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Israeli off-shore exploration

and development
How to manage the risks?
Eitan Glazer, Partner
Energy Practice Leader
PwC Israel

April 28, 2013

Helping energy companies succeed


With over 5,300 industry-dedicated professionals
located in strategic energy centres, we can help
companies everywhere they operate.
PwC can help energy companies
evaluate priorities, assess risks,
and build stakeholder confidence.

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Dealing with risk is a critical business priority


No industry is immune from the risks that can bring
down a business!!!

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Jump in BP Credit Default Swap rates


Implied credit rating reduced by 6 levels to Ba2
600

400

200

May 10

Jun 10

Jul 10

Aug10

Sep10

Oct10

Graph: BP 5-year CDS price during the third quarter of 2010


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What is risk?

Risk is the possibility that an event will occur


and adversely affect the achievement of
objectives

Likelihood

A more common way to express risk magnitude


Very Likely

Extreme

Likely

High

Possible

Medium

Unlikely

Low

Very
Unlikely
Minor

Moderate

Major

Severe

Critical

Impact /Consequence
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Risks effect all 3 sectors of the industry


Upstream

Midstream

Downstream

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TECOP Model For Risk Evaluation


Identifying Risks by Categories

Technical Risks
Economics Risks
Commercial Risks
Organizational Risks
Political Risks
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TECOP Model For Risk Evaluation


Risks related to the Reservoir:
Geological risks(Dry holes, Missing target layers)
Development (Duration and costs of construction)

Production (Accelerated depletion, Estimated life )

Technical
Risks

Aging infrastructure (Maintenance, Oil spill)


Storage facilities (Blowouts, leaks)

Backup pipe (Lack of redundancy)


Maintenance (skilled manpower)
Safety (endangering lives
IT and Cyber
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TECOP Model (Cont)


Drilling and production Cost estimation (ROI)
Capital raising and financing

Exchange Rates
Price and pricing (Supply & Demand)

Economics Regulation (Antitrust, Price control)


Risks
LNG market

Taxes, Levy and royalties


Export permits

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TECOP (Cont)
Long term contracts
Regulation

Energy prices
Customers

Commercial
Risks

Competition
Legal
Insurance

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TECOP (Cont)
Supply chain (weak link)
Cooperation between teams along the chain

Internal and External Experience


Professionalism
Organizational
Risks

Project management
IP
Fraud

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TECOP (Cont)
Government involvement
Regulatory Environment

Environmental issues

Political
Risks

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Construction permits
Stake holders
Geo-political risks

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Risk Universe
Technical

Economical

Commercial

Organizational

Value Chain:
Development
Sourcing
Production
Distribution
Exploration
Infrastructure
Business Continuity
Physical Assets:
Maintenance
Plant and Equipment
Inventory
Storage
Pipes
Knowledge:
Intellectual Property
Advanced
Technology
Data Management
Knowledge Transfer
Information Technology:
IT Security and
Controls
IT Availability and
Continuity
IT Integrity
IT Infrastructure
Disaster Recover

Budget

Regulatory:
Trade
Foreign
Regulations
Labor
SEC
Environmental/Cli
mate Change
Privacy
Product Integrity
Healthcare
Emerging
Regulation
Legal:
Litigation
Contracts
Liability
Legal

Governance:
Board Structure &
Performance
Tone at The Top
Corporate
Monitoring
Organizational
Structure
Standards of Business
Conduct :
Ethics
Integrity
Corporate Social
Responsibility
Fraud
Legal:
Litigation
Contracts
Liability
People:
Culture
Recruitment &
Retention
Compensation &
Benefits
Development &
Performance
Health and Safety
Knowledge:
Intellectual Property
Advanced
Technology
Data Management
Knowledge
Transfer

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Market:
Interest Rate
Foreign Currency
Commodity
Economic
Performance
Liquidity and Credit:
Cash Management
Borrowing
Hedging
Credit and
Collections
Insurance
Accounting and
Reporting:
Reporting and
Disclosure
Control Environment
Tax & Taxation
Accounting
Capital Structure:
Debt
Equity

Market Dynamics:
Competition
Socio-Political
Economic Factors
Market Movement
Globalization
Emerging Markets

Political
Planning and Resource
Allocation:
Business Strategy
Regional Strategy
Planning &
Forecasting
Due Diligence
Acquisition and
Divestiture
Political/Charitable
Contributions
Stakeholders:
Shareowner
Business Partner
Distributor
System Integrator
Customer
Supplier

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Heat Map Risk Map (Example)


5
OS5

OS3
S4

OP15
F3

OS1

S2

C4

OS2

S3

S7

C2

F2

F4

OP3 F7

OS4
C1

OS6

S5

F5
F6

OP5

S6
OP14
OP10

S1

OP8
F1

OP9
OP13

OP2

OP12

OP11
OP4

OP7

OP1
C3

OP6

0
0.00

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1.00

2.00

3.00

4.00

5.00

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What is risk management?

Risk management is:


The systemic, structured and transparent
process of : identifying, analysing, managing,
monitoring and reporting risks, to ensure the
nature and amount of risk taken by the
organisation is aligned to the pursuit of its
objectives.

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Inherent risk, current risk and target risk


Inherent risk

Current risk

The level of risk before the


effects of any controls in place to
mitigate the risk.

Target risk

The level of risk after the effects


of any controls in place to
mitigate the risk.

The level of risk expected after


implementation of planned
additional mitigation actions /
controls.

Controls can mitigate the


likelihood and/or the
consequence of a risk.

Likelihood

Very
Likely

Likely

Possible

Unlikely
Very
Unlikely

T
Minor

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Moderate

Major

Severe

Impact /Consequence

Critical
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PwC Risk management phases

Evaluation

Development

Implementation

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Risk survey
Risk universe
Heat Map
Work Plan for risk framework

Risk policy
Risk procedure
Organizational infrastructure for risk
management

Key Risk Indicators (KRI)


Reporting
Mitigation and remediation plan

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The Targets and Goals of Risk Management

Proactive
Mechanism
to identify
Risks

Establishing
Business
Flexibility
to Survive
Risk Events

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Connecting
the Business
Strategy to
the Risks It
is exposed to

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key messages to Executives and Management

Strengthen checks and


balances

1
2
3

Understand whats really


going on

Understand risk better

Raise readiness to
respond

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Clarify investor risk appetite


Review asset portfolio vs. appetite
Focus beyond safety and operations
Consider supply chain risk
Monitor early warning risk indicators
Run integrated, worst case scenarios
Challenge technical readiness to respond
Identify key roles and prepare individuals
Review Board capability and involvement
Clarify personal accountabilities for risk
Create one approach to risk
Build risk capability in the line

Spend time on risk issues with your teams


Encourage staff to raise issues openly
Reward people for silent running not for
heroism
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What are the four key lessons?

PwC

Understand risk
better

Be prepared

Strengthen
checks & balances

Understand whats
really going on

Be Aware!
Be Prepared !
Be Proactive!
Eitan Glazer
Energy Practice Leader
PwC Israel

2013 Kesselman & Kesselman. All rights reserved.

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