Same as the entire oil and gas industry, OMV Petrom is exposed to a variety of risks – including market and financial risks as well as operational and strategic risks. The OMV Petrom Group’s risk management processes focus on the identification, analysis and evaluation of such risks and their impact on the Group’s financial stability and profitability as well as on their impact on sustainability matters. For OMV Petrom, a risk represents the uncertainty on objectives measured by the combination of the likelihood or frequency of an event and its consequences, which can result in opportunities (upside) or threats (downside).
Risk Management Governance
The Executive Board is responsible for risk oversight, ensuring that management has put in place a rigorous process for identifying, prioritizing, managing, and monitoring the critical risks affecting the Company.
Risk prevention is deeply integrated into the decision-making processes of everyday business activities at every level of our organization. The Executive Board sets, communicates, and implements our risk management policy throughout the Group. OMV Petrom Executive Board members regularly discuss current and upcoming environmental, climate, and energy-related policies and regulations, related developments in the fuels and gas market, the financial implications of carbon emissions trading obligations and progress on achieving sustainability-related targets.
To ensure that management takes risk-informed decisions, with adequate consideration of actual and prospective view, the Executive Board has empowered a dedicated Risk Management function with the objective to lead and coordinate the Company’s risk management-related processes. OMV Petrom’s consolidated risk profile is regularly reported for the Executive Board’s endorsement and for the information of the Supervisory Board’s Audit Committee.
Risk Management Process
The risk management process is based on a precautionary, systematic approach, aimed at timely identification and management of risks in order to avoid a possible negative impact on our business or reputation. We believe that creating a risk-aware culture throughout the organization, where everyone is aware of the risks related to his job and implements risk management practices on a daily basis, is the most effective way to avoid a negative impact. To this end, our comprehensive Enterprise-Wide Risk Management (EWRM) program is driven by senior management and cascades to every employee of the Company. It ensures greater awareness and focus on risks that might affect the Company’s objectives. The main purpose of our EWRM process is to deliver value through risk-based management and decision-making. OMV Petrom is constantly enhancing the EWRM process based on internal and external requirements. The ISO 31000 risk management framework guides the process, with a dedicated risk organization working under a robust internal regulation framework with a quantitative information technology infrastructure. Additionally, the EWRM system actively pursues the identification, analysis, evaluation, and mitigation of main risks to bring their effects on the Company’s cash flow to an acceptable agreed level.
Bottom-up and top-down processes are combined, with every single employee responsible for managing the risks within his sphere of responsibilities in a holistic process. We use common risk terminology and language across OMV Petrom in order to facilitate effective risk communication and management. The risks identified in the bottom-up risk process by operational staff during day-to-day business management are assessed against a mid-term time horizon of three years. Department heads are responsible for initiating the risk analysis, which includes selection of the appropriate risk identification techniques. These tasks include interviews, workshops, surveys, and analyses of historical losses, and collection of information on risks documented in risk registers or loss databases. Heat maps or risk matrices are used to support the prioritization process and serve to identify probability ranges and the related consequences if risks were to materialize. On the other hand, senior management evaluates top-down risks against a long-term time horizon to provide a strategic perspective of risks across a ten-year timeframe. Permanently scanning the horizon to identify emerging risks and having regular risk meetings, our senior management have the full perspective on the strategic risks landscape. This process enables us to capture new trends and developments of the operating environment and industry best practices, thereby enabling the Group to achieve its long-term objectives. OMV Petrom has four levels of risk management roles in a pyramid-type risk organization. The first (bottom) layer comprises the risk owners represented by managers from various areas, the second level is made up of risk coordinators who facilitate and coordinate the risk management process in their division, and the third layer is the risk management function which coordinates the entire process assisted by specialized corporate functions (e.g., HSSE, Compliance, Legal, Finance, Controlling). The top level is represented by OMV Petrom’s Executive Board which steers and approves OMV Petrom’s consolidated risk profile in accordance with the Company’s objectives and risk appetite. The risk management system and its effectiveness are monitored by the Audit Committee of the Supervisory Board via regular reports.
Risk Taxonomy
Risk categories are defined as follows:
- Short-term risks may impact near-term financial results, including those that may materialize within the current annual reporting cycle
- Medium-term risks may materially impact our financial results within a three-year timeframe
- Long-term risks may fundamentally impact the viability of our long-term strategy and business model, including those that may materialize within a ten-year timeframe
The risks within OMV Petrom’s EWRM system are further grouped into the following categories: market and financial, operational, and strategic. These categories include, among others, market, financial, project, process, health, safety and security, tax, compliance, personnel, legal, regulatory, and reputational risks. In terms of tools and techniques, OMV Petrom follows the best international risk management practices and uses stochastic quantitative models to measure the potential loss associated with the Company’s risk portfolio under a 95% confidence level and a three-year time horizon. Risks identified are analyzed considering the causes, consequences, historical trends, volatilities, and potential cash flow impact.
Market and Financial Risks
Key financial and non-financial exposures include commodity market price risk, foreign exchange risk, counterparty credit risk, etc., in connection with low-probability, high-impact hazards. Other risks accounted for are liquidity risk, and interest rate risk. In terms of mid-term liquidity, we aim to secure our capacity to deliver positive economic value while managing the Company’s risks and their potential cash flow impact within the limits of the risk appetite. High potential single event risks as well as long-term strategic risks are also identified, evaluated, analyzed, and managed consistently. To assess short-term liquidity risk, the budgeted operating and financial cash inflows and outflows are monitored and analyzed on a monthly basis to establish the expected net change in liquidity, and the basis for financing decisions and capital commitments. For mid-term risks, to ensure that OMV Petrom always remains solvent and retains the necessary financial flexibility, liquidity reserves in the form of committed credit lines are maintained.
With regard to the market price risk, OMV Petrom is naturally exposed to the price-driven volatility of cash flows generated by production, refining, and marketing activities associated with crude oil, oil products, gas, and electricity. Market risk has core strategic importance within OMV Petrom’s risk profile and liquidity. The market price risks of OMV Petrom commodities are closely analyzed, quantified, and evaluated. In terms of foreign exchange risk management, OMV Petrom is essentially exposed to the volatility of RON against USD and EUR. The effect of foreign exchange risk on cash flows is regularly monitored.
Derivative financial instruments may be used for the purposes of managing exposure to commodity prices and foreign exchange currencies upon approval from OMV Petrom’s Executive Board in line with the Company’s risk appetite and/or risk assessments. Counterparty credit risk management refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to OMV Petrom. Counterparty credit risks are assessed, monitored and managed at Company level using predetermined limits for specific countries, banks, clients, and suppliers. Based on creditworthiness and available rating information, all counterparties are assigned maximum permitted exposures in terms of credit limits (amounts and maturities), and the creditworthiness assessments and granted limits are reviewed on a regular basis. OMV Petrom is also inherently exposed to interest rate volatility in its financing activities, however, the risk level is low.
Operational Risks
From an operational risk perspective, OMV Petrom is an integrated company with a wide asset base composed mainly of hydrocarbon production and processing plants. A special focus is given to process safety risks where OMV Petrom’s policy is “Zero harm, No losses”. The low-probability, high-impact risks associated with the operational activity (e.g., blowouts, explosions, earthquakes, etc.) are identified and incident scenarios are developed and assessed for each of them. Where required, mitigation plans are developed for each specific location. Besides emergency, crisis, and disaster recovery plans, OMV Petrom’s policy regarding insurable risks is to transfer its risks via insurance instruments. These risks are however closely analyzed, quantified, and monitored by the risk organization and are managed via detailed internal procedures. Our risk management system is part of the corporate decision-making process. Risks associated with new major investment projects or important business initiatives are assessed and communicated to management prior to the approval decision, as part of the project evaluation process.
Pandemic risks
The global spread of the COVID-19 pandemic continues to have a significant impact on global economic development. Increases in COVID-19 cases around the world as new virus variants emerge, combined with supply chain disruptions and high price inflation, could cause a delay in the expected demand recovery. OMV Petrom is responding to the situation by taking specific steps to protect the company’s economic stability and energy supply. Every employee’s health and well-being is a top priority.
Strategic risks
From a long-term sustainability perspective, a strategic risk assessment process is in place, on the one hand, to capture the executive management’s perspective of the risk environment across a long-time horizon and, on the other hand, develop risk mitigation plans and monitor implementation of defined actions. The strategic risks refer to both externally and internally driven risks (e.g., oil and gas market volatility, climate change, political, regulatory, human capital, technology and innovation). An annual strategic risk assessment ensures a robust revalidation of identified risks. It captures new developments or provides updated information on the operating environment and industry trends, and thereby has a positive impact on the Company’s ability to achieve its objective.
The universe of our strategic risks
- Climate Change – In OMV Petrom we approach climate change in a holistic way, all energy transition related activities are integrated to minimize the risks and enhance the opportunities.
- Global Oil & Gas Demand – Due to major factors affecting the volatility of the oil and gas markets, the prices may have large fluctuations. The recent climate change regulations trigger an unprecedent pressure, affecting all market fundamentals.
- Technology and Innovation – The fast pace of technology development, the current trends within the energy industry and the lack of innovation capabilities could lead to a significant loss of growth or efficiency opportunities.
- Cyber Threats – Due to a major cyber event, the OMV Petrom IT infrastructure may experience a massive disruption that can lead to the loss of access or the destruction of critical information.
- Political & Regulatory – Major political factors and emerging regulatory requirements may impact OMV Petrom’s ability to achieve its strategic objectives.
- Human Capital – As a major company, OMV Petrom considers human capital as an important asset and has put in place a strategy to manage human resource risks.
- Reserve Replacement – OMV Petrom mature fields and declining production triggers immediate measures to increase Reserve Replacement Rate (RRR). This supports our view of increasing the share of natural gas in our hydrocarbon production, as we see natural gas as a key enabler for a successful energy transition in Romania.