Risk management more and more a part of key tasks at energy and resources companies
Not yet smooth sailing for risk management monitoring and reportingDOWNLOAD
Brussels, 7th June 2010 – Risk management is one of the issues taking on increasing strategic importance at energy and resources companies. That’s the conclusion drawn by Deloitte from a survey of energy and resources companies conducted in Europe, the Middle East and Africa. Although the implementation of risk management has become a common practice within these organisations, it is clear that many of them still find it difficult to monitor and report on their risks in an integrated and professional manner – and that they are not succeeding in making risk awareness part of their overall corporate culture. Belgian companies are not among the frontrunners when it comes to risk management in Europe, but instead languish behind in the chasing bunch.
In a changing world where energy shortages and climate change have become common currency, energy and resources companies are facing countless new risks. A scarcity of natural resources, political instability, ageing infrastructure and unfavourable weather conditions are just some of the problems dogging these companies. The oil spill in the Gulf of Mexico is a recent example. To delve more deeply into the issue, Deloitte has carried out a survey in the energy and resources sector aimed at highlighting the current implementation of Enterprise Risk Management (ERM). The survey, “Risk Intelligence in the Energy & Resources Industry”, is based on questions and interviews conducted with 50 CEOs, risk managers and senior management Europe, the Middle East and Africa.
Internationally, the companies involved in the production of energy also tend to be the frontrunners when it comes to risk management. The reasons for this include the significant risks associated with energy production (such as nuclear reactors), as well as the risks linked to trading in the raw materials used for producing energy or distributing and selling the energy itself on international markets. Companies that transport and distribute electricity and gas have not been involved for as long with risk management. But they are catching up fast and in some cases are even forging ahead. Finally, risk management is also beginning to filter through to water companies.
“We are seeing a similar trend among Belgian energy and resources companies,” says Laurent Vandendooren, Country Leader Enterprise Risk Management at Deloitte Belgium. “They may not be among the frontrunners in Europe, but they are back in the chasing bunch. The main stimulus for these companies to come to terms with risk management is the public interest of being able to guarantee safe, secure supplies of electricity, gas and water. In the years ahead, we expect to see the energy sector invest a great deal in new production capacity aimed at accommodating the growing demand for (renewable) energy. This will go hand in hand with the conversion of existing networks to smart systems capable of coping with the rise in locally produced energy and the gradual replacement of the existing, ageing infrastructure. There is also likely to be a lot of investment in the water sector to develop and maintain the network of sewers and drains to comply with European guidelines.”
The survey indicates that 96% of the companies questioned already conduct risk management activities. Gert Vanhees, Energy & Resources Industry Leader at Deloitte Belgium confirms this: “Given the public interest in this type of company, it would be unthinkable for energy and resources providers not to have a fully structured approach to arm themselves against risks of every kind that might threaten supplies to energy or water.”
In the energy and resources sector, risk management is no longer the sole domain of just the progressive companies. It has become an essential part of maintaining credibility within the industry. An additional trend is that increasing numbers of companies in the energy and resources sector manage risks across the board, rather than restricting themselves to managing isolated activities. Systems have been put in place across the industry to provide proper management for complex risks that often cross the boundaries between individual departments.
The Deloitte study also shows that companies which have developed sufficient maturity in the area of risk management are now shifting their attention more and more towards value creation. The traditional focus for implementing risk management often lies on protecting current capital equipment. But as a company’s maturity in risk management increases and these risks become firmly under control, other risks relating to strategy and how to implement it (risks associated with the development of new products, penetrating new markets and completing acquisitions) grow in importance. Good management of these risks is likely to be driven by the profit potential, but they can also have serious negative consequences if they are not controlled properly. As a result, risk management is coming to be viewed as a means for improving a company’s overall competitive capabilities.
More and more energy and resources companies are seeing the value of introducing risk reporting alongside traditional financial reporting. Yet many of these companies do not yet have any form of integrated risk reporting available. Information is often fragmented and there is no overall vision of what risk reporting should consist of. Various entities within the company apply different methods; they don’t speak the same language and view problems from different angles. This makes any reporting that does exist extremely complex and unusable and so companies are unable to come up with an overall synopsis of the risks they face.
Companies that are successful in implementing integrated risk management succeed in doing so because they make it part of their corporate culture. As a result, everyone understands how the organisation deals with risks and what his or her personal responsibility is regarding the management of specific risks. Training and education play an important role in creating a genuine risk culture. Yet only 30% of companies appear to have a training plan for risk management. Most companies only train those people who have direct risk management responsibilities. This results in no awareness of risk being created within the organisation. Gert Vanhees: “Risk management has to become part of the corporate culture. People have to deal consciously with risks and any new risks that occur have to be reported immediately to the appropriate authorities. Training provides the first step in building up this awareness. One best practice is to incorporate risk management courses as part of an overall training plan within the organisation.”
Technology can be used to facilitate the risk management process, but a large number of the organisations surveyed indicated that they are still some distance away from reaching this level. Thus far, there is still no single solution available that provides the functionalities required for making total ERM management possible.