RISKS MANAGEMENT IN THE PETROLEUM INDUSTRY Risks management is one of the most decisive issues of the enterprises, of the corporate governance leaders, especially in the framework of integration to the world market economy. In the world in general and in the oil and gas industry in particular, risks management is considered the most important, including common risks such as political, environment security, price fluctuation, human resources, technology…that have caused difficulties for the companies, even the bankruptcy, with a very clear example of the BP’s oil overflow breakdown at the Mexico Gulf… During the past years, the world economy crisis has caused great loss, even bankruptcy for the companies, globally as well as in Vietnam. According to the Ministry of Planning and Investment in 2013, more than 55.000 companies were dissolved and ceased their operation. Oil and gas companies have not been an exception. Apart from efficient and effective ones, some subsidiaries of Petrovietnam have been inefficient and have brought about many difficulties such as financial imbalance and ownership capital’s reduction… So the question raised for the managers: What is the main reason for that loss and bankruptcy? Objective or subjective reason? Was there any forecast? Were the prevention measures applied to avoid the risks? What are the experiences from successful companies in this crisis and difficult period? This report is aiming at going deeper to understand the essential issues in the risks management of the companies in oil and gas industry, including the following main points: 1) The importance of the risks management in the corporate governance or the risks management is linked closely with the corporate governance; 2) The essential risks in the oil and gas industry; 3) Risks management practices in Petrovietnam; 4) Risks Management Solutions for the Petroleum Industry 1) Risks management links closely with the corporate governance: “Doing business holds many risks but also many opportunities for the catchers to sustain and further develop”,according to Stephen Wagner- the leading risks management specialist. In other way, risks are the obvious secondary products of all activities. Organizations can not delete completely the risks. Risks of the company are loss due to elements that are difficult to control they bring about impossible targets of the companies (targets on profits, marketshare, brandname, company culture, social welfare…). Risks management is to synthesis measures that the corporate governance leaders must implement in order to identify, protect, avoid and reduce the loss if risks happen. According to the Enterprises Law in 2005 and corporate governance’s structure, risks management is inseparated part of corporate governance. It implies in 3 levels of the risks internal control: 1) CEO is everyday executive, responsible for secure business, preventing from risks according to regulations of the Board of Directors and the Law; 2) The Board of Directors is responsible for controlling the CEO’s activities in order for the company to reach its goals; 3) Supervisers assigned by the Owner, independent, responsible for controlling all activities of the company, of the Board of Directors and CEO. These are 3 levels of the internal control, not to mention independent auditing, supervisors, State auditing in case of the company with State investment capital. In short, risks go along with rewards. In business, normally high risks bring about high benefits, otherwise in some cases high risks bring about loss, even bankruptcy. So the risks management not only secures the assets but also helps to increase the value and create opportunities for the company to further develop. Correct and diversified risks definition, measurement and quantification on the basis of continuing regulation and reflection those changes in management decisions is important regular mision of managers of all levels: enterprises can not delete completely the risks but need to understand the risks to face with, then determine the capacity of risks self-management inside the company, and create the best prevention solutions to minimize the higher risks, prevent and reduce serious loss, improve the efficiency and save the costs. Risks definition has to analyze estimation of the roots of internal risks or external matters such as: External forces: business environment, legal regulations on tax, fees, customs, labour…; forecast of the sector’s growth rate, needs, income per capita, GDP,…; political issues; price fluctuation, exchange rate fluctuation…; Internal factors: internal processes and regulations; human resource… Based on the analysis of the source of risks, enterprise’s risks can be divided into 3 types: 1) Business risks (from external environment, from partners…); 2) Activities’ risks (from activites of internal process, from employees…); and 3) Risks of conformity (from conformity with law and regulations…). So, in the oil and gas industry, which are the risks that call for much attention? 2) The essential risks in the oil and gas industry Political Risks: One of the main characteristics of theoil and gas sector is the requirement of the large investment, high risks and great influence from political factor…Big oil and gas companies generally are national ones, totally or partially state-owned. So the countries’ strategies and policies, especially energy, economic and diplomatic policies influence significantly on activities of companies in oil and gas sector. Instability in the oil region is countable political factor. It is difficult to implement project in Iran with the embargo and sanction, so complicated for cash call or looking for services contractors… In case of Vietnam’s oil and gas sector, the expansion of seeking and exploring new mining resources in deep waters has recently been not only very costly and risky, but also faced strong dispute from China with typical case of the incident of the geological collecting ship named Binh Minh 02 whose cables, despite protection from other nearby boats, were cut by Chinese ship. Risks of reserves: Demand in petroleum products have been on increase, especially in developing countries in both short and long term, due to their population boom, developing industrial sectors and especially high traffic and travel demand... Besides, petro is also unalterable resource. According to the Global Energy Safety Institute, the demand for petro will increase by 60% in 2020 from now. The Energy Information Administration (EIA) reported that the world oil consumption demand will reach about 107mil barrels a day by 2030 and that this figure of Vietnam will get higher at 460,000 barrels a day by 2014. Together with consumption demand estimate, the estimation of supply capability, reserves, reserves assessment, actual exploration rate over reserves assessment figures during searching and exploration period, are all risky estimation. Therefore, the Investment Rate of Return (IRR, NPV) of oil and gas investment projects are usually higher than those of other industries (often around 35% or at least over 30%) in order to avoid and cover risks of big investments. The high returns are complimented for the high risks such as dry well, impractical actual reserve volume, low exploitation rate, higher exploitation cost than expected due to unforeseen undersea and underground terrains... To meet increasing petro demand and to grow petro reserves, Petro Vietnam Corporation is not only seeking, exploring and exploiting petro from continental shelf but also overseas. PVN/PVEP at the moment have invested in 13 different seeking and exploring oil and gas projects in countries such as Cuba, Indonesia, Iran, Tunisia, Myanmar, Laos, Cambodia, Congo and Madagasca, besides exploitation projects in Russia, Venezuela, Algeria and Malaysia. Oversea investment brings huge challenges such as fierce competition, international and other countries’ law, terms and policies while Vietnam freshly entered the integration process... Market Risks: Oil product price is determined by world price, hence every world price fluctuation instantly affects oil companies’ revenue and project investment...In economic crisis, crude oil price dropped below 40USD/barrel in 2009. Economic recovery is the basis for continual oil price increase and get to milestone of 110USD/barrel in the following 2 years. Since then oil price has been complicated due to European Public Loans and oil related conflict. Estimation of oil price in the coming years during global economic recovery is a challenge with unexpected risks due to large fluctuation. Besides, exchange rates are also important since trading in different currencies affects largely petro companies such as Dung Quat Refinement Factory, input is crude oil bought in USD while output-petro- is sold in Vietnam Dong. Therefore every currency exchange rate fluctuation directly affects the company’s revenue and business. The oversea investment of the corporation in Junin 2 Project in Venezuela, Venezuela’s Bolivar over USD is set very low by Venezuela government compared with market rate (4 times lower), caused large impact on the project effectiveness... The high investment in oil and gas projects caused high risks in attracting funds, usually an oil and gas project can only be granted funds by large international banks or combination of banks. High risks in exploitation cost fluctuating with oil price, loan interests, insurance... also need to be considered. Human Resource Risks: Oil and Gas Vietnam industry is relatively young and only started to receive Government support in the past few years. In 1981, the first gas exploitation in Tien Hai-Thai Binh with support from old Xoviet Vietnam Petro Collaboration (Vietsovpetro) was established. Until 26/6/1986, Vietnam was listed in the world crude oil exploitation and export countries. At end of 2012, PVN had around 50.000 staff including 8,16% management, 41,99% technical staff and 49,85% manufacturing staff. From the work experience, labour in operation and maintenance has been more skillful and can replace oversea experts such as the case in Dung Quat Oil Refinement Factory, Vietsovpetro... However, to compare with developed countries with 100% trained labour, labour at higher education degree accounts for more than 72%, Vietnam’s figures are relatively low, at only 53%. Competition in high quality labour in petro industry is getting more intensed. Besides the above factors, petro industry is also affected by other important factors such as environment, national environmental protection requests, safety and security rules in the industry such as CO2 GHG emissions are all affecting greatly petro industry. Just like other industries, IT risks in petro sectors are also important such as shale gas revolution in USA that led to drop in gas market price...Techonology in seeking, exploring, transporting, refining and using gas in Vietnam has improved significantly in many aspects after learning and corporating with other countries’ developed oil and gas industry. Regarding exploration: PVN on its own can now source and extract oil, established and built its own oil drilling rigs, partly in domestic and also reach to other countries. Regarding transportation: PVN/PVTrans now own big crude oil boats that can transport oil for export. Regarding oil refine: the first oil refining factory Dung Quat with 6.5mil tons of oil produce/year (approx. 148,000 barrells/day) and planned to enhance its capacity to 9.5mil tons/day. Other new oil refining factory will be operated and active are Nghi Son, Long Son... Regarding gas usage: after long time wasting associated gas resources due to low technology, Vietnam now can use gas to produce electricity, fertilizers and other products, make use of the associated gas resources and help in high investment rate of return. From analysing above factors, depending on actual circumstance and periods, managers can set priority in solving problems and as basis for management decisions. Risks assessment is crucial to business. Business managers need to assess main and important risks, analyze strength and weaknesses of competitors, their positioning. In other words, these risks can bring down business or vastly affect company revenue. Through financial tools, CEO also needs to analyze breakeven point or acceptable point with no loss, together with market analysis and estimation to have flexible and optimal solution for reducing risks or transfering risks to third party... Also note that transferring risks also means transferring benefits to third party. Together with determining prior/critical risks, business managers also need to assess their companies ability in accepting risks, aka acceptable risks rate with funding to cover those risks. For example, if a project cost suddenly increases by 10% in force majeure, revenue reduced by 10%, is company loss or gained, how long it can bear the situation of loss. Lastly, decision in choosing optimal solution to prevent and control risks complied with rules and guides should be discussed. In order to have effective risk management, company needs to have Strategy that define risks to be faced, especially critical risks that can lead to company fail, and build optimal preventive activities in managing these risks. Risks management should start from the first day of strategic planning stage, focus on company’s positioning, assess the positive and negative look of the market (basic market and technical analysis), future risks acceptance capability. Risks management should continually assess and identify uncertainties affecting the objectives of the organization to focus on core business lines, the influence of the main material price ... Can the company cope with various fluctuated market factors? A good risk management plan not only minimises risks level but also allows for flexibility and highest liquidity rate while reducing the costs arising from the transfer of risk. An effective strategy and implementation process often emphasize the particularly important role of senior leaders in business and require utilizing the collective wisdom of the whole company in which its staff and leaders share ideas and co-search for the best solutions to problems. Reporting regularly to the Leaders will provide a clear view on risk level to help prioritize activities related to risk. As internal and external environment is constantly changing, risks should be reassessed and continuously updated In short, for each risk, the decision should be limited, monitored or ignored. Only when we can actually identify and quantify each risk, do we determine if that risk should be limited, maintained or eliminated. In order to identify actions to minimize risks, we should build intervening procedure at all levels and identify the maximum loss level related to risk, and at what risk level intervening actions will be compulsory. 3) Risk management Status of the Petrovietnam: Although Vietnam oil and gas industry is still young, its contribution and position to the country is undeniable, especially during the past few years difficult time. Oil and gas industry contributed the most to the national oversea currency, along with essential products for the national economy such as electrification products, petroleum, high-pressure compressed air, clean energy supplies, and urea supply and LPG for industrial development and consumer welfare in the country. It contributed the most to national revenue especially in the past few years. Although total national export volume has declined, petroleum industry still maintain its contribution, at about 18-22% of all national GDP, and 25-30% of the whole national revenue. In 2013, Petrovietnam revenue reached over 762,860 bil VND, gross profit before tax was 72,400 bil and contributed 195,4 bil to national budget. The company has now established a synchronized Vietnam Oil and Gas Sector, from exploration stage - gas - electric - processing - distribution of petroleum products and services. It is pioneering in international integration and collaboration and expanding investment to overseas. Along with domestic investment, the company has actively sought and expand investment to countries in Asia, Europe, Africa, Latin America. 4) Risks Management Solutions for the Petroleum Industry The expansion of mining exploration in deep waters is expensive, risky and disputed by China. Domestic oil reserves is declining since exploitation is at higher speed to search and exploration speed. Therefore, under pressure in expanding reserves, the Corporation has implemented overseas investment projects with high risks such as local policy, exchange rates, experience ...Due to economic crisis, funding for oil and gas projects faced difficulties. Petrovietnam has been part of Vietnam Government under direct decision and approval of the Prime Minister in objectives, strategies and planning...It has been also supported with funding and technology... Oil and Gas Law and Oversea investment Law has been granted with favourable conditions. With such support, Vietnam has attracted attention and collaboration in exploring and exploitation from big oil and gas corporation in the world. However, under the administration of the Government, the dynamic capabilities and flexibility are low, with high dependence and low competitiveness. Human resources and technologies not yet fully meet the needs of the industry. According to SWOT analysis, Petrovietnam’s risks are summarised in the following figure: The Petrovietnam has synchronized risk management solutions such as solutions for science, technology, business management, organization and human resources. The risk management is also conducted through levels, under Enterprise Law: Professional Boards of the corporation help the CEO to analyze and avoid business and operational risks such as those in environmental safety, funding, market .... The Board of Directors with the help of the Internal Control Committee consultation, reviews and manages once again its risks in the implementation of projects and works .... and its unit. Until now the government has not appointed Supervisers to the owner to control all the corporation activities. However, in recent years the corporation has conducted independent audit and received Government auditors and inspectors, financial and tax inspectors ... Vietnamin general and its oil and gas industry in particular have not been aware of the importance of risk management, hence its risk management has been more passive to proactive. Risks have not been predicted and only are solved when they actually happened. There is lack of linkage between risk and control management, governance structures (organizational structure, functional roles, tasks) are not well defined and clear enough, downplayed the role of auditors hence appointed incompetent and unqualified staff people, qualification standards for the controlling process. The controlling position is also new in Vietnam since Vietnam has just freshly integrated and the implementation of Enterprise Law is also new, not to mention the transfer of state-owned enterprises into joint-stock companies or limited liability members . A complete risk management strategy and system need to be established under value chain of the petroleum industry in order to build internal control system, risk management and prevent major/critical risks that highly likely happen in priority order. Each activity in the oil and gas value chain will have different critical risks. There should have policy, procedure and process for risk management, human and asset insurance (preventive tools)./. References: 1.Annual report of Petrovietnam Corp; 2. Websites on risk management in business and in oil and gas enterprises 3.Oil and Gas Law, Enterprise Law and other references ... Dr. Nguyễn Xuân Thắng Master. Trần Thanh Tùng
Posted on: Sun, 24 Aug 2014 14:10:58 +0000
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