Same as the oil and gas industry as a whole, 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.
Risk Management Process
The Risk Management System and its effectiveness are monitored by the Audit Committee of the Supervisory Board via regular reports.
The risk management process is based on a precautionary, systematic approach aimed at timely identifying and managing 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 conscious of the risks related to their 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 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.
OMV Petrom’s EWRM system complies with the ISO 31000 Risk Management International Standard. It comprises 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 manage their effects on the Company’s cash flow up to an acceptable level agreed as per the risk appetite.
The risk management process, implemented through OMV Petrom’s EWRM framework, combines bottom-up and top-down processes, each employee being responsible for managing the risks within their responsibilities. Paying attention to every risk makes risk management a holistic process.
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. Risks are identified in the bottom-up process during day-to-day business. Department heads are responsible for initiating the risk analysis, including selecting 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 assessment process and serve to identify probability ranges and the related consequences if risks were to materialize.
Senior management evaluates top-down risks to provide a strategic perspective of risks across a longer time horizon. Permanently scanning the horizon to identify emerging risks and having regular risk meetings, the 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. 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.
The Group considers short-, medium-, and long-term risks per the horizons noted below:
- Short-term risks – risks that may impact near-term financial results, including those that may materialize within the current annual reporting cycle;
- Medium-term risks – risks that may materially impact our financial results due to longer-term manifestation, including those that may materialize over a three-year timeframe and might impact the Mid-Term Plan;
- Long-term risks – risks that may fundamentally impact the viability of our long-term strategy and business model, including those that may materialize over a ten-year timeframe;
In terms of tools and techniques, OMV Petrom follows the 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 mid-term three-year horizon. The identified risks are analysed depending on their nature, considering their causes, consequences, historical trends, volatilities, and potential cash flow impact.
As regards mid-term liquidity, the objective of OMV Petrom’s risk management system is to secure its capacity to deliver positive economic value added by managing the Company’s risks and their potential cash flow impact within the limits of the risk appetite. High potential single event risks and long-term strategic risks are also identified, evaluated, analysed, and managed consistently. For mid-term risks, to ensure that OMV Petrom always remains solvent and retains the necessary financial flexibility, liquidity reserves are maintained in the form of committed credit lines.
To assess short-term liquidity risk, the budgeted operating and financial cash inflows and outflows throughout OMV Petrom are monitored and analysed on a monthly basis to establish the expected net change in liquidity. This analysis provides the basis for financing decisions and capital commitments.
The risks within OMV Petrom’s EWRM system are organized into the following categories: market and financial, operational, and strategic.
Market and Financial Risks
Regarding 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 Group’s risk profile and liquidity. The market price risks of OMV Petrom commodities are closely analysed, quantified, and evaluated.
Foreign exchange risk. OMV Petrom is essentially exposed to the volatility of lei 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 price 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. The Group’s counterparty credit risks are assessed, monitored and managed at the Company level using predetermined limits for specific countries, banks, clients, and suppliers.
OMV Petrom is inherently exposed to interest rate risk due to its financing activities. The volatility of EURIBOR and ROBOR may trigger less or additional cash flow resources necessary to finance the interest payments associated with OMV Petrom’s debt. However, the risk and the mentioned volatility are low.
OMV Petrom is an integrated company with a wide asset base composed mainly of hydrocarbon production and processing plants. 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. A special focus is given to process safety risks, where OMV Petrom Group’s policy is “Zero harm, No losses”. 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 the risks via insurance instruments. These risks are closely analysed, quantified, and monitored by the risk organization and are managed via detailed internal procedures.
OMV Petrom’s risk management system is part of the corporate decision-making process. Risks associated with new major projects or important business initiatives are assessed and communicated to management prior to the approval decision as part of the project evaluation process.
From a long-term sustainability perspective, a strategic risk assessment process is in place. On the one hand, the process captures the executive management’s perspective of the risk environment across a longer-term horizon and, on the other hand, develops risk mitigation plans and monitors the implementation of defined actions. The strategic risks refer to both externally and internally driven risks (oil and gas market demand volatility, climate change, political and regulatory, reserve replacement rate, 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 objectives.