Enterprise Risk Management for Energy Companies
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Description
Enterprise risk management (ERM) encompasses the identification and assessment of the risks that materially affect company value and the implementation of a company-wide strategy to manage those risks. The overall aim is to apply a rigorous and coordinated approach to assessing and responding to risks that affect the achievement of a company’s strategic goals and thus the long-term market value of the company. Corporate managers are becoming increasingly aware of the inadequateness of the “silo” approach to risk management in which each department or subdivision of a company handles its “own” risk. Obvious examples are liability risk, credit risk, and market price risks (currency, interest r…Frequently asked questions
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Days 1 and 2 will cover “ERM Basics for Energy Companies” In the first two days of the course, participants will learn about ERM, including the tools and techniques used in ERM implementation at energy companies. Day 1 Session 1: History and foundation concepts of enterprise risk management History and foundation concepts that expand traditional risk management into an ERM structure Benefits and best practices of ERM Importance of management, culture, and control as it relates to ERM and problems associated with implementation Generally accepted frameworks: COSO, ISO31000 and others How ERM can increase firm value Session 2: Benefits and best practices of ERM for energy companies This session will cover the benefits of ERM implementation for energy companies. The ERM practices of Statoil will be discussed to illustrate best practices. This company has implemented a framework that works well for Statoil and that centers on the two basic goals of the company: to create value and avoid accidents. ERM is thoroughly embedded in the organisation’s work processes, and its risk committee had managed the transition from a “silo” mentality to promoting Statoil’s best interests in areas where risk needs to be considered. Session 3: Management, culture, and control as it relates to ERM and the problems associated with implementation Many companies have encountered problems when implementing ERM and some of this is due to mistakes, misconceptions and/or management and corporate culture issues. What are these mistakes/misconceptions? What are problems with culture and control that impede a successful ERM programme? These crucial topics will be discussed in this session. Session 4: ERM tools and techniques – part 1 Literature and techniques of enterprise risk management ERM tools and techniques How to create and use corporate risk tolerance How to prepare a risk profiles such as - “Top 10” list - Risk map - Heat map - Web diagram Exercise: Prepare corporate risk tolerances (also known as risk criteria) Day 2 Session 1: ERM tools and techniques – part 2 Continuation of Part 1 topics Session 2: Types of risk and ERM Market risk Credit risk Operational risk Reputational risk Legal risk Financial reporting risk Other types of risk Session 3: Constructive dialogue and ERM lessons from the financial crisis To understand risk management at large complex organisations before the crisis, one must look for critical elements of ERM, but generally not for ERM itself. This session focuses on one critical element, constructive dialogue, which includes (1) processes for eliciting risk-related information that flows to the top of the organisation where it can be addressed in decision-making, and (2) full, candid, and respectful discussions of risk-reward tradeoffs. The financial crisis demonstrated how constructive dialogue was essential to promote sound decision-making at a time when the housing and credit bubbles had lulled many organisations, particularly financial firms, into complacency. Session 4: Case studies and group exercises on ERM for energy companies This session will cover value-at-risk (VaR) as part of the group exercises. Underlying assumptions, advantages and disadvantages, and several calculation examples for single assets, such as energy assets, are detailed for both the dollar and percentage value-at-risk estimation methods. The main focus, however, is a tutorial on calculating value-at-risk for portfolios of assets, such as energy assets, using the covariance approach utilised in portfolio theory. Important take-aways for ERM will be covered such as understanding the correct interpretation of VaR – what it helps us estimate and what it is not able to help us estimate. Days 3 and 4, will focus on advanced ERM for energy companies and will cover achieving ERM maturity: benchmarking and case studies Day 3 Session 1: Overview of steps and strategies to achieving ERM maturity in energy companies Proponents of ERM have been proselytising for years that ERM’s holy grail embeds the process into strategic planning. This enables organisations to practice strategic risk management. The hypotheses being that organisations practicing strategic risk management are better positioned to create and protect stakeholder value. This is a profound vision. But its execution depends on three different, but related, variables: Executive managements’ willingness to reexamine the purpose of ERM - from control to a strategic function Positioning and leveraging ERM within the organisation to support strategic planning and operational business goals Utilising a new tool to measure the value created or protected as a consequence of practicing strategic risk management These important issues will be discussed in this session. Session 2: What are the challenges for achieving and maintaining ERM maturity in energy companies? There are many challenges for reaching ERM implementation. It is a process that firms should realise takes time. Maturity is not reached in two years but can be reached in six years. This session covers challenges that actual companies have faced. Session 3: Understanding the benefits and added value in achieving ERM maturity Academic research has shown that ERM adds value. How does it add value? There are a number of ways. Case study examples will be covered and highlights from research will be explored. Session 4: Learning from the challenges of others: case studies of ERM programmes at global energy companies The case study, implementing risk management within MECO, will be covered. This case study is based on real life examples of Middle Eastern oil and gas companies where ERM has been put into place. The case study is a consolidation of the various approaches and captures the challenges of implementing risk management in the Middle East. For the purposes of this case study, the name MECO has been chosen to represent the numerous companies used to gather this data. Risk management has not yet been fully implemented in any of the companies and they have had a varying degree of success. This case study is by no means intended to present a successful risk management implementation or best practices, rather it is a good example of the challenges in implementing and sustaining a successful programme and the types of things that can lead to a breakdown of risk management. Day 4 Session 1: Fundamentals of how risk integration can lead to a risk-aware culture There is nothing more crucial to the success of ERM efforts in an energy company than an informed and supportive culture. Culture is not merely an intangible concept; its elements can be defined and progress in moving toward a desired culture can be measured. Information, technical skills, and processes are very important, and some processes are necessary to assist in developing an appropriate culture. However, an energy company could possess world- class technical capabilities and strong processes for collecting and reporting information, but still have a bankrupt culture so that no value was added through ERM efforts. This session will cover fundamentals of how to integrate risk management efforts and achieve a risk-aware culture. Session 2: Applying benchmarking for ERM best practices A discussion and analysis of ERM is not complete without applying benchmarking to the company’s practices because ERM is a continuing process. What are benchmarks that can be used to gauge ERM progress and best practices? This session will cover benchmarking and this type of analysis is a must for a firm to measure their advancements toward achieving ERM maturity. Session 3: Leveraging ERM to practice strategic risk management ERM has rightfully become a top priority for directors and executive management of leading companies globally. The recent financial crisis highlights the disastrous results when risks associated with strategies are ignored or ineffectively managed. Coming out of the crisis are numerous calls for improvements in overall risk oversight, with a particular emphasis on strategic risk management. One of the major challenges in ensuring that risk management is adding value is to incorporate ERM in business and strategic planning of organisations. The “silos” that separate risk management functions in organisations also create barriers that separate strategic planning from ERM. In many cases, risk management activities are not linked or integrated with strategic planning, and strategic risks can be overlooked, creating dangerous “blind spots” in strategy execution and risk management that can be catastrophic. This session will address just this and share insights in how to leverage ERM into strategic risk management will be presented. Session 4: Case studies and course wrap-up on ERM This final session will include case study examples to summarise the important topics covered over this four-day course about ERM for energy companies. There will be opportunity for final discussions about the many issues presented during the course. Course summary and close
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