ERP Practice Exam2 7115

2015
ERP
Practice
Exam 2
AM Session
Physical25 Questions
ERP Practice Exam 2
TABLE OF CONTENTS
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
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 2
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 2 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 2 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 2 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 2
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 2
Answer Sheet
ERP Practice Exam 2
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 2
Questions
ERP Practice Exam 2
1.
The table below summarizes the projected crude oil production and annual expenses related to the development of a new oil reserve:
(Expenses in USD millions)
Year 0 (now)
Year 1
Year 2
Year 3
Exploration
10
Upstream Development
25
Operating and Transportation
30
15
12
Crude Oil Production (in BBLs)
800,000
350,000
200,000
Use the following assumptions to calculate the projects NPV assuming that all cash flows occur at the end of
each year:
2.
Projected average price of crude oil produced: USD 88/bbl

Risk-adjusted discount rate: 12%
a.
b.
c.
d.
USD
USD
USD
USD
-1,486,000
-1,338,000
2,751,000
2,954,000
Engineers at an oil and gas company are modeling the value of an option to expand production of an oil field
over a 3-year time horizon using a 5-step lattice. The current NPV of the field is USD 50,000,000 and forecasted 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.
b.
c.
d.
USD
USD
USD
USD
56,160,000
59,861,000
63,080,000
67,493,000
ERP Practice Exam 2
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.
b.
c.
d.
4.
A newly discovered offshore natural gas field extends across the territorial waters of two countries. Both
nations seek to develop the field in order to meet domestic demand and earn LNG export revenues. How can
the two countries best maximize the future commercial viability of the natural gas reserve while minimizing
the potential for a conflict over mineral rights?
a.
b.
c.
d.
5.
CIF
DES
EFP
FOB
Which of the following legal structures will most evenly allocate risk among a group of individual investors
who participate in the development of an LNG liquefaction terminal that is attached to a natural gas field with
an expected life of 30 years?
a.
b.
c.
d.
Establish independent drilling rights on the reserve and designate a third-party arbitrator to settle future
production disputes
Establish a sliding scale production arrangement based on a pro-rata allocation of the total projected
recoverable gas volume per square nautical mile
Establish a joint development zone that includes the shared portion of the reserve before either country
begins exploitation
Establish a proportional claim on mineral rights development based on the United Nations Convention on
the Law of the Sea
Consider a very complex refinery with long-term crude oil supply contracts established with several producers
in the Persian Gulf, Venezuela, and West Africa. What type of shipping arrangement offers the refinery the
greatest economic flexibility and control over its product inventory?
a.
b.
c.
d.
6.
Have the ability to re-allocate amortized recovery costs from lower to higher producing projects
Be exempt for taxes owed to other jurisdictions on local production revenue
Be able to invest additional capital in oil exploration and development
Have the opportunity to ease crude oil shortages in the domestic market by selling additional volumes
of oil
Joint venture agreement

Master limited partnership
Project bond
Unitization contract
ERP Practice Exam 2
Questions 7-8 use the information below.

The following data summarizes basis differentials and current refining margins in the Asian market (margins
are based on the entire range of products produced by the refinery):
Crude Basis to
Gravity/Sulfur
Content
7.
Very Complex
Refinery Margin
(USD)
Refinery Margin
(USD)
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
Under current market conditions, the complex refinery will receive the highest margin by processing:
Light sweet crude
Intermediate sweet crude
Light sour crude
Heavy sour crude
Brent crude oil is expected to trade in a narrow range around USD 108/bbl with basis differentials and refining
margins projected to remain stable over the next several years. What type of refining technology will a simple
refinery most likely invest in to maximize its current economic output?
a.
b.
c.
d.
9.
Complex
Refinery Margin
(USD)
42.3 / 0.18%
a.
b.
c.
d.
8.
Simple
Brent
(USD)
Coker unit
Condensate splitter unit
Hydroskimmer unit
Hydrotreater unit
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 countrys crude oil exports
most likely be priced?
a.
b.
c.
d.
At a discount to the Brent crude oil contract

At parity with the Brent crude oil contract
At a premium to the Brent crude oil contract
Crude oil of this grade will have little price correlation with Brent making the Brent futures contract a
poor benchmark
ERP Practice Exam 2
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.
b.
c.
d.
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 refuses
delivery of the contracted volume of LNG?
a.
b.
c.
d.
12.
credit support annex

force majeure clause
quick sale provision with liquidated damages
take-or-pay provision
Above-ground tank storage

Aquifer storage
Depleted reservoir storage
Salt cavern storage
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.
b.
c.
d.
A
A
A
A
The production manager for a natural gas producer is evaluating a range of potential storage options for several recently discovered reserves. Which natural gas storage option provides the greatest flexibility and ease
of use during extraction?
a.
b.
c.
d.
13.
Anthracite
Bituminous
Lignite
Sub-Bituminous
As
As
As
As
a
a
a
a
flat tolling charge of USD 0.250/MMBtu for pipeline access

fuel consumption fee of USD 15,600 for the total volume shipped
reduction of 7,800 MMBtu on the total volume delivered
surcharge of USD 0.125/MMBtu on the purchase price
ERP Practice Exam 2
14.
What is the expected production pattern for a well drilled into a field believed to contain sizeable quantities
of crude oil and associated natural gas?
a.
b.
c.
d.
15.
The well will primarily produce oil initially, but as it matures, oil production will decline and natural gas
production will increase
The well will primarily produce natural gas initially, but as it matures, gas production will decline and oil
The well will produce both oil and gas in roughly the same proportion throughout the duration of its
operating life
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
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.
b.
c.
d.
16.
Facility
Facility
Facility
Facility
A
B
C
D
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 heat
rate of 8.5MMBtu/MWh and an expected ATC capacity factor of 80% during a 30-day month?
a.
b.
c.
d.
USD
USD
USD
USD
1,905,000
3,715,000
4,572,000
5,184,000
ERP Practice Exam 2
17.
18.
Use the data below to calculate the implied market heat rate for a power grid supplied by a series of natural
gas-fired generators.
Grid load: 240,000 MWh

Market clearing price: USD 65.85/MWh
Natural gas price (daily average): USD 4.60/MMBtu
a.
b.
c.
d.
8.87 MMBtu/MWh
12.91 MMBtu/MWh
14.32 MMBtu/MWh
16.15 MMBtu/MWh
Ocean Wind Authority (OWA) is the project sponsor for High Cliffs Wind (HCW), a new 1,000 MW offshore
wind turbine installation. HCW has a BBB credit rating based on the results of an initial feasibility study. OWA
has secured a Power Purchase Agreement (PPA) from Acme Power and Light (APL), a AA rated local electric
utility. Under terms of the PPA, APL has made a firm ten year commitment to purchase up to 90% of the
power generated by the facility after its expected completion in five years. Assuming OWA arranges bank
loans to fund the project, what will most likely be the terms of the lending arrangement?
a.
b.
c.
d.
19.
In the electricity markets, a financial tolling agreement is most similar to what type of contract?
a.
b.
c.
d.
10
A fifteen year amortizing term loan with recourse to the assets of HCW, priced as a BBB credit
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 HCW
A fifteen year amortizing, non-recourse term loan, priced as a AA credit
A five year construction loan that converts to a ten year fully amortizing, non-recourse term loan, priced
as a AA credit
An Asian-style option on electricity futures

A fixed-for-floating swap
An option on a commodity spread
A strip of sequentially-dated futures
ERP Practice Exam 2
20.
The equilibrium price for electricity on a power grid with total demand of 450 MW is USD 52/MWh. Assuming a
merit order curve is used to set the equilibrium price, which of the following plants will be dispatched?
a.
b.
c.
d.
21.
Variable Cost
Capacity
USD 51/MWh
300 MW
USD 56/MWh
150 MW
USD 45/MWh
200 MW
Plant B only
Plant C only
Plant A and Plant C
All plants are dispatched
What makes a hedging strategy based on purchasing options a more efficient risk management tool for producers
and end-users than forwards, futures, or swaps?
a.
b.
c.
d.
22.
Plant
Certainty of cash outflows

Counterparty netting arrangements
Minimal collateral thresholds
Physical settlement
NuPower Electric purchased a 50 MW Financial Transmission Right (FTR) to mitigate the potential economic
impact of transmission congestion between Node A (Injection) and Node B (Sink). The purchase price of the
FTR is USD 5/MW.
LMP = USD 40/MW
LMP = USD 20/MW
At settlement, the Locational Marginal Price (LMP) for power at Nodes A and B is USD 40/MW and USD
20/MW respectively. Calculate the net profit or loss NuPower realized on the transaction.
a.
b.
c.
d.
- USD 9,000,000
- USD 1,000,000
USD 1,000,000
USD 9,000,000
11
ERP Practice Exam 2

The three-bus power grid below illustrates the amount of power supplied and consumed, along with the marginal
price of power generated at each node on the grid:
200 MW
350 MW
B
USD 40
0/MW
/MWh
200 MW
U
USD
SD 50/MWh A
0 MW
500 MW
250 MW
23.
100 MW
150 MW
300 MW
400 MW
What is the current price for electricity (in USD/MWh) at node C?

a.
b.
c.
d.
12
400 MW
Maximum generation capacity at each node is 500 MW and a 200 MW transmission constraint exists between
nodes A and B. In order to keep the generator at node C offline, the transmission line from node B to node C
must have a minimum capacity of: (solve for X)
a.
b.
c.
d.
24.
USD 50/MWh
34
37
40
42
ERP Practice Exam 2
25.
A generator has submitted the following four offers to the day-ahead (DA) market in the PJM. Assuming that the
following volumes shown below were cleared in the real-time (RT) market, what is the generators economic
profit or loss based on the prices described?
a.
b.
c.
d.
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
- USD 183,914
- USD 6,586
USD 6,586
USD 183,914
13
Energy Risk
Professional
(ERP ) Exam
Practice Exam 2
Answers
ERP Practice Exam 2
a.
b.
c.
d.
1.
a.
b.
c.
18.
2.
19.
3.
20.
4.
21.
22.
5.
6.
8.
9.
23.
7.
d.
24.
25.
10.
11.
12.
13.
14.
Correct way to complete
15.
1.
16.
Wrong way to complete
17.
1.
15
Energy Risk
Professional
(ERP ) Exam
Practice Exam 2
Explanations
ERP Practice Exam 2
1.
The table below summarizes the projected crude oil production and annual expenses related to the development of a new oil reserve:
(Expenses in USD millions)
Year 0 (now)
Year 1
Year 2
Year 3
Exploration
10
Upstream Development
25
Operating and Transportation
30
15
12
Crude Oil Production (in BBLs)
800,000
350,000
200,000
Use the following assumptions to calculate the projects NPV assuming that all cash flows occur at the end of
each year:
Projected average price of crude oil produced: USD 88/bbl

Risk-adjusted discount rate: 12%
a.
b.
c.
d.
USD
USD
USD
USD
-1,486,000
-1,338,000
2,751,000
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)
70.4
30.8
17.6
Total costs (USD/millions)
21
55
23
12
-21
+15.4
+7.8
+5.6
Cash flow
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 or
0.812, and Year 3: 1/(1+0.12)3, or 0.731. Then multiply each cash flow by the discount factor and sum the
results 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.
17
ERP Practice Exam 2
2.
Engineers at an oil and gas company are modeling the value of an option to expand production of an oil field
over a 3-year time horizon using a 5-step lattice. The current NPV of the field is USD 50,000,000 and forecasted 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.
b.
c.
d.
USD
USD
USD
USD
56,160,000
59,861,000
63,080,000
67,493,000
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 the
following formulas:
u = exp(sDT) = 1.12321
d = 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 56,160,435
Down: 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.
18
ERP Practice Exam 2
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.
b.
c.
d.
Have the ability to re-allocate amortized recovery costs from lower to higher producing projects
Be exempt for taxes owed to other jurisdictions on local production revenue
Be able to invest additional capital in oil exploration and development
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 countries
may 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 additional 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. Both
nations seek to develop the field in order to meet domestic demand and earn LNG export revenues. How can
the two countries best maximize the future commercial viability of the natural gas reserve while minimizing
the potential for a conflict over mineral rights?
a.
b.
c.
d.
Establish independent drilling rights on the reserve and designate a third-party arbitrator to settle future
production disputes
Establish a sliding scale production arrangement based on a pro-rata allocation of the total projected
recoverable gas volume per square nautical mile
Establish a joint development zone that includes the shared portion of the reserve before either country
begins exploitation
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 occasions, is for the two nations to establish a joint development zone (JDZ) that encompasses the portions of the
reserve in both countrys territorial waters. The JDZ will include definitions of each nations claim and a unitization 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.
19
ERP Practice Exam 2
5.
Consider a very complex refinery with long-term crude oil supply contracts established with several producers
in the Persian Gulf, Venezuela, and West Africa. What type of shipping arrangement offers the refinery the
greatest economic flexibility and control over its product inventory?
a.
b.
c.
d.
CIF
DES
EFP
FOB
Answer: d
Explanation: The correct answer is d: under the terms of the FOB contract, the buyer is responsible for
arranging shipping and insurance charges providing flexibility in making these arrangements in the manner
that they wish and allowing for the possibility of saving money.
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 investors
who participate in the development of an LNG liquefaction terminal that is attached to a natural gas field with
an expected life of 30 years?
a.
b.
c.
d.
Joint venture agreement

Master limited partnership
Project bond
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, Strategy
and Finance, Chapter 9, pages 351-356.
20
ERP Practice Exam 2

The following data summarizes basis differentials and current refining margins in the Asian market (margins
are based on the entire range of products produced by the refinery):
Crude Basis to
Gravity/Sulfur
Content
7.
Simple
Brent
(USD)
Complex
Refinery Margin
(USD)
Very Complex
Refinery Margin
(USD)
Refinery Margin
(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
Under current market conditions, the complex refinery will receive the highest margin by processing:
a.
b.
c.
d.
Light sweet crude

Intermediate sweet crude
Light sour crude
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 listed
are 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 refining
margins projected to remain stable over the next several years. What type of refining technology will a simple
refinery most likely invest in to maximize its current economic output?
a.
b.
c.
d.
Coker unit
Condensate splitter unit
Hydroskimmer unit
Hydrotreater unit
Answer: a
Explanation: Answer a is correct. According to the table the heaviest oils are trading at a steep discount to
the light crudes (-7.85 and -8.10) while producing a higher return (17.98 and 18.65). If projections are that
these margins will persist over the medium/long term, then the investment in a coker unit to process heavy
crudes makes economic sense.
Reading reference: Inkpen and Moffett, chapter 12.
21
ERP Practice Exam 2
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 countrys crude oil exports
most likely be priced?
a.
b.
c.
d.
At a discount to the Brent crude oil contract

At parity with the Brent crude oil contract
At a premium to the Brent crude oil contract
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 be
set. 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.
b.
c.
d.
Anthracite
Bituminous
Lignite
Sub-Bituminous
Answer: c
Explanation: The correct answer is c; lignite is a type of soft coal with the lowest carbon content of the four
major types and a high moisture content.
Reading reference: Vincent Kaminski, Energy Markets, Chapter 26, p. 798.
22
ERP Practice Exam 2
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 refuses
delivery of the contracted volume of LNG?
a.
b.
c.
d.
A
A
A
A
credit support annex

force majeure clause
quick sale provision with liquidated damages
take-or-pay provision
Answer: d
Explanation: The correct answer is d. A take-or-pay provision forces the customer to either take the volume
of gas specified by the contract whether it is needed or not or pay for the gas, even if it is never delivered. Answer c is incorrect because while a spot market is developing for LNG, it cannot be considered fully
liquid in that the exporter cannot be guaranteed that there would be a buyer available for this cargo.
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 several recently discovered reserves. Which natural gas storage option provides the greatest flexibility and ease
of use during extraction?
a.
b.
c.
d.
Above-ground tank storage

Aquifer storage
Depleted reservoir storage
Salt cavern storage
Answer: d
Explanation: The correct answer is d. Since salt caverns allow for the quickest withdrawal of stored gas
among all of the underground storage options, withdrawal can begin much more quickly than either aquifers
or 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.
23
ERP Practice Exam 2
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.
b.
c.
d.
As
As
As
As
a
a
a
a
flat tolling charge of USD 0.250/MMBtu for pipeline access

fuel consumption fee of USD 15,600 for the total volume shipped
reduction of 7,800 MMBtu on the total volume delivered
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 calculated 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 quantities
of crude oil and associated natural gas?
a.
b.
c.
d.
The well will primarily produce oil initially, but as it matures, oil production will decline and natural gas
The well will primarily produce natural gas initially, but as it matures, gas production will decline and oil
The well will produce both oil and gas in roughly the same proportion throughout the duration of its
operating life
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 to
become 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.
24
ERP Practice Exam 2
15.
Four natural gas storage facilities with the following characteristics are currently available in the market:
Facility A
Facility B
Facility C
Facility D
150
200
300
250
Volume (mcf)
Injection (mcf/day)
5.2
1.2
1.8
2.4
8.0
2.4
3.2
7.8
Based on the data above, which storage facility represents the best option for peak shaving?
a.
b.
c.
d.
Facility
Facility
Facility
Facility
A
B
C
D
Answer: a
Explanation: The main characteristic of a peak shaving storage is low number of injection and especially withdrawal days (how quickly gas can be put into or taken out of storage). In the table below storage site A has
the lowest number of injection and withdrawal days.
Storage
Volume (mcf)
150
200
300
250
Injection (mcf/day)
5.2
1.2
1.8
2.4
8.0
2.4
3.2
7.8
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.
25
ERP Practice Exam 2
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 heat
rate of 8.5MMBtu/MWh and an expected ATC capacity factor of 80% during a 30-day month?
a.
b.
c.
d.
USD
USD
USD
USD
1,905,000
3,715,000
4,572,000
5,184,000
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 MWh
The Spark spread formula is: USD 52/MWh 8.5 x USD 4.25/MMBtu = USD 15.875/MWh
This 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 natural
gas-fired generators.
Grid load: 240,000 MWh

Market clearing price: USD 65.85/MWh
Natural gas price (daily average): USD 4.60/MMBtu
a.
b.
c.
d.
8.87 MMBtu/MWh
12.91 MMBtu/MWh
14.32 MMBtu/MWh
16.15 MMBtu/MWh
Answer: c
Explanation: The correct answer is c. The implied market heat rate is calculated by dividing the cost of the
natural gas into the market clearing price for electricity: USD 65.85 / USD 4.60 = 14.32
Reading reference: Vincent Kaminski, Energy Markets, Chapter 22.
26
ERP Practice Exam 2
18.
Ocean Wind Authority (OWA) is the project sponsor for High Cliffs Wind (HCW), a new 1,000 MW offshore
wind turbine installation. HCW has a BBB credit rating based on the results of an initial feasibility study. OWA
has secured a Power Purchase Agreement (PPA) from Acme Power and Light (APL), a AA rated local electric
utility. Under terms of the PPA, APL has made a firm ten year commitment to purchase up to 90% of the
power generated by the facility after its expected completion in five years. Assuming OWA arranges bank
loans to fund the project, what will most likely be the terms of the lending arrangement?
a.
b.
c.
d.
A fifteen year amortizing term loan with recourse to the assets of HCW, priced as a BBB credit
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 HCW
A fifteen year amortizing, non-recourse term loan, priced as a AA credit
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 a
term loan. As a separate project company, the execution of a PPA with Acme Power and Light would be typical of a project finance agreement, a benefit to OWA is that they may then be able to use the utilitys higher
credit rating to reduce their own borrowing costs. The basic premise of a project finance agreement is that
the loan is based on the future cash flows of the project (in this case the PPA) and that lenders have little or
no recourse in the case of a default.
Reading reference: Chris Groobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer for
Renewable Energy and Clean Tech Projects.
19.
In the electricity markets, a financial tolling agreement is most similar to what type of contract?
a.
b.
c.
d.
An Asian-style option on electricity futures

A fixed-for-floating swap
An option on a commodity spread
A strip of sequentially-dated futures
Answer: c
Explanation: The correct answer is c. In a financial tolling agreement, no physical delivery of electricity is
required, the contract is instead settled against the market prices of fuel (usually natural gas) and electricity
and a formula within the contract. The tolling agreement is therefore essentially an option on the heat rate
spread between the input and output of the generator.
Reading reference: Vincent Kaminski. Energy Markets. Chapter 23, Electricity Market Transactions, pages 860-862.
27
ERP Practice Exam 2
20.
The equilibrium price for electricity on a power grid with total demand of 450 MW is USD 52/MWh. Assuming a
merit order curve is used to set the equilibrium price, which of the following plants will be dispatched?
a.
b.
c.
d.
Plant
Variable Cost
Capacity
USD 51/MWh
300 MW
USD 56/MWh
150 MW
USD 45/MWh
200 MW
Plant B only
Plant C only
Plant A and Plant C
All plants are dispatched
Answer: c
Explanation: The merit order curve dispatches generation in order of variable operating costs until total
capacity for the system is met. The last plant dispatched that fulfills the capacity requirement will set the
equilibrium price. In this case, Plant Cs entire capacity will be dispatched plus 125 MW of capacity from Plant
A 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 producers
and end-users than forwards, futures, or swaps?
a.
b.
c.
d.
Certainty of cash outflows

Counterparty netting arrangements
Minimal collateral thresholds
Physical settlement
Answer: a
Explanation: The correct answer is a. Producers and end-users have shown an increasing interest in using
option-based strategies. This trend can be explained by the relative certainty of cash outflow offered by
options versus the ongoing margining and collateralization requirements associated with forwards, futures
and swaps. After an initial upfront cash flow (option premium), there are typically no other financial obligations related to an option contract.
Reading reference: Vincent Kaminski. Energy Markets, Chapter 18, Page 667-668.
28
ERP Practice Exam 2
22.
NuPower Electric purchased a 50 MW Financial Transmission Right (FTR) to mitigate the potential economic
impact of transmission congestion between Node A (Injection) and Node B (Sink). The purchase price of the
FTR is USD 5/MW.
LMP = USD 40/MW
LMP = USD 20/MW
At settlement, the Locational Marginal Price (LMP) for power at Nodes A and B is USD 40/MW and USD
20/MW respectively. Calculate the net profit or loss NuPower realized on the transaction.
a.
b.
c.
d.
- USD 9,000,000
- USD 1,000,000
USD 1,000,000
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 two
locations; in this case NuPower will receive the Node B price and pay the Node A price, so the FTR payout is
20 40, or - $ 20 per MWh. NuPower already spent USD 5/MW to buy the FTR, so therefore, the net loss per
MW is - USD 25. Total MWh for June 2014 = 30 * 24 * 50 = 36,000 MWh. Therefore, the total loss for
NuPower is 36,000 * (-25) = - USD 9,000,000.
Reading reference: Vincent Kaminski, Energy Markets, chapter 23, p. 849.
29
ERP Practice Exam 2

The three-bus power grid below illustrates the amount of power supplied and consumed, along with the marginal
price of power generated at each node on the grid:
200 MW
350 MW
B
USD 40
0/MW
/MWh
200 MW
U
USD
SD 50/MWh A
0 MW
500 MW
250 MW
23.
USD 50/MWh
400 MW
Maximum generation capacity at each node is 500 MW and a 200 MW transmission constraint exists between
nodes A and B. In order to keep the generator at node C offline, the transmission line from node B to node C
must have a minimum capacity of: (solve for X)
a.
b.
c.
d.
100 MW
150 MW
300 MW
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 to
the grid at that point. There is an injection of 500 MW at node A with a load of 250; this means that 250 MW
can be sent to node c. If we subtract 250 from 400, there is a remainder of 150 MW that must be supplied from
node 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.
30
ERP Practice Exam 2
24.
What is the current price for electricity (in USD/MWh) at node C?

a.
b.
c.
d.
34
37
40
42
Answer: c
Explanation: The correct answer is c. The 400 MW load at node C can be met with 250 MW of power from
node A and 150 MW of power from node B. This means that the cost for power at node C will be set by the
marginal cost for power at node B, or USD 40/MWh.
a = Price at Node A
b = avg of A and B costs
d = avg of A and C marginal costs
Reading reference: Daniel Kirschen and Goran Strbac. Fundamentals of Power System Economics, Chapter 3
31
ERP Practice Exam 2
25.
A generator has submitted the following four offers to the day-ahead (DA) market in the PJM. Assuming that the
following volumes shown below were cleared in the real-time (RT) market, what is the generators economic
profit or loss based on the prices described?
a.
b.
c.
d.
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
- USD 183,914
- USD 6,586
USD 6,586
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.
32
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2015

ERP Practice Exam 2

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

ERP Practice Exam 2

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 2 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 2 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 2 does not necessarily cover

3. After completing The ERP Practice Exam 2

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 2

Correct way to complete