate your score by comparing your answer
were selected in consultation with the Energy Oversight
sheet with the practice exam answer key. Only
Committee (EOC) to assist candidates in their review of the
include questions completed within the rst 50

minutes in your score.
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
Use the practice exam Answers and Explanations to

better understand the correct and incorrect answers
readings listed in the 2015 ERP Study Guide in-depth prior
and to identify topics that require additional review.
to sitting for the exam.
Consult referenced core readings to prepare for

the exam.
Suggested Use of Practice Exams

To maximize the eectiveness of the practice exams, candidates are encouraged to follow these recommendations:
Remember: pass/fail status for the actual exam is

based on the distribution of scores from all candidates, so use your scores only to gauge your own
progress and level of preparedness.
Energy Risk
Professional
(ERP ) Exam
Practice Exam 1
Answer Sheet
ERP Practice Exam 1
a.
b.
c.
d.
a.
1.
18.
2.
19.
3.
20.
4.
21.
5.
22.
6.
23.
7.
24.
8.
25.
b.
c.
d.
9.
10.
11.
12.
13.
14.
Correct way to complete
15.
1.
16.
Wrong way to complete
17.
1.
Energy Risk
Professional
(ERP ) Exam
Practice Exam 1
Questions
ERP Practice Exam 1
1.
An upstream global oil and gas company is developing a reservoir within the borders of a North African host
country under terms of a concessionary agreement. Total realized exploration and development expenses,
along with original cost projections, are allocated below:
Land surveys
Geological testing
Drilling
Equipment
Total
Actual (USD)
Estimated (USD)
1,650,000
3,100,000
8,000,000
14,000,000
26,800,000
1,900,000
2,350,000
9,250,000
11,000,000
24,500,000
Assume that exploration and development efforts fail to produce a commercially viable field after two years
and management decides to cease operations. What financial impact will this have on the company?
a.
b.
c.
d.
2.
of
of
of
of
USD
USD
USD
USD
2,300,000 after reimbursement of original exploration cost estimates

18,800,000 after reimbursement of drilling costs
22,050,000 after reimbursement of land survey and geological testing costs
26,800,000 with no reimbursement
What best describes profit oil in a contractual arrangement between a global petroleum company and a
sovereign government to develop a crude oil reserve in a host country?
a.
b.
c.
d.
3.
Loss
Loss
Loss
Loss
The minimum production volume required to guarantee the commercial viability of the project
The production volume required to generate an economic return after operating costs, taxes, and royalties
have been deducted
The volume of oil produced and sold outside of long-term sales agreements
The volume of oil produced and sold after capital costs have been fully amortized
A hydroskimming refinery in South America applies the daily Brent crude oil spot price as the benchmark reference price for its crude oil feedstock. Assuming the current Brent spot price is USD 88.29, the refinery
would most likely purchase which of the following crudes?
a.
b.
c.
d.
Canadian Oil Sands (bitumen) at USD 71.06/bbl

Mexico Mayan Heavy at USD 85.40/bbl
West Texas Sour at USD 87.30/bbl
Nigerian Bonny Light at USD 94.60/bbl
ERP Practice Exam 1
4.
The construction of crude oil or natural gas pipelines is typically financed using what mechanism?
a.
b.
c.
d.
5.
6.
The risk management team at a refinery implements a strategy to hedge market risk using crack spreads. The
team prices a 3:2:1 crack spread at USD 21.80/bbl based on the following NYMEX futures data. Based on this
information, what is the September RBOB futures contract price?
September WTI futures price: USD 89.90/bbl

September Ultra Low Sulfur Diesel (ULSD) futures price: USD 3.13/gal
a.
b.
c.
d.
USD
USD
USD
USD
To
To
To
To
mitigate basis risk on the delivery of crude oil exports

account for transportation costs in crude oil shipments
adjust refined product spreads based on crude oil input prices
price a specific crude oil stream against a global benchmark
A contract is written for physical delivery FOB on 500,000 barrels of Bonny Light Crude Oil to a designated
storage facility. What does FOB imply about this transaction?
a.
b.
c.
d.
1.96/gal
2.42/gal
3.21/gal
3.85/gal
What best describes the application of price differential formulas in contractual agreements in the crude oil market?
a.
b.
c.
d.
7.
Government funding with mandatory appropriations for energy infrastructure development

Private capital from companies that seek a return on capital from transmission charges
Exclusive bilateral partnerships between producers and marketers
Broad-based consortiums that include a mix of public and private funding
The purchase price includes all transport fees; the buyer is responsible for scheduling a tanker to make
final delivery of the crude to the storage facility
The purchase price includes all transport fees; the seller is responsible for scheduling a tanker to make
The purchase price excludes all transport fees; the buyer is responsible for scheduling a tanker to make
final delivery of the crude oil to the storage facility and paying all delivery charges
The purchase price excludes all transport fees; the seller is responsible for scheduling a tanker to make
final delivery of the crude to the storage facility and will bill the buyer separately for all delivery charges
ERP Practice Exam 1
8.
A joint public/private partnership is structured for development of a newly-discovered natural gas field and
LNG export terminal in a politically-stable South Asian nation. What pricing methodology will ensure the
country receives an accurate market price for its LNG exports?
a.
b.
c.
d.
9.
Link
Link
Link
Link
LNG
LNG
LNG
LNG
exports to fixed-for-floating swaps that allow for future price adjustments.

exports to an index based on a basket of Asian crude oils.
exports to average long-term bilateral natural gas contracts in the region.
export prices to the NYMEX Henry Hub contract.
A refinery has chartered a cargo of crude oil for delivery from a Nigerian producer to a port outside
Rotterdam under the following contract specifications:
Bonny Light price: USD 110.20/bbl

Worldscale base rate: USD 23.00/MT
Vessel size: 55,000 DWT
Charter rate for this route: WS114
Voyage time: 12 days
What is the largest risk exposure to the refinery in the transaction?

a.
b.
c.
d.
10.
Basis risk
Price risk
Supply risk
Volumetric risk
How will the discovery of sour gas from a test well impact the future development of a new natural gas field?
a.
b.
c.
d.
The gas has a low heating value and will need to be blended with other gases to meet standard Btu levels
for shipment by pipeline
The gas contains high sulfur levels and will need to be treated prior to shipment by pipeline
The gas contains excess water vapor and requires hydroskimming treatment to achieve an acceptable Btu
level for consumption
The gas is geologically immature with no commercial value
ERP Practice Exam 1
11.
Rank the following coal samples from four different reserves in order of highest to lowest quality, using the
specifications summarized in the table below.
Coal
Reserve
Seneca
Black Thunder
Bowie
Cordero
a.
b.
c.
d.
12.
d.
Moisture
Content
11.4
27.0
9.0
30.3
Volatile Matter
Content
34.2
32.0
36.5
32.0
Fixed Carbon
Content
44.3
34.5
60.0
20.0
Black Thunder, Cordero, Bowie, Seneca

Bowie, Seneca, Black Thunder, Cordero
Cordero, Black Thunder, Seneca, Bowie
Seneca, Bowie, Cordero, Black Thunder
The shortfall will be settled at the contract price

The shortfall will be settled at the current market price
Two percent of the shortfall will be settled at the contract price and the remaining one percent at the
current market price
Two percent of the shortfall will be settled at the contract price with no additional compensation required
for the remaining one percent
Why are aquifers considered a sub-optimal choice for natural gas storage when compared to other types of
underground facilities?
a.
b.
c.
d.
Ash
Content
10.1
5.0
9.0
5.7
A US based commodity trader has purchased physical coal for delivery under a contract with a quantity variance
adjustment clause. The quantity of coal actually shipped is 3% below the volume specified in the contract. At
what price will the shortfall be settled?
a.
b.
c.
13.
Sulfur
Content
0.8
0.5
1.0
0.2
Incremental expense required to re-process wet aquifer gas after extraction

Environmental concern about groundwater contamination
Increased risk of a gas leak from the containment facility
High cushion gas storage requirement
ERP Practice Exam 1
14.
Operating models based on forecasted spark spread economics are often used to optimize power generation
decisions. What best describes a typical flaw made by users of these models?
a.
b.
c.
d.
15.
Failure to adequately account for intraday volatility in fuel prices

Inability to account for sudden changes in market fundamentals
Overestimation of plant start-up and shut-down costs
Unrealistic assumptions about a plants ability to quickly cycle on and off
An LNG distributor provides customers a weekly LNG price quote based on the closing NYMEX Henry Hub
futures settlement each Monday. The weekly price quote includes a cap and floor equivalent to +/- 25% of the
average NYMEX Henry Hub price for the previous month.
The November average closing price and weekly pricing data for December are shown below:
November average closing price: USD 3.81/MMBtu
NYMEX Henry Hub Monday closing price for December
__________________________________________________
Week
Week
Week
Week
1:
2:
3:
4:
USD 4.04/MMBtu
USD 4.13/MMBtu
USD 4.56/MMBtu
USD 4.81/MMBtu
Assuming the distributor sells 80,000 MMBtu of gas per day, seven days per week, what will be the total sales
revenue for the four weeks of December?
a.
b.
c.
d.
16.
USD
USD
USD
USD
1,399,200
1,403,200
9,794,400
9,822,400
An ISO will typically compensate generators serving as operating reserves with:

a.
b.
c.
d.
A fee paid for time spent as an operating reserve, in addition to payment for any electricity dispatched
A fee paid for time spent as an operating reserve without any additional compensation for any power
dispatched
The time spent as an operating reserve paid at the market clearing price, plus an option to sell any excess
power on the spot market
The time spent as an operating reserve paid at the market clearing price, but no additional compensation
for any power dispatched
ERP Practice Exam 1
17.
18.
The spark spread (in USD/kWh) for a combined cycle natural gas turbine plant using the following
assumptions, is:
Average plant heat rate: 8,100 Btu/kWh

Current price of natural gas: USD 4.70/MMBtu
Current price of electricity: USD 46.00/MWh
a.
b.
c.
d.
0.01250
0.00793
-0.00793
-0.01250
The highest bids in a real-time power auction will typically be submitted by operators at which type of power
generation facility?
a.
b.
c.
d.
19.
Baseload nuclear
Mid-merit coal-fired
Onshore wind farm
Oil-fired combustion turbine
A local utility company has arranged to purchase one hour of load from the grid in the day-ahead market
under the following terms:
200 MW @ USD 54/MWh
What net settlement payment (in USD) is required from the RTO under a contract for differences (CfD),
assuming the spot market price for electricity is USD 75/MWh and the utilitys actual load is 275 MW for the
contracted hour?
a.
b.
c.
d.
10
1,575
4,050
4,840
5,625
ERP Practice Exam 1
20.
Fixed feed-in-tariffs provide what economic benefit to wind and solar producers?
a.
b.
c.
d.
A one-time subsidy payment when the grid interconnection has been completed
A fixed price per kWh of power produced and delivered to the grid
A spread above the market clearing electricity price which varies based on the capital efficiency of each
producer
A tax credit for each marginal kWh of power produced and delivered to the grid above a pre-determined
minimum
Questions 21 - 22 use the information below:

O-Power has developed a proprietary tidal stream turbine designed to generate electric power by harvesting
kinetic energy from the ocean. Using a project finance arrangement, O-Power creates a project company called
DynaWave to develop a large-scale installation for commercial application. O-Power agrees to contribute 25% of
the initial equity capital required as project sponsor with a partner, ABC Financial, contributing the remaining
75%. (Assume each partner has fulfilled its capital commitment and development of the prototype is underway.)
21.
Which party will bear the economic liability if the DynaWave project fails?
a.
b.
c.
d.
22.
The ongoing working capital requirements for the DynaWave project will most likely be funded through a:
a.
b.
c.
d.
23.
As the majority equity holder, ABC Financial is responsible for 100% of DynaWaves realized economic losses
O-Power and ABC Financial are liable for 25% and 75% respectively of DynaWaves total realized economic losses
As project sponsor, O-Power is responsible for 100% of DynaWaves realized economic losses
DynaWave is responsible for 100% of its realized economic losses
Fixed-rate loan with quarterly amortization

Partially amortizing facility with a bullet due at maturity
Revolving facility with flexible drawdown
Syndicated loan offered as a 144A private placement
Cussler Energy is a curtailment service provider offering demand response (DR) services to Canadian industrial customers in the Independent Electricity System Operator (IESO) market. How will Cussler most likely
engage with the IESO to provide DR services?
a.
b.
c.
d.
By
By
By
By
bidding on a separate exchange established for IESO demand response participants

signing a bilateral contract directly with IESO at a negotiated price
bidding as a baseload power supplier in IESOs day-ahead auction
bidding as a generator in IESOs capacity market
11
ERP Practice Exam 1
24.
25.
A Load Serving Entity (LSE) in the PJM market contracts to purchase power in the day-ahead market to meet
its estimated load/demand requirements. Calculate the LSEs total cost of power using the following dayahead and real- time market data:
Projected day-ahead demand: 100 MW

Day-ahead price: USD 35.00/MWh
Actual real-time demand: 105 MW
Real-time price: USD 37.50/MWh
a.
b.
c.
d.
USD
USD
USD
USD
3,512.50
3,675.00
3,687.50
3,937.50
Two ERCOT market generators, Brunswick Power Cooperative (BPC) and Acme Power LLC (APL), strike the
following deal for electricity on June 23:
Buyer: BPC
Seller: APL
Contract size: 30 MW per hour
Contract period: RTC (Round the Clock)
Contract price: USD 25/MWh
On the settlement date, one of APLs generators is shut down for unscheduled maintenance, limiting the
amount of power it can deliver to BPC to 20 MW per hour. ERCOT provides balancing power at a cost of USD
30/MWh for on-peak (16 Hours) and USD 20/MWh for off-peak (8 Hours).
Ignoring APLs marginal cost of generation, calculate its net cashflow from the transaction.
a.
b.
c.
d.
12
APL
APL
APL
APL
pays USD 18,000

pays USD 11,600
receives USD 11,600
receives USD 18,000
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Energy Risk
Professional
(ERP ) Exam
Practice Exam 1
Answers
ERP Practice Exam 1
a.
b.
c.
d.
1.
2.
a.
19.
20.
4.
21.

7.
8.
9.
10.
11.
13.
14.

15.
17.

23.
24.
25.
12.
16.
22.
6.
d.
c.
18.
3.
5.
b.
Correct way to complete

1.
Wrong way to complete
1.
15
Energy Risk
Professional
(ERP ) Exam
Practice Exam 1
Explanations
ERP Practice Exam 1
1.
An upstream global oil and gas company is developing a reservoir within the borders of a North African host
country under terms of a concessionary agreement. Total realized exploration and development expenses,
along with original cost projections, are allocated below:
Land surveys
Geological testing
Drilling
Equipment
Total
Actual (USD)
Estimated (USD)
1,650,000
3,100,000
8,000,000
14,000,000
26,800,000
1,900,000
2,350,000
9,250,000
11,000,000
24,500,000
Assume that exploration and development efforts fail to produce a commercially viable field after two years
and management decides to cease operations. What financial impact will this have on the company?
a.
b.
c.
d.
Loss
Loss
Loss
Loss
of
of
of
of
USD
USD
USD
USD
2,300,000 after reimbursement of original exploration cost estimates

18,800,000 after reimbursement of drilling costs
22,050,000 after reimbursement of land survey and geological testing costs
26,800,000 with no reimbursement
Answer: d
Explanation: The correct answer is d. Under a concessionary system, the E&P company assumes all the risks
associated with exploring for and developing oil and gas reserves. If their effort fails to find a viable reserve,
the E&P company must bear all of the costs; the host country does not bear any responsibility for these costs.
Reference: Charlotte Wright & Rebecca Gallun. Fundamentals of Oil & Gas Accounting, Chapter 15, page 679.
2.
What best describes profit oil in a contractual arrangement between a global petroleum company and a
sovereign government to develop a crude oil reserve in a host country?
a.
b.
c.
d.
The minimum production volume required to guarantee the commercial viability of the project
The production volume required to generate an economic return after operating costs, taxes, and royalties
have been deducted
The volume of oil produced and sold outside of long-term sales agreements
The volume of oil produced and sold after capital costs have been fully amortized
Answer: b
Explanation: The correct answer is b. Profit oil is the gross revenue from oil after costs such as operating
expenses, royalties and taxes have been paid; it is the oil from which a project will realize a profit.
Reading reference: Wright and Gallun, Chapter 15, page 685.
17
ERP Practice Exam 1
3.
A hydroskimming refinery in South America applies the daily Brent crude oil spot price as the benchmark reference price for its crude oil feedstock. Assuming the current Brent spot price is USD 88.29, the refinery
would most likely purchase which of the following crudes?
a.
b.
c.
d.
Canadian Oil Sands (bitumen) at USD 71.06/bbl

Mexico Mayan Heavy at USD 85.40/bbl
West Texas Sour at USD 87.30/bbl
Nigerian Bonny Light at USD 94.60/bbl
Answer: d
Explanation: The correct answer is d. The refinery is described as a hydroskimming facility making it a simple
refinery. Therefore, it will yield the most gasoline by refining a light, sweet crude, which is choice d, even
though Bonny Light is being offered at a premium to Brent (which it typically is). West Texas Sour is a medium
weight oil that will require additional processing to remove the sulfur impurities, while the yield from the heavy
Mayan crude will seriously reduce the amount of gasoline produced, both of which will negate the discount
offered for these crudes. It is unlikely the refinery would even be able to process the raw Canadian bitumen.
Reading reference: Andrew Inkpen and Michael Moffett. The Global Oil and Gas Industry: Management,
Strategy and Finance, Chapter 12.
4.
The construction of crude oil or natural gas pipelines is typically financed using what mechanism?
a.
b.
c.
d.
Government funding with mandatory appropriations for energy infrastructure development

Private capital from companies that seek a return on capital from transmission charges
Exclusive bilateral partnerships between producers and marketers
Broad-based consortiums that include a mix of public and private funding
Answer: d
Explanation: The correct answer is d. According to Inkpen and Moffett, the very sizeable capital cost of
pipeline construction is typically shared by a consortium of organizations, including governments and development banks.
Strategy and Finance, Chapter 11, page 402.
18
ERP Practice Exam 1
5.
The risk management team at a refinery implements a strategy to hedge market risk using crack spreads. The
team prices a 3:2:1 crack spread at USD 21.80/bbl based on the following NYMEX futures data. Based on this
information, what is the September RBOB futures contract price?
September WTI futures price: USD 89.90/bbl

September Ultra Low Sulfur Diesel (ULSD) futures price: USD 3.13/gal
a.
b.
c.
d.
USD
USD
USD
USD
1.96/gal
2.42/gal
3.21/gal
3.85/gal
Answer: b
Explanation: The correct answer is b. A 3:2:1 crack spread is three barrels of crude oil to two barrels of gasoline and one barrel of heating oil. Here the per barrel crack spread of USD 21.80 is given. Multiplying this by
three equals USD 65.40. The cost of crude oil is also multiplied by 3 (for the 3 barrels used to calculate the
spread): 89.90 x 3 = 269.70, when the refining margin (65.40) is added, the result is 335.10.
The price of the ULSD is given as 3.13/gal, multiplying this by 42 (gallons in a barrel) gives an amount of USD
131.46. Subtracting this from USD 335.10 gives a result of USD 203.64, the cost of two barrels of gasoline.
Dividing this by 42 (number of gallons in a barrel) and the 2 (the factor for gasoline in a crack spread) gives a
per gallon cost of USD 2.42/gal.
Strategy and Finance, Chapter 12, page 459.
6.
What best describes the application of price differential formulas in contractual agreements in the crude oil market?
a.
b.
c.
d.
To
To
To
To
mitigate basis risk on the delivery of crude oil exports

account for transportation costs in crude oil shipments
adjust refined product spreads based on crude oil input prices
price a specific crude oil stream against a global benchmark
Answer: d
Explanation: The correct answer is d. A differential formula is used to price a specific crude oil stream against
a recognized benchmark like the Brent or WTI contracts. The differential allows for the crude oil to be priced
at a premium or discount to the existing benchmark based on the specifications of the crude oil (gravity, sulphur content, etc.) measured against the specifications of the benchmark crude.
Reading reference: Vincent Kaminski. Energy Markets. Chapter 17.
19
ERP Practice Exam 1
7.
A contract is written for physical delivery FOB on 500,000 barrels of Bonny Light Crude Oil to a designated
storage facility. What does FOB imply about this transaction?
a.
b.
c.
d.
The purchase price includes all transport fees; the buyer is responsible for scheduling a tanker to make
The purchase price includes all transport fees; the seller is responsible for scheduling a tanker to make
The purchase price excludes all transport fees; the buyer is responsible for scheduling a tanker to make
final delivery of the crude oil to the storage facility and paying all delivery charges
The purchase price excludes all transport fees; the seller is responsible for scheduling a tanker to make
final delivery of the crude to the storage facility and will bill the buyer separately for all delivery charges
Answer: c
Explanation: The correct answer is c. The term FOB stands for Free On Board, meaning the cargo is delivered
to a specified shipment point, it is then the buyers responsibility to pay for shipment to the cargos final destination, along with any insurance costs, tariffs, fees, etc., so you will be responsible to make the arrangements
to have the crude delivered to your refinery.
Reading reference: Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management,
Strategy and Finance, Chapter 9, page 421
8.
A joint public/private partnership is structured for development of a newly-discovered natural gas field and
LNG export terminal in a politically-stable South Asian nation. What pricing methodology will ensure the
country receives an accurate market price for its LNG exports?
a.
b.
c.
d.
Link
Link
Link
Link
LNG
LNG
LNG
LNG
exports to fixed-for-floating swaps that allow for future price adjustments.

exports to an index based on a basket of Asian crude oils.
exports to average long-term bilateral natural gas contracts in the region.
export prices to the NYMEX Henry Hub contract.
Answer: b
Explanation: To improve the ability to hedge and to more accurately reflect market prices, gas contracts
have in the past been indexed to a basket of oil prices, making b the correct answer. The other answers are
incorrect: answer a is not the proper application of a Fixed-for-Floating swap; long bilateral contracts would
not be an accurate source for pricing information; and Henry Hub serves the US domestic market so it too
would not be an accurate measure of market forces at play in the Pacific.
Reading reference: Vivek Chandra, Fundamentals of Natural Gas: An International Perspective, Chapter 4,
page 117.
20
ERP Practice Exam 1
9.
A refinery has chartered a cargo of crude oil for delivery from a Nigerian producer to a port outside
Rotterdam under the following contract specifications:
Bonny Light price: USD 110.20/bbl

Worldscale base rate: USD 23.00/MT
Vessel size: 55,000 DWT
Charter rate for this route: WS114
Voyage time: 12 days
What is the largest risk exposure to the refinery in the transaction?

a.
b.
c.
d.
Basis risk
Price risk
Supply risk
Volumetric risk
Answer: b
Explanation: The correct answer is b The refinery should be most concerned with price risk that there will
be a change in the value of the crude oil during the 12 days of the voyage, since the value of the oil will affect
the refinerys margin through the crack spread. The other answers are incorrect: since there is not a local
source for oil at the refinery, basis risk is not an issue; sine the oil is to be consumed, market risk is not an
issue and any discrepancies between the contracted and actual volumes can be settled at the market price
through a contract mechanism.
Reading reference: Vincent Kaminski, Energy Markets, Chapter 4
10.
How will the discovery of sour gas from a test well impact the future development of a new natural gas field?
a.
b.
c.
d.
The gas has a low heating value and will need to be blended with other gases to meet standard Btu levels
for shipment by pipeline
The gas contains high sulfur levels and will need to be treated prior to shipment by pipeline
The gas contains excess water vapor and requires hydroskimming treatment to achieve an acceptable Btu
level for consumption
The gas is geologically immature with no commercial value
Answer: b
Explanation: The correct answer is b. Gas with high levels of sulfur are considered sour. Because sulfur is corrosive,
sour gases are typically treated to remove the excess sulfur before the gas is shipped or consumed.
Reading reference: Vivek Chandra. Fundamentals of Natural Gas: An International Perspective, Chapter 1, page 6.
21
ERP Practice Exam 1
11.
Rank the following coal samples from four different reserves in order of highest to lowest quality, using the
specifications summarized in the table below.
Coal
Reserve
Seneca
Black Thunder
Bowie
Cordero
a.
b.
c.
d.
Sulfur
Content
0.8
0.5
1.0
0.2
Ash
Content
10.1
5.0
9.0
5.7
Moisture
Content
11.4
27.0
9.0
30.3
Volatile Matter
Content
34.2
32.0
36.5
32.0
Fixed Carbon
Content
44.3
34.5
60.0
20.0
Black Thunder, Cordero, Bowie, Seneca

Bowie, Seneca, Black Thunder, Cordero
Cordero, Black Thunder, Seneca, Bowie
Seneca, Bowie, Cordero, Black Thunder
Answer: b
Explanation: Answer b lists the coal types in the correct order. The higher the fixed carbon content, the
higher the calorific/heating value of the coal type. Moisture reduces the calorific value of coal, and in this
example, moisture content is arranged in inverse proportion to the carbon content.
Reading reference: Vincent Kaminski, Energy Markets, Chapter 26, pages 942-944.
12.
A US based commodity trader has purchased physical coal for delivery under a contract with a quantity variance
adjustment clause. The quantity of coal actually shipped is 3% below the volume specified in the contract. At
what price will the shortfall be settled?
a.
b.
c.
d.
The shortfall will be settled at the contract price

The shortfall will be settled at the current market price
Two percent of the shortfall will be settled at the contract price and the remaining one percent at the
current market price
Two percent of the shortfall will be settled at the contract price with no additional compensation required
for the remaining one percent
Answer: c
Explanation: The correct answer is c. The quantity variance adjustment clause, which specifies a deadband of
+/- 2%. Any volumes outside this band are priced at the current market price.
Reading reference: Vince Kaminski, Energy Markets, Chapter 26, page 955.
22
ERP Practice Exam 1
13.
Why are aquifers considered a sub-optimal choice for natural gas storage when compared to other types of
underground facilities?
a.
b.
c.
d.
Incremental expense required to re-process wet aquifer gas after extraction

Environmental concern about groundwater contamination
Increased risk of a gas leak from the containment facility
High cushion gas storage requirement
Answer: d
Explanation: The correct answer is d, one reason aquifers are seldom used for underground storage is
because much of the gas pumped into an aquifer, as much as 80%, ultimately cannot be extracted due to
maintain a high level of cushion gas; other underground storage methods require far less cushion gas. The
other answers are incorrect; working gas is the amount of gas available for withdrawal from an underground
storage complex.
Reading reference: Vivek Chandra, Fundamentals of Natural Gas: An International Perspective, Chapter 2
14.
Operating models based on forecasted spark spread economics are often used to optimize power generation
decisions. What best describes a typical flaw made by users of these models?
a.
b.
c.
d.
Failure to adequately account for intraday volatility in fuel prices

Inability to account for sudden changes in market fundamentals
Overestimation of plant start-up and shut-down costs
Unrealistic assumptions about a plants ability to quickly cycle on and off
Answer: d
Explanation: The correct answer is d. One challenge in modeling the spark spread for dispatch decisions is
that such models often make unrealistic assumptions about a plants ability to turn on and off; it is very
unlikely that a plant could or would be switched off for an hour then run for an hour as indicated by the forecast above.
Reading reference: Vincent Kaminski, Energy Markets, chapter 22, page 813.
23
ERP Practice Exam 1
15.
An LNG distributor provides customers a weekly LNG price quote based on the closing NYMEX Henry Hub
futures settlement each Monday. The weekly price quote includes a cap and floor equivalent to +/- 25% of the
average NYMEX Henry Hub price for the previous month.
The November average closing price and weekly pricing data for December are shown below:
November average closing price: USD 3.81/MMBtu
NYMEX Henry Hub Monday closing price for December
__________________________________________________
Week
Week
Week
Week
1:
2:
3:
4:
USD 4.04/MMBtu
USD 4.13/MMBtu
USD 4.56/MMBtu
USD 4.81/MMBtu
Assuming the distributor sells 80,000 MMBtu of gas per day, seven days per week, what will be the total sales
revenue for the four weeks of December?
a.
b.
c.
d.
USD
USD
USD
USD
1,399,200
1,403,200
9,794,400
9,822,400
Answer: c
Explanation: The correct answer is c. For the calculation, the weekly price must be multiplied by 7, for the
days of the week, and then by a factor of 80,000 for the MMBtu per day amount. Week 2 will finish above the
cap established by the pricing scheme USD 3.81 plus 25% = USD 4.76 therefore this figure must be used
for this week, rather than the NYMEX closing price of USD 4.81. Therefore, the total for the four weeks is USD
9,794,400.
Reading reference: Vivek Chandra, Fundamentals of Natural Gas: An International Perspective, Chapter 4,
pages 113-114.
24
ERP Practice Exam 1
16.
An ISO will typically compensate generators serving as operating reserves with:

a.
b.
c.
d.
A fee paid for time spent as an operating reserve, in addition to payment for any electricity dispatched
A fee paid for time spent as an operating reserve without any additional compensation for any power
dispatched
The time spent as an operating reserve paid at the market clearing price, plus an option to sell any excess
power on the spot market
The time spent as an operating reserve paid at the market clearing price, but no additional compensation
for any power dispatched
Answer: a
Explanation: The correct answer is a; as an operating reserve the generator agrees to have its dispatch controlled by the ISO. The generator will receive payment for serving in OR and will be paid for any electricity
they dispatch to the SO. If the generator does not dispatch any electricity, it will be paid a make-whole side
payment as long as it agrees to follow the dispatch rules set by the generator. The other answers are incorrect: since it is in operating reserve, the generator cannot sell power on the spot market, which is why serving
as an OR is said to entail an opportunity cost to the generator, since they do not have this opportunity to sell
power on the open market.
Reading reference: Steven Stoft, Power System Economics: Designing Markets for Electricity, Chapter 3.6,
p. 260.
17.
The spark spread (in USD/kWh) for a combined cycle natural gas turbine plant using the following
assumptions, is:
Average plant heat rate: 8,100 Btu/kWh

Current price of natural gas: USD 4.70/MMBtu
Current price of electricity: USD 46.00/MWh
a.
b.
c.
d.
0.01250
0.00793
-0.00793
-0.01250
Answer: b
Explanation: Answer b is correct, the calculation for determining the spark spread in this scenario is as follows:
Spark Spread = Output Price Input Price
Output Price = USD 46/MWh x 1MWh/1,000 kWh = USD 0.046/kWh
Input Price = 8,100 Btu/kWh x USD 4.7/1,000,000 Btu = USD 0.03807/kWh
Therefore, the Spark Spread = 0.00793
Reading reference (new): Vincent Kaminski, Energy Markets, Chapter 22, Analytical Tools.
25
ERP Practice Exam 1
18.
The highest bids in a real-time power auction will typically be submitted by operators at which type of power
generation facility?
a.
b.
c.
d.
Baseload nuclear
Mid-merit coal-fired
Onshore wind farm
Oil-fired combustion turbine
Answer: d
Explanation: The correct answer is d; an oil-fired combustion turbine would typically follow the most
aggressive bidding strategy in the auction because it has the highest marginal cost. Market prices are set
by the least efficient unit required to satisfy anticipated load, so the least efficient plants might operate only
a few hundred hours a year. Therefore, these plants need to maximize their profits during the times when
they are activated. Because of the intermittent nature of wind, it is difficult for wind operators to bid into the
real-time market.
Reading reference: Vincent Kaminski, Energy Markets, Chapter 22, pp. 683-684
19.
A local utility company has arranged to purchase one hour of load from the grid in the day-ahead market
under the following terms:
200 MW @ USD 54/MWh
What net settlement payment (in USD) is required from the RTO under a contract for differences (CfD),
assuming the spot market price for electricity is USD 75/MWh and the utilitys actual load is 275 MW for the
contracted hour?
a.
b.
c.
d.
1,575
4,050
4,840
5,625
Answer: d
Explanation: The correct answer is d. Under a CfD market agreement, the amount beyond the contracted volume is settled at the spot market price; in this case 75 MWh (275MW-200MW) at USD 75/MWh, or USD
5,625. The other 200 MW are paid for at the rate of USD 54/MWh as specified in the nominated contract and
are not part of the CfD settlement.
a. (75-54)*75
b. (75*54)
c. [(54+75)/2]*75
Reading reference: Steven Stoft, Power System Economics: Designing Markets for Electricity, Chapter 3.2
26
ERP Practice Exam 1
20.
Fixed feed-in-tariffs provide what economic benefit to wind and solar producers?
a.
b.
c.
d.
A one-time subsidy payment when the grid interconnection has been completed
A fixed price per kWh of power produced and delivered to the grid
A spread above the market clearing electricity price which varies based on the capital efficiency of each
producer
A tax credit for each marginal kWh of power produced and delivered to the grid above a pre-determined
minimum
Answer: b
Explanation: The correct answer is b. A feed-in tariff offers a fixed price per unit of renewable energy which is
produced and delivered to the grid.
Reading reference: Jeffery Altman, Ross Board, Felix ab Egg, Andreas Granata, and Hans Poser.
Development and Integration of Renewable Energy: Lessons Learned from Germany (FAA Financial
Advisory AG), p. 13.
Questions 21 - 22 use the information below:

O-Power has developed a proprietary tidal stream turbine designed to generate electric power by harvesting
kinetic energy from the ocean. Using a project finance arrangement, O-Power creates a project company called
DynaWave to develop a large-scale installation for commercial application. O-Power agrees to contribute 25% of
the initial equity capital required as project sponsor with a partner, ABC Financial, contributing the remaining
75%. (Assume each partner has fulfilled its capital commitment and development of the prototype is underway.)
21.
Which party will bear the economic liability if the DynaWave project fails?
a.
b.
c.
d.
As the majority equity holder, ABC Financial is responsible for 100% of DynaWaves realized economic losses
O-Power and ABC Financial are liable for 25% and 75% respectively of DynaWaves total realized economic losses
As project sponsor, O-Power is responsible for 100% of DynaWaves realized economic losses
DynaWave is responsible for 100% of its realized economic losses
Answer: d
Explanation: The correct answer is d. In a project finance arrangement, the main purpose of creating a project
company is to contain economic liability, insulating equity investors from downside risk. Therefore the project
company, DynaWave, will have the primary liability in the bankruptcy. The equity investors, O-Power and Tidal
King, have no further liability with regard to the project.
Reading reference: Chris Groobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer for
Renewable Energy and Clean Tech Projects, page 4.
27
ERP Practice Exam 1
22.
The ongoing working capital requirements for the DynaWave project will most likely be funded through a:
a.
b.
c.
d.
Fixed-rate loan with quarterly amortization

Partially amortizing facility with a bullet due at maturity
Revolving facility with flexible drawdown
Syndicated loan offered as a 144A private placement
Answer: c
Explanation: Working capital loans typically have smaller loan amounts than term or construction loans and
are usually revolving in nature, so amounts which are paid back can be reborrowed. They are used to pay
everyday expenses such as the purchase of inventory and the amount of a working capital loan is typically
limited to a percentage of the firms cash and inventory on hand less any outstanding letters of credit.
Reading reference: Chris Groobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer for
Renewable Energy and Clean Tech Projects, page 9.
23.
Cussler Energy is a curtailment service provider offering demand response (DR) services to Canadian industrial customers in the Independent Electricity System Operator (IESO) market. How will Cussler most likely
engage with the IESO to provide DR services?
a.
b.
c.
d.
By
By
By
By
bidding on a separate exchange established for IESO demand response participants

signing a bilateral contract directly with IESO at a negotiated price
bidding as a baseload power supplier in IESOs day-ahead auction
bidding as a generator in IESOs capacity market
Answer: d
Explanation: The correct answer is d. Demand response is bid to IESO through the capacity market. The
demand response provider will bid DR resources similar to any other generator and the transaction will be
cleared through the market.
Reading reference: Bo Shen, Girish Ghatikhar, Chun Chun Ni, and Junqiao Dudley. Addressing Energy Demand
Through Demand Response. (Berkeley National Laboratory, June 2012). P. 9.
28
ERP Practice Exam 1
24.
A Load Serving Entity (LSE) in the PJM market contracts to purchase power in the day-ahead market to meet
its estimated load/demand requirements. Calculate the LSEs total cost of power using the following dayahead and real- time market data:
Projected day-ahead demand: 100 MW

Day-ahead price: USD 35.00/MWh
Actual real-time demand: 105 MW
Real-time price: USD 37.50/MWh
a.
b.
c.
d.
USD
USD
USD
USD
3,512.50
3,675.00
3,687.50
3,937.50
Answer: c
Explanation: The correct answer is c. Since the real-time demand was higher than the forecasted load purchased from the day-ahead market, additional volume must be acquired from the real-time market. This settlement can be calculated using the following formula: USD 35 x 100 MW + (105-100) MW x USD 37.50 = USD
3,687.50
Reading reference: Power System Economics: Designing Markets for Electricity, Steven Stoft, Chapters 3-2, 3-3, 3-6.
29
ERP Practice Exam 1
25.
Two ERCOT market generators, Brunswick Power Cooperative (BPC) and Acme Power LLC (APL), strike the
following deal for electricity on June 23:
Buyer: BPC
Seller: APL
Contract size: 30 MW per hour
Contract period: RTC (Round the Clock)
Contract price: USD 25/MWh
On the settlement date, one of APLs generators is shut down for unscheduled maintenance, limiting the
amount of power it can deliver to BPC to 20 MW per hour. ERCOT provides balancing power at a cost of USD
30/MWh for on-peak (16 Hours) and USD 20/MWh for off-peak (8 Hours).
Ignoring APLs marginal cost of generation, calculate its net cashflow from the transaction.
a.
b.
c.
d.
APL
APL
APL
APL
pays USD 18,000

pays USD 11,600
receives USD 11,600
receives USD 18,000
Answer: c
Explanation: The correct answer is c. Because APL could only deliver 20 MW of power per hour rather than 30
MW ERCOT provided the mission volume of 10 MW per hour at the real time market price indicated above. The
cost can be calculated as: 16 Hours * 10 * 30 = USD 4,800 plus 8 Hours * 10 * 20 = USD 2,000 for a total of
(4,800 + 2,000 = USD 6,400). In summary, APLs net profit for the transaction will be: (18,000 6,400 = USD
11,600) for supplying 20 MW of power (Contracted volume of 30 MW, minus the ERCOT RT cost for 10 MW).
Reading reference: Fundamentals of Power System Economics, By Daniel Kirschen and Goran Strbac, Chapter
3.6 (3.6.1.1 Example 3.4), Page 388.
30
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ERP Practice Exam 1

ERP Practice Exam 1 Candidate Answer Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

ERP Practice Exam 1 Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

ERP Practice Exam 1 Answer Sheet/Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

ERP Practice Exam 1 Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

ERP Practice Exam 1

1. Plan a date and time to take the practice exam.

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

Set dates appropriately to give sucient study/review

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

time for the practice exam prior to the actual exam.

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

2. Simulate the test environment as closely as possible.

agement concepts and approaches and how they would

apply to an energy risk managers day-to-day activities.

testing an energy risk professional on a number of risk man

material before beginning the practice exam.

immediately be slotted into just one category. In the real

Allocate two minutes per question for the practice

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

50 minutes have passed Complete the entire exam but

note the questions answered after the 50-minute mark.

The ERP Practice Exam 1 has been developed to aid

Minimize possible distractions from other people,

energy risk manager will be faced with an issue that can

Have only the practice exam, candidate answer

The ERP Exam is also a comprehensive examination,

Take the practice exam in a quiet place.

Follow the ERP calculator policy. Candidates are only

practice exam is based on a sample of actual questions

allowed to bring certain types of calculators into the

from past ERP Exams and is suggestive of the questions

exam room. The only calculators authorized for use

that will be in the 2015 ERP Exam.

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

The ERP Practice Exam 1 contains 25 multiple choice

into the exam room with a personal calculator other

questions. The 2015 ERP Exam will consist of a morning

than the following: Texas Instruments BA II Plus

questions. The practice exam is designed to be shorter to

(including the BA II Plus Professional), Hewlett Packard

allow candidates to calibrate their preparedness for the

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

exam without being overwhelming.

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

The ERP Practice Exam 1 does not necessarily cover

3. After completing The ERP Practice Exam 1

Calculate your score by comparing your answer

were selected in consultation with the Energy Oversight

sheet with the practice exam answer key. Only

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

include questions completed within the rst 50

subjects covered by the exam. Questions for the ERP Exam

such, it is strongly suggested that candidates review all core

Use the practice exam Answers and Explanations to

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

and to identify topics that require additional review.

to sitting for the exam.

Consult referenced core readings to prepare for

Suggested Use of Practice Exams

Remember: pass/fail status for the actual exam is

ERP Practice Exam 1

Correct way to complete