As with 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 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). The purpose of these activities is to actively manage risks in the context of the Group’s risk appetite to achieve the long-term strategic goals.
During 2022, OMV Petrom continuously monitored the ongoing conflict between Russia and Ukraine and its potential impact on the company’s business activities. Further sanctions on Russia and counter sanctions issued by Russia could lead to disruptions in global supply chains and shortages, e.g., energy products, raw materials, agricultural products, and metals and consequently lead to further increases in operational cost. OMV Petrom is responding to the situation with targeted measures to safeguard the Company’s economic stability as well as the security of supply of energy.
In addition, the global outbreak of the COVID-19 pandemic continues to have a major impact on global economic development. Increases in COVID-19 cases around the world following the emergence of new virus variants combined with disruptions in supply chains, high price inflation and rising interest rates could lead to a significant deterioration in economic growth.
OMV Petrom closely monitors global developments and regularly evaluates their impact on its cash flow and liquidity position.
Enterprise-Wide Risk Management
Financial and non-financial risks are regularly identified, assessed, and reported through the Group-wide Enterprise-Wide Risk Management (EWRM) process. The main purpose of OMV Petrom’s EWRM process is to deliver value through risk-based management and decision-making, which is ensured by applying a “three lines of defense model” (1. business management, 2. risk management and oversight functions, 3. internal audit). The company is continually enhancing the EWRM process based on internal and external requirements. The process is facilitated by a Group-wide IT system supporting the established individual process steps, guided by the ISO 31000 risk management framework.
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 culture 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 views, the Executive Board has empowered a dedicated Risk Management function with the objective to lead and coordinate the Company’s risk management-related process. 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.
In 2022, the OMV Petrom Group initiated a robust physical climate risk and vulnerability assessment in accordance with EU Taxonomy.
Acute and chronic risks related to temperature, wind, water and solid mass were first screened based on business specificity and potential impact on OMV Petrom. A two-fold approach was used that is in line with the Enterprise-Wide Risk Management Approach.
Based on the preselected acute and chronic risks, all OMV Petrom Group’s sites, where EU taxonomy eligible activities occur, were prioritized. This exercise was performed with the support of a risk intelligence external consultant using a set of indices specifically aimed at providing a robust understanding of the changes in future environmental conditions for the respective locations and businesses.
All assets with a medium, high or extreme exposure to one or more acute or chronic physical climate risks, were further analyzed. Physical hazard modeling was applied, consisting of processes and analyses of atmospheric data related to temperature, precipitation, drought, wildfire, as well as other data related to coastal flooding, tropical cyclones, water stress, and fluvial-basin flooding in order to provide a rigorous estimate of risk. The analysis incorporates scenarios based on the Representative Concentration Pathways (RCPs) from the International Panel on Climate Change (IPCC). The four RCPs (RCP 2.6, 4.5, 6.0 and 8.5), included in the IPCC AR5 were used in this exercise and applied to various time horizons in accordance with the Group Strategy.
Once the financial impact of the respective risks is estimated, the potential mitigation strategies are discussed with the management, in order to ensure that appropriate adaptation measures are considered.
Risk Management Process
The risk management process is based on a precautionary, systematic approach, aimed at timely identification and management of risks 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 jobs and implements risk management practices on a daily basis, is the most effective way to avoid a negative impact. To this end, our comprehensive 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.
OMV Petrom is constantly enhancing the EWRM process based on internal and external requirements, with a dedicated risk organization working under a robust internal regulation framework with an appropriate 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.
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.
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 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. 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.
Senior management also evaluates top-down risks against a long-term time horizon to provide a strategic perspective of risks. Permanently scanning the horizon to identify emerging risks and having regular risk meetings ensures that senior management have the full perspective on the strategic risks landscape. This process enables them 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
In OMV Petrom, risk management is a holistic process with effective risk communication ensured through the use of common risk terminology and language across the company. The full spectrum of risks including economic, environmental, and social issues, is analyzed using either a semi-qualitative or quantitative approach and documented in a centralized risk repository. The resulting corporate risk profile provides a holistic view of issues that could affect the Company’s medium- and long-term performance. The profile is therefore integrated into OMV Petrom’s decision-making process.
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.
Market and Financial Risks
Key financial and non-financial exposures include commodity market price risk, foreign exchange risk, counterparty credit risk, liquidity risk, interest rate risk, etc. In terms of mid-term liquidity, the Group aims 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 in connection with low-probability and high-impact hazards.
To assess short-term liquidity risk, the budgeted operating and financial cash inflows and outflows are monitored and analyzed monthly 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.
The low-probability high-impact risks associated with the operational activity (e.g., blowouts, explosions, earthquakes, etc.) are identified and the 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.
ESG risks are identified using a double materiality approach and using a selection of the appropriate risk identification techniques such as interviews, workshops, surveys, and analyses of historical losses, as well as information on risks documented in risk registers or loss databases. Environmental risks and opportunities include regulatory, operational, reputational, and financial drivers and specifically relate to issues such as climate change and availability and quality of water used for operations. Such risks are then analyzed against three-year time horizons as a deviation of cash flow from the plan and the likelihood of such an impact. Digital technologies are used in monitoring and managing environmental risks through a special risk management IT tool integrating environmental risk scenarios with operational and business risks.
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., climate change, regional gas growth, traditional business, political & regulatory, and human capital & communities). 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 strategic objective.
The strategic risks are monitored in the respective task forces: part of the climate change risks in the NES task force, while political and regulatory and human capital and local communities’ risks in the Stakeholders Management task force.
The universe of our strategic risks
Climate Change: Risk of not meeting 2030 emissions target ambitions combined with risk and opportunities from an accelerated speed for transition
Traditional Business: Sustainability focus and climate change targets put pressure on traditional business driving interest towards projects relevant for the transition to a low carbon environment
Regional Gas Growth: Delay or cancellation of exploration and potential development in Black Sea.
Human Capital & Communities: Attracting and retaining talents under the new market conditions to ensure the needed employee experience and harmonizing the Sustainability/ ESG long term agenda with immediate needs identified by the communities where we operate
Political & Regulatory: Major political factors and emerging regulatory requirements may impact OMV Petrom’s ability to achieve its strategic objectives