1.0 Introduction Risk is defined as an uncertain event or condition that has a probability of transpiring in which there will be a positive or negative impact to a situation, project or process. A certain risk has one or more causes and when it happens, there will be also one or more impacts. If also these will occurs, there may be impacts with the schedule, cost or performance. All projects or operations assume risks and by means of Risk Management, tools and techniques are used to monitor and control these events that will have some kind of impact to the outcome of a project or production (Gray & Larson 2006). Risk Management is a practical method of defining and resolving the workplace health and safety issues and problems. It is an ongoing process of identifying and managing risks in order to avoid the exposure. This method includes the several processes that consists Risk Management Planning, Risk Identification, Risk Analysis, Risk Monitoring and Risk Control. The objective of Risk Management is to reduce the probability and impact of risk that is adverse to the project or production. However, if the impact is positive the probability of the risk should be increased (Heally 1997). Risk Management Plan will provide the guidelines and a framework that is based on industry acceptable practices. The purpose of the plan is to establish the methodology for 1
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
1.0 Introduction
Risk is defined as an uncertain event or condition that has a probability of transpiring in
which there will be a positive or negative impact to a situation, project or process. A
certain risk has one or more causes and when it happens, there will be also one or more
impacts. If also these will occurs, there may be impacts with the schedule, cost or
performance. All projects or operations assume risks and by means of Risk
Management, tools and techniques are used to monitor and control these events that will
have some kind of impact to the outcome of a project or production (Gray & Larson
2006).
Risk Management is a practical method of defining and resolving the workplace health
and safety issues and problems. It is an ongoing process of identifying and managing
risks in order to avoid the exposure. This method includes the several processes that
More than 80 risks are identified by the Petron Risk Management System by
means of the bottom-up approach. All personnel will participate in the
identification and the update of definition of these risks. Some of the major risks
identified are the following:
1. Financial or Interest rate risk – This risk involve possible losses due to the fluctuating
interest rates that is inherent to the Philippine economy.
2. Foreign exchange risk – This risk comes from the difference in the US dollar
denominated assets and liabilities when it will be converted to Philippine Peso since
this currency are used by Petron Corporation as its functional currency.
3. Credit risk – This risk is about the exposure of Petron Corporation’s financial assets to
this kind of risk as shown on the statement of financial position.
4. Commodity price volatility risks – These risks emanates from the exposures to
fluctuations in the prices of crude oil and products in the world market.
5. Liquidity Risk - This risk is the outcome if there are adverse changes in the business
environment or internal operations that will result to a substantially higher working
14
capital requirements and the presence of a difficulty in financing additional working
capital.
6. Other market price risk – Risk that will result from investments carried at fair value.
7. Regulatory Risks – These risks come from changes in national and local government
policies and regulations which can result in substantial financial cost for the company,
either directly or indirectly.
8. Risk of operational disruptions – This risk emanates from accidents, process or
machinery failure, human error, adverse events outside of human control and delays
in major capital expansion projects.
9. Catastrophic and environmental risks – These risks will come from external factors.
Petron Corporation will have to recognise the need to include climate change as this
pose a significant risk to the continuity of its operations. This was proven during
Ondoy storm that several service stations were forced to shut down due to heavy rains
that caused flooding.
(Petron Corporation 2008)
Other risks that can be considered base on the nature of Petron Corporations as an
organisation on the Oil industry are the following:
Design Risk
Facility Risk
Technology Risk Transportation Risk
Planning Design Risk
Construction Risk
Commissioning Risk
Permits and License Risk
Availability of Material Risk
Delay Risk
Decommissioning Risk
Quality of Supply Risk
Quantity of Supply Risk
Labour Issues Risk
15
Interruption of Refining Process Risk
Resource Risk
Liquidity Risk
Debt Service Risk
Demand Risk
Marketing Risk
Commercial Risk
Product Off take Risk
Terrorism Risk
Criminal Risk
Risk of natural Disaster
Recruitment and retention of qualified Workforce Risk
Outbreak of pandemic Risk
Supply chain risk (Al-Thani 2008)
5.3 Risk Analysis
Risk analysis in Petron Corporation through its Petron Risk Management System
develops an understanding of the risk. It will provide information for decision
making on whether risks involve need treatment by the most appropriate and
cost-effective risk treatment strategies that will be implemented by top
management. Risk analysis will aim to establish an understanding of the level of
a certain risk and its nature. This process will ascertain the absolute level of risk
and on the other hand will assist in determining the priorities. In Petron
Corporation the level of risk is determined by combining likelihood and impact.
Petron Risk Management System has developed a risk assessment tool which
allows risks identified to be assessed and recorded from bottom-up in its
organisational structure. Likelihood and Impact tables are used to provide
definitions for the rating scales so the Petron Risk Management system will have
a common understanding of the meaning within the organisation. In its bottom-
up approach, all personnel from all levels of the organisation will participate in
this quantification process of Petron Risk Management System. Hence, this
16
system also will serve as an empowering tool up to a certain degree across the
organisation (Petron Corporation, 2008).
Peron Corporation follows an enterprise-wide risk management framework,
Petron Risk Management System cuts across divisions and will attempt to cover
the widest possible spectrum for covering risk. The system will touch on
concerns with the environment regulatory and socio-political issues, strategic
partnership, continuous project innovation and other identified risks that makes
up the 80 risks identified. Petron Risk Management system will undertake
different but parallel journeys (Petron Corporation 2008) .
There are three steps in the risk analysis process:
Consider the likelihood of risk – what is the likelihood that the risk may
actually occur within the existing controls. The personnel will choose the
description which is best suits the likelihood of the risk occurring based
on the risk assessment tools used.
Consider the impact of the risk – this is based on what happened in the
past and what could possibly happen in the future. The personnel will
also select a descriptor which will best reflect the impacts of the risk in
relation with the existing controls that are already placed.
Calculate the risk – calculate the risk by matching the impact rating and
the likelihood rating on the Risk Matrix.
Table 3 Risk rating using the Likelihood/Impact Risk Matrix (Shire of Mundaring n.d.)
17
The risk assessment tool above is one example on how likelihood and impact is measured in
order to have a structured approach across the organisation. All personnel will examine the
following likelihood table and will analyse about what examples of events in Petron
Corporation have occurred. This will assist on how likely the identified risk is to happen.
The range of likelihood is from “Almost certain” to “Rare” (Shire of Mundaring n.d.).
Table 4 (Shire of Mundaring n.d.)
On the other hand, the personnel will at the same time look at the impact at such rick
occurring on the Impact and determine the range from “Insignificant “to Catastrophic”. When
both likelihood and impact rating are plotted on the Risk Rating table, this will give a risk
category from “Low” to “Extreme” (Shire of Mundaring n.d.).
Table 5 Impact Matrix (Shire of Mundaring n.d.)
18
5.4 Risk Response Planning
The aim of Risk Response planning is to create options and plans that will allow
Petron Corporation to face the major risks identified which can reduce the
likelihood of it to occur.
There are four options available and can be used by Petron Risk Management:
Risk Avoidance – making decisions or taking actions which ensure that
the risk involve cannot possibly occur.
Risk Reduction – making decisions or taking actions which will reduce
the likelihood of a risk occurring.
Risk Mitigation – making decisions or taking actions which reduce the
impact of a certain risk if it will occur.
Risk Transfer – making decisions, taking actions and establishing
management systems for the risk or responsibility to finance the effect of
risk if it will occur.
The choice of which is the best risk control to be used will be based on many
variables such as cost, human resources and the degree of difficulty of a particular
option (University of Canberra n.d.).
5.5 Risk Plan Implementation
The Petron Risk Management System classifies major risk as the one having the
high probability of occurring and at the same time has a substantial adverse
financial impact (Petron Corporation 2008).
These are the major risk the company will manage and the corresponding actions
to be taken:
Financial Risk – Petron Corporation management will hedge its dollar-
dominated liabilities by off-setting this with dollar dominated sales using
19
financial derivatives such as forwards. This risk can be avoided by limiting the
use of hedging instruments to 100% of the underlying values.
Interest Risk – The Company should balance the mix of cash balances with the
various deposit rates and fixed and floating rates on its debts.
Credit Risk – Credit should be regulated and only extended to qualified and
credit-worthy customers that are consistent with the established Petron
Corporation credit policies, guidelines and credit verification procedures.
Liquidity Risk – Petron Corporation should maintain a poll of credit lines from
financial institutions that exceeds projected financing requirements for working
capital.
Commodity Price Risk – Petron Corporation should implement the hedging for
petroleum products to protect margins. Derivative instrument such as swaps and
options can be used in hedging commodity-price-volatility risk exposures.
Risk of operational disruptions – Petron Corporation should implement
programs designed to directly address avoidance of operational disruptions
through effective maintenance practices and the inculcation of an organisational
culture that will foster a continuous process improvement. Petron Corporation
should have a corporate-wide health and safety and environment program to
address this risk.
Regulatory Risks – Petron Corporation should maintain strong lines of
communication with its various counterparts in government and in the public
arena. This should be done to both National and Local Governments. This line
of communication can also be used in the identifications of potential risk factors.
Catastrophic and environmental risks – Petron Corporation should insure
various business activities. This insurance coverage should balance with the
accompanying costs. The insurance should provide adequate financial protection,
manages costs and will optimise premium recovery. This will also allow the
minimisation of premium costs and widen risk coverage by accessing to major
international reinsurers. Petron Corporation should implement preventive and
preparatory measures, contingency plans, standard operating procedures and
manuals, regular drills and practices, regular inspections by authorities, insurers,
consultants and constant training of personnel. A response program will be
included in Petron’s Risk Management System that will address public
20
notification and emergency medical treatment and other specifying response
procedures.
(Petron Corporation 2008)
5.6 Risk Tracking, Monitoring and Control
The objectives of risk tracking, monitoring and control are to systematically track
the identified risks, identify any new risks, effectively manage the contingency
reserve and document the lessons learned for future risk assessment and
allocation efforts (University of Canberra n.d.).
Petron Corporation will use the Risk Management Plan and a Risk Register as
inputs and tools to provide a framework for managing risks through a formalised
monitoring and control process. The development of the Risk Register is to cover
all elements of the process and the corresponding response from the top
management involve and the Board of Directors of Petron Corporation to the
identified risks. Sample of tools for Risk Management Plan and Risk Register are
the following (University of Canberra n.d.):
Figure 6 The Risk Management Model
21
(Al-Thani 2008)
Table 6 Risk Management Plan (Shire of Mundaring n.d.)
Table 7 Risk Register (University of Canberra n.d.)
22
The Risk Tracking, Monitoring and Control will closely monitor and control risks
based on the Likelihood and Impact Matrix and the Risk Register with an established
unacceptable rating range.
5.7 Risk Management Implementation
The Risk Management Implementation Plan for Petron Corporation is prepared to
give effect the implementation of all risk management policy and strategy that
will be made by Top Management and the Corporation’s Board of Directors.
This document will set out all risk management activities for a period of time
usually one calendar year.
The development of Petron’s Risk Management implementation plan will take
into consideration the following:
The Risk Management Policy
The Risk Management Strategy
Costs and Available Resources
The Urgency of the Situation and its Corresponding Sustainability
(Petron Corporation 2008)
6.0 Compliance with Risk Management Standard
Petron Corporation has a corporate-wide health; safety and environment program that
should be fulfil requirements of relevant legislative requirements and codes of practice.
Risk management is the cornerstone of legislation and good practice relating to health
and safety. In Petron Corporation, consultation with employees and management should
be done including redesigning jobs, processes or workplaces. Such as introduction of
mechanical handling equipment, rearranging material flow, timing and scheduling.
Eliminating hazards by removing stored goods permanently from emergency exits is one
example. Over-all, the risk management plan of Petron Corporation through its Petron
23
Risk Management System will comply with ISO 31000 Risk Management Standard as
shown on the model below (Purdy 2010).
Figure 7 Risk Management Process from ISO 31000:2009 (Purdy 2010)
Petron Risk Management System complies with ISO 31000 Risk Management Standard to ensure that risk will be managed effectively and efficiently. This is evident since its Risk Management Model reflects the above Model. All aspects of the Risk Management System are in accordance with the principles of effective risk Management in ISO 3100 which are the following:
Create and protect value – Petron’s main focus which is to protect and enhance the company’s profitability.
Be an integral part of all organisational processes – this is addressed by its bottoms-up approach.
Be part of decision making – again will be addressed by the same approach. Explicitly address uncertainty – this is seen in the identification of numerous
risks. Be systematic, structured and timely – evident in Risk Analysis, Risk Assessment
and Risk Management Implementation. Be based on the best available information Be tailored Take into account human and cultural factors Be transparent and inclusive Be dynamic, iterative and responsive to change Facilitate continual improvement of the organisation
24
All risks in this system are identified and assessed at all levels in the Petron Corporation’s
organisation making it an integral part of the process. In ISO 31000 Risk Management
Standard, risk analysis is concerned in developing the understanding of each risk by
quantifying its consequences and likelihood. Petron’s system will use the Likelihood and
Impact Matrix as an approach to risk analysis, thus, it will conform to the said standard
(Purdy 2010).
A response program will be included in Petron’s Risk Management System that will address
public notification and emergency medical treatment and other specifying response
procedures. This program which addressed Operational, Catastrophic and Environmental
Risks will use inspection, test, maintenance of emergency response equipment, and training
of all employees in the relevant procedures, development and review of plan. This plan will
also comply to ISO 31000 Risk Management Standard (Falcone 1998).
7.0 Conclusions
The management of risk is one of the most important issues facing the oil industry and Petron
Corporation. It can be considered as the sustainability factor of Petron Corporation in the
environment it is in at present. The Risk Management Plan involves Risk Identification, Risk
analysis, Risk Response, Risk Plan Implementation, Risk Tracking, Monitoring and Control
and Risk Management Implementation. In Petron Corporation’s bottoms-up approach in
Risk Management, all risks are identified and assessed at all levels with its organisation. The
results of the risk analysis in this organisation are measured using the Likelihood and Impact
matrix in order to quantify the effect on the whole process. The whole Petron Risk
Management System is in accordance with ISO 3100 Risk Management Standard. All risks
in this system are identified and assessed at all levels in the Petron Corporation’s organisation
making it an integral part of the process. Petron’s system will use the Likelihood and Impact
Matrix as an approach to risk analysis, thus, it will conform to the said standard. The main
aspects of the whole framework is geared to enhanced toward a more holistic and sustainable
co-existence of the company with its external and internal environment.