Detailed Glossary of Energy Trading terms

Something physical or tangible that may be referenced by a contract or trade

Detail

Financial derivatives are completely cash-based and usually have no physical underliers

Energy derivatives usually have at least one physical underlier, which may be a commodity,

e.g. coal

or a something related to a commodity

e.g. storage

The underlier acts as a bridge to the physical world - and usually as a set of reference prices for price-setting and valuation

We need to emphasize that nearly all energy trades have at least one physical underlier - few of them actually involve the delivery of energy commodities

A term principally used in oil and gas context - covering the search for new reserves, exploratory activities, construction of new extraction facilities, and the running of those facilities

Detail

The gas and oil industries are generally divided into three main sectors - roughly following the life cycle of the commodity

Upstream activities follow a sequence:

• Search - actually locating new sources of oil and gas
• Exploration - the test drilling of wells or testing of other extraction methods on a potential source
• Construction of production facilities for the extraction
• Operation of those production facilities to "produce" oil and gas

See also midstream and downstream