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ORLEN Group 2016 Integrated Report

II nagroda specjalna w kategorii Raport Zintegrowany | Najlepszy raport on-line

Risk Management

Capitals:  

In the course of its business, the ORLEN Group monitors and assesses its risk exposures on an ongoing basis and takes steps to minimise their effect on its financial position.

The functioning of the Corporate and Market Risk Management System

The ORLEN Group monitors its operations and assesses risk to formulate activities to undertake in order to minimise its impact on the overall financial situation on an ongoing basis.

In 2016 PKN ORLEN and the ORLEN Group companies’ Corporate Risk Management Policy and Procedure which comprehensively regulates the process of the Corporate Risk Management system was updated. PKN ORLEN has an Audit and Corporate Risk Management Department, which coordinates the corporate risk management process at all levels of the organisation and makes an independent and objective evaluation of risk management and internal control as well as business process analysis. The Department conducts audit tasks based on annual audit plans approved by the Management Board and accepted by the Audit Committee of the Supervisory Board  and the Supervisory Board. The Department may also perform ad hoc audits commissioned by the Supervisory Board and the Management Board.

Key roles in Corporate Risk Management System:

The methodology adopted by the Audit, Control and Corporate Risk Management Office allows us to identify risk on the basis of one common model and link them with business processes and strategic objectives.

The Enterprise Risk Management (ERM) System is one of the tools facilitating the effectiveness of the realization of strategic and operational goals. It ensures comprehensive identification of risk and control mechanisms and its assessment in a project, process and at whole organisation levels. PKN ORLEN is the first Polish corporation (with the exception of the financial industry), which has implemented a complex Corporate Risk Management System and the applied solutions are in line with the best practices in this area.

Assessment of risk in a breakdown by business area is carried out at least once every year, as part of the process of self-evaluation, and its purpose is to provide an update of the risks which are most significant for the organisation. The process, risk and control owners are responsible for its performance. The most significant element of the Corporate Risk Management methodology applied involves the comparison of two risk assessments: gross risk assessment and net risk assessment. Gross assessment looks at the value of risk in the absence of control mechanisms and preventive measures, while net assessment is the value of estimated risk taking into account the efficacy of the control mechanisms and preventive measures for the specific risks that are in place. This approach makes it possible to manage identified threats better, as well as to confirm whether the strategies adopted to minimize them are accurate. As a result of periodic assessment, plans of corrective actions are defined for the individual risks and controls, which mainly aim to achieve an acceptable risk level. Each risk assessment and control mechanism testing process is completed with a report on the most significant risks and planned method of their limitation, which is submitted to the Management Board Members and the Supervisory Board Audit Committee.

In 2016, the process of risk self-assessment and control mechanism testing was carried out in PLN ORLEN S.A. with the presence of the managerial staff, which allowed for updating the assessment of 527 risks by testing 1251 control mechanisms in 83 business processes.

In 2016, two more key companies of the ORLEN Group were covered by the ERM system (Anwil Orlen Deutschland): ORLEN Lietuva and Unipetrol a.s.

As part of the implemented Corporate Risk Model, all of the identified risks are classified on the basis of the following categories:

I. STRATEGIC RISKS – risks directly connected with the strategic goals, referring to specific actions and to the degree of their performance (a.k.a. KPIs). For the purposes of detailed identification of strategic risks, partial strategies are created for the individual fields attributed to the appropriate owners, who perform quarterly risk assessments.

II. PROJECT RISKS – understood as uncertain events or circumstances which may have a negative impact on at least one project goal, if they occur. They are assessed on a systematic basis as implementation of the projects progresses, and in any case at least once a year as part of the self-assessment process.

III. PROCESS/OPERATIONAL RISKS – risks identified within the existing business processes, related directly to their key goals, making it possible to manage processes efficiently. These risks are assessed annually as part of the self-assessment process by the business areas, the main intention of which is to confirm the effectiveness of the control mechanisms used to keep the risk at the defined level.

Risks and processes classification along with control mechanisms within the ERM functioning:

RISKS/PROCESSES

RISK DESCRIPTION

RISK MITIGATION METHOD

STRATEGIC  
Assumptions
  • Inconsistent and unrealistic strategic goals and assumptions
  • change of strategic goals/assumptions during the process
Systematic review of the key strategic goals to check if they are up to date and their ongoing monitoring against the changing environment (regulations, market, key suppliers, etc.)
Division of competences
  • inappropriate division of competences between the organisational units
  • no decision-making centre
High degree of employee specialization, appropriate assignment of duties and responsibilities by developing precise scopes of tasks.
Internal consistency
  • lack of internal consistency between strategic goals within the organisation
Preparation of partial strategies for individual areas for the purpose of specific identification of strategic risks.
Review and approval of the strategy by the Management Board.
New regulations
  • entry into force of unfavourable legal regulations
  • no effective action of the public administration in relation to enforcement of the law
Participation in public consultations for legislative drafts reducing the risk of implementation of unfavourable regulations.
Accidents at work and other threats
  • incomplete knowledge about work safety among contractors
  • threats to work safety and fire safety related to the presence of third-party employees on the ORLEN Group’s premises
Supervision and management of contractors’ work by implementation of tools to monitor work safety.
Implementation of uniform requirements for contractors and subcontractors in line with the guidelines set forth in the “ORLEN Group Safety Standard no. 9”.
PROJECT  
Budget overrun
  • inappropriate estimate of the project implementation costs
Systematic monitoring of the contractor’s activities. Defining KPIs with regard to deadlines, with delays entailing additional costs (penalties) for the Supplier.
Schedule overrun
  • inappropriate assumptions concerning the project completion time
Constant supervision of inspectors over the performance of the work in progress, systematic evaluation of the progress of implementation of successive stages of the projects and enforcement of performance of the work.
Project scope modification
  • incomplete performance of the project
  • exceeding the project framework
Systematic analysis of the environment in which the project is being implemented. Depending on the circumstances arising, potential decisions may be made to change the scope of its implementation.
Division of competences
  • inappropriate division of competences between the organisational units
  • no decision-making centre
Preparation and implementation of methodology concerning competency division of project team members in order to avoid conflict of interests. Utilisation of dedicated IT tool supporting project implementation.
Systems
  • absence of IT systems supporting project implementation
Definition of alternative IT systems at the project planning stage or commencement of testing of other systems allowing project implementation.
Engineering/technology
  • limited market of technology providers
Working with the licensor as partner if it is impossible to obtain technologies by way of a standard purchase.
Weather conditions
  • bad weather conditions (unexpected or highly intense)
Planning the implementation of a part of the scope of the project works on the basis of historical analyses of weather trends, thus minimising the risk of impact of weather conditions on planned activities.
PROCESS / OPERATIONAL  
Procurement    
 
  • supplying crude oil (by land and by sea) in a quantity and of a quality not corresponding to the requirements
  • planning supplies in such a way as to meet the quality requirements related to the crude oil.

Monitoring of the process of supplies carried out by land and by sea. Using dedicated analytical and statistical tools, analysing industry and news portals.

Monitoring of the market for selected crude oil types with regard to their availability and value. Confirmation of purchase profitability each time for transactions not covered by contracts.  
 
  • purchase of investment services and biocomponents
Supplier selection process performed in line with the procedures in force and in accordance with the required documents (including market analysis, time schedule, supplier assessment).
 
  • guarantee of production continuity
Making sure that internal procedures are in place making it possible to react effectively in the case of an emergency by way of purchasing services and raw materials for production directly.
Production    
 
  • inappropriate planning and management of repairs in the production area
Functional IT system supporting the repair planning process and maintenance at the production plant. Changes to the plans being developed and the process of acceptance of the individual elements of the plans are documented in the system.
 
  • operational inefficiency in the context of production supply chain balancing
The area responsible for the production balancing process has tools in place making it possible to perform the balancing process in an optimum manner. The procedures and processes in place define responsibility, scope and deadlines for the provision of input data for the production balancing process.
 
  • failure to achieve the assumed economic benefits resulting from the implementation of the initiatives
Ongoing monitoring and verification of initiatives on the basis of expert knowledge, ensuring the realisation of projects with highest efficiency potential.
Distribution and logistics    
 
  • environmental pollution as a result of the distribution processes carried out
Periodic checking of contamination levels in Oil Terminals.
 
  • failure to comply with the requirements to physically maintain an appropriate level of mandatory stocks
Systematic monitoring of stock levels with reports verifying the levels of the required minimum quantities.
 
  • failure of the logistics infrastructure affecting supply continuity as well as supply of products, or loss thereof
Periodic inspections of the condition of the logistic infrastructure, including updating of reports.
Retail    
 
  • inefficient process of contract conclusion and price negotiations
Pricing policy setting forth the rules of collaboration with contracting parties and systemic mechanisms to prevent irregularities. Acceptance of prices/discounts/payment terms in contracts before their signing. Checking the correctness of parameters of the contracts before entering them into the system and verifying customers’ purchasing potential.
 
  • failure to apply ethical standards and unfair conduct on the part of employees, fraud on company property and other violations
Checking compliance with the ethical standards in place, as well as observance of the Ethical Code of Conduct; checking for any signs pointing to violations of ethical standards or fraud.
 
  • failure of the pricing policy to maximize benefits and to develop market potential
Dedicated tools used to manage prices and to ensure the pursuit of an efficient and competitive pricing policy.
Checking and monitoring whether changes in retail prices are entered correctly in the systems.
Wholesale    
 
  • readiness to react quickly with regard to the adjustment of sales plans in the case of changes to value and production chains
Implementation of sales plans on the basis of volumes agreed with the customers as per the contract/order.

Systematic checking of sales and production plan implementation with the participation of the wholesale area and of the supply chain management office.
 
  • inefficient process of negotiating terms and of concluding commercial contracts

Negotiation of trading conditions and signing agreements in accordance within the scope of the authority granted. Provisions related to trading conditions are reviewed and consulted with other organisational units.

Formal process in place for the conclusion of contracts and for the issuing of opinions about them.
 
  • failure of the pricing policy to maximize benefits and to develop market potential
Price formulas approved by the area responsible for pricing policy development. Additional review by the business responsible for product sale. In petrochemicals, a formal process is in place for the negotiation of minimum.
Finance 1    
 
  • commodity risk – related to changes in refinery and petrochemical margins generated from the sales of products, to the Brent/Ural differential, to prices of crude oil and products as well as to CO2 emission allowances, and to the risk related to the prices of commodities in cash-and-carry arbitrage transactions
Cash flow planning.
Market risk management policy and hedging strategies defining the rules for measuring individual exposure, parameters and time horizon for the hedging against the specific risk, as well as the use of hedging instruments.
 
  • exchange rate risk – related to the currency exposure of cash inflows and outflows, investments, receivables and payables, and assets and liabilities denominated in foreign currencies
 
  • interest rate risk – related to assets and liabilities held, for which the interest revenue and costs depend on variable interest ratesh
 
  • liquidity risk – related to an unexpected shortage of cash or lack of cash or access to sources of financing
Short- and long-term cash flow planning. Policy for short-term liquidity management, defining the rules of reporting and consolidating liquidity of PKN ORLEN and ORLEN Group companies. The Group pursues a policy of diversifying sources of financing and uses diversified tools for efficient liquidity management.
 
  • risk of loss of cash and deposits – risk of bankruptcy of domestic or foreign banks in which the ORLEN Group keeps or invests its cash
Short-term credit rating of the bank. Short-term liquidity management policy and policy of diversifying sources of financing as well as the use of a tool for efficient liquidity management.
 
  • credit risk – related to the contracting parties’ failure to pay trade receivables
Analyses of contracting parties’ reliability and solvency.
Management based on the procedures and policy adopted with regard to trade credit management and debt recovery.
Applicable law and other regulations    
 
  • amendments to existing legislation or new regulations significantly influencing the ORLEN Group as well as its financial position and business results

    The most important legislative acts regulating the functioning of the oil sector are the following:
    - Act of 25 August 2006 on biocomponents and liquid biofuels (amended many times) – imposing the obligation on domestic refineries and fuel importers to meet what is referred to as the National Index Target, i.e. the obligation to ensure a minimum proportion of renewable fuels (biocomponents) in the total amount of liquid fuels.
    - Act of 7 July 2016 amending the act on the goods and services tax and certain other acts (fuel package) and Act of 22 July 2016 amending the Energy Law and certain other acts (energy package), introducing a series of fundamental changes regulating the market of liquid fuels in Poland, including new rules concerning VAT settlements related to the imports of liquid fuels into Poland, as well as closely linking the tax requirements to the licensing-related requirements in Poland.
    - Act of 30 November 2016 amending the Energy Law and certain other acts, introducing a schedule of deregulation of natural gas prices in Poland, assuming that the prices will be deregulated for industrial consumers starting from 1 October 2017 and for households starting from 1 January 2024.- Act amending the Energy Law and certain other acts, restoring by 2018 the system of certificate-based support for the generation of electricity in high-efficiency cogeneration. In the coming years, the ORLEN Group is exposed to risks related to the number of certificates granted, to changes in the prices of the certificates, as well as to the risk of increase of costs of the substitute fees.
    - Act amending the Energy Law and certain other acts, restoring by 2018 the system of certificate-based support for the generation of electricity in high-efficiency cogeneration. In the coming years, the ORLEN Group is exposed to risks related to the number of certificates granted, to changes in the prices of the certificates, as well as to the risk of increase of costs of the substitute fees.
    - Mandatory stocks – under the new regulations, producers and traders are obliged to pay what is referred to as a substitute fee in exchange for a gradual decrease of the obligation to physically maintain stocks. The change in the level of mandatory operational stocks is as follows: from 68 to 60 days in 2016, and to 53 days in 2017.
Monitoring changes in legislation at the level of the individual jurisdictions as well as active participation in legislative processes.
Corporate management    
 
  • insufficient IT system security
A procedure in place in relation to the management of logical access to IT systems, which includes for instance the authorization of requests to grant or modify rights to IT systems, restricted access to the OS layer and databases as well as to the system hardware, and a complex level of password security.
 
  • inappropriately configured operational planning and supply chain optimization model favouring non-optimal business decisions

Periodic analysis and an update of the model used for operational planning and daily monitoring of operating plan implementation by the supply chain management area. Planning data used for corporate planning and for operating activities are defined and provided using standardized forms in accordance with the work schedule.

1) point 7.3.5 of the Consolidated Financial Statements for 2016. 

Effect of controls/risk response plans

The Risk Map shows the location of key risks for the organisation broken down by risk type, in terms of:

If controls (risk management strategies) are applied, risk is reduced to acceptable levels.


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