I suggest you read this first part and use the second part below as reference. I never intend these posts to be too long - I'm always trying to be pithy (... whatever that means...)
The long and winding road of Enterprise Risk Management follows principles that are anchored in foundational, sound maxims.
There is a gap, perhaps more adequately described as a CHASM, that separates what risk managers are trying to do and what is happening in the asset intensive industry. Up from that chasm emerge devastating events that kill people, devastate the ecosystem, and generally slow economic growth. Do I really need a list of those events or should I just point out what's happened in San Bruno California over this past weekend? Reading that should evoke thoughts of other pipeline explosions, underground mine explosions, Gulf of Mexico explosions, refinery explosions...
So what does this have to do with sustained profitability? The Institute of Internal Auditors, in the ERM Integrated Framework (Sept. 2004) states:
"Value is created by informed and inspired management decisions in all spheres of an entity's activities, from strategy setting to operations. Entities failing to recognize the risks they face, from external or internal sources, and to manage them effectively can destroy value - in absolute or relative terms - for shareholders and other stakeholders, including the community and society at large."
So what I would like to suggest for Part 2 of this blog is that you scan through the following excerpt of an annual report of a multi-billion dollar energy company. If you can find words like Hazards Analysis or pipeline integrity or reliability best practices, I'll send you a box of Canadian Smarties.
The point I'm making is hopefully as obvious as a blast crater in San Bruno. Not enough attention is being paid to risks that directly impact the integrity of product
Part 2 -
“The audit committee of the company’s board of directors periodically reviews and discusses risk assessment and risk management policies, including the company’s material financial and accounting risk exposures and the steps management has undertaken to control them. Our risk management committee reviews the status of risk exposures through regular reports and meetings and monitors compliance with our risk management policy and control procedures.”
Talking points you will typically find in an annual report
• Economic risk of finding, producing and replacing reserves at a reasonable cost
• Prevailing prices of crude oil and natural gas
• Labor risk associated with securing the manpower necessary to complete capital projects in a timely and cost effective manner
• Operating hazards and other difficulties inherent in the exploration for and production and sale of crude oil and natural gas
• Success of exploration and development activities
• Timing and success of integrating the business and operations of acquired companies
• Credit risk management
• Limit setting, contract protection, counterparty diversification, interest rate risk associated with the Company’s ability to secure financing on commercially acceptable terms
• Foreign exchange risk due to fluctuating exchange rates on the Company’s US dollar denominated debt and as the majority of sales are based in US dollars
• Risk of catastrophic loss due to fire, explosion or acts of nature
• Geopolitical risks associated with changing governmental policies, social instability and other political, economic or diplomatic developments in the Company’s operations
• Planning for growth product market demand
• Succession planning
• Environmental impact risk associated with exploration and development activities, including GHG
• The Company utilizes various derivative financial instruments to manage its commodity price, currency and interest rate exposures.
• The Company’s risk management program is not used for speculative purposes.
• The Company uses a variety of means to help mitigate and/or minimize these risks
• The Company maintains a comprehensive property loss and business interruption insurance program to reduce risk to an acceptable level
• The Company believes this diversification reduces price risk when compared with over-leverage to one commodity
Statements you won’t read about in the Annual Report
• The Audit Committee periodically reviews consolidated reliability data on the state of production assets to ensure that threats to scheduled production have been accounted for
• Levels of maintenance work are systematically reviewed so that the right level of work is done to meet the business needs of the operation, and no more
• The Company’s Management Team periodically reviews engineering efforts which identify cost savings opportunities:
• Areas with high levels of reactive work
• High overtime areas
• Work order analysis
• High levels of production disruptions
• High production costs
– The Company’s Management Team oversees strategies that balance the risk of failure to the cost of purchasing replacement power
CAPEX and OPEX reassignment
– The Company has established best engineering work processes that systematically identify “bad actors”
– Engineering Managers are able to quickly divert budget spend from low-need to higher-need areas
– Asset Performance Management systematically helps engineering efforts to optimize energy consumption on a fleet-wide basis
– Asset Performance Management supports HSE efforts by providing timely data on levels of reactive maintenance so that Lost Time Incidents and injury rates can be carefully monitored
– Safety performance has been improved year over year due to the Asset Performance Management work processes