Transcript Risk management in Statoil

Enterprice-wide risk management
Energy Risk Europe, 4th October 2006 London
The Statoil group
Short on history – long on achievements
 Production (2004): 1.1
mmboepd
 Reserves (2004):4.3 bn
boe
 24,000 employees
 Activity in 29 countries
 Operating 2.7 mmboepd
of NCS production
 Marketing 2/3 of
NCS gas volumes
 World’s 3rd largest
crude oil seller
Competitive returns1)
Return on Average Capital Employed 2004
ExxonMobil
ChevronTexaco
Total
Statoil
BP
Shell
Eni
BG
ConocoPhillips
Repsol YPF
Norsk Hydro
0
1
10
20
30
40
Source: Lehman Brothers Oil and Gas Quarterly Scoresheet (10 February 2005), rolling 12-month ROACE.
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Designing an effective enterprise-wide risk management
framework
Enterprise-wide Risk Management
Corporate Risk Management (blue font)
Tactical risk
 Market (prices)
Strategic risk
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Credit risk
Operational risk
 Accidents
 Catastrophe
 Environment
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Short term
Market (prices)
Country
Tax
Reputation
Insurable risk via Captive
Reservoir
Project
HSE
Administrative
Long term
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Corporate Risk Committee
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Corporate Risk Committee (CRC) at group level
(advisory role / responsible for):
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Strategic market risk policy
o corporate hedging policy and strategies
o strategic market views
Insurance policies
Insurable risks
CRC advicery role
CRC decision vehicle
Credit risk
Trading methodologies issues
Risk reporting
Information to CRC / training
Risk assessments of large projects
with difficult business risks
Portfolio risk assessments
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Participants:
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CFO (head of CRC)
Head of Country Risk and Social Responsibility
Head of Refining & Marketing
Head of Oil Trading and Supply
Head of Financial Services
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E&P Norway
International E&P Strategy and Control
Natural Gas Finance & Control
Natural Gas Long Term Market
Corporate Risk Management
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CRC cases (overview 2003-2005)
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Cove Point - overview / mandates
Cove Point expansion
Credit Default Swaps
Energiverk Mongstad
Insurance markets after GoM events
Overview of new country risk reporting
Hedge strategies - part I & II
Main features in Statoil’s risk management
Correlations between Brent and ref. margin &
NOK/USD & STL
Country risk status portfolio
Country risk overview: Libya
Country risk - Status pilot phase
Country risk overview: Algeria
Development country risk
Natural Gas Long Term contracts risks
NG Clearing: purpose and organization
NG trading mandates
NG weather derivatives - gen. disc. about use
NG: risk i gas portfolio and sub optimization
Oil vs gas indexation
Oil price hedging - status prices
Oil price hedging 2004
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PMT project - Tjeldbergodden
Risk capital/-appetite
Risk report October 05
Risk management report corporate tactical
Risk assessment / Enterprise wide Risk
Management
Risk report status
Connection between results and risk capital in
trading
Snorre-incident – economical consequences and
insurance
Statoil’s credit exposure
Statoil’s reputation
Status hedge 2005
Status crude oil market
Status tax risk
Bad scenarios – gap
Bad scenarios – going forward
Bad scenarios part I
Bad scenarios part II
Tactical reporting
Currency risk
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Variable premium puts
Strategic risk management policy
Summary
 Statoil’s corporate risk management defines crude oil price, natural gas price
and production of crude oil and natural gas as the corporate’s core risks.
 Main goals in the corporate’s risk management policy:
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contribute in ensuring Statoil’s long term strategic development and reaching
targets through protecting financial flexibility, i.e. avoiding different categories
of financial distress, downrating and protecting cash flow, making the
corporate able to
 start and accomplish profitable projects/acquisitions and
 avoiding forced divestments
even in periods with bad market conditions.
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Dynamic measurement of risk.
Some challenges for the energy sector?
 In a bank a currency trader knows that when he has bought some foreign
currency, he has a position !
 When is an oil trader getting a position?
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All future potential positions?
All proven reserves?
All ”lifted” production?
All sold cargoes?
 When is the mark to market zero?
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When the oil is sold a fixed price?
When the oil is sold a the floating market price?
 Is it possible to use the same principles for oil, oil products, gas, lng,
electrisity, coal???
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Risk comprises both the upsidePositive
and downside outcomes
impact
Oil price
Large
Natural
gas price
Project
Production
Currencies
Country
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Probability
Pot. reputation
effect
Credit
Op. damages /
accidents
Catasthropic
events
Large
Negative
impact
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Country risk
Asymmetric outcomes
 What does asymmetric risk mean for expected net present value (E(NPV)):
Example:
Event: X2
Event: X1
Event: Enforceability of
Government Contracts
90%
Base case
(“Best case”)
NPV
100
10%
Country risk impact
6 months delay
40
E (NPV) = 100 x 90% + 40 x 10% = 94
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Interpretation:
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10% probability means that in one out of ten countries (at this risk level) we will get 40, while the other nine, we
will get 100
At portfolio level you will get approx. 94 (‘never’ 100 or 40 assuming many projects with country risk)
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Tax Asymmetry versus tax level
Illustrative
High
Buybacks
NCS
PSC
Tax level
UK
GoM
Low
Positive
Neutral
Negative
”High upside,
”Low upside,
low downside”
high downside”
Tax asymmetry
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Risk and reward our different businesses
25 %
Reward
Basis oil NCS
Basis nat. gas NCS
Transportnet/processplants NCS
Upstream oil internat.
Retail
Refining
Petrochemical
20 %
15 %
10 %
5%
0%
Low risk
Moderate risk
Moderate to high risk
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Risk elements
– Implementation risk
Feed / resource
BPlan
Growth
ReturnCo
More Oil
More Gas
Local competence
Project execution
Size / complexity
New technology
Business plan is a base case with an assessed risk for success
Other scenarios are relative to Business plan. Scale is divided into 1-2 green, 3-4 yellow and 5-6 red
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Monitoring, controlling and reviewing your risk
management framework.
Different Risk frameworks
 Utilizing correlation is easy to understand, but what are the challenges in
practice ?
 The main issues with regard to price risk responsibility :
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who should have the price risk responsibility
how to report the effects
how to avoid suboptimization
how to deal with tax and accounting issues
 Different concepts with regard to:
Price
responsibility
only on
corporate level
Business units
have limited
price
reponsibility
(internally)
Hedging on
profit center
level (internally)
Hedging on
profit center
level (externally)
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Reviewing VAR
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Decide on a probabilty of loss
Decide on a frequency
Very low probability high frequency events give more comfort (99.9% daily var)
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But….how do you test this?
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On average you’re going to exceed your VAR once every 1000 days (or four years)
Higher probability lower frequency events give better testability (75% weekly var)
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But….you lose more than your VAR every one week out of four
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How do you know what you could lose in extreme movements
However VAR is calculated, the methodology must have the following characteristics
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It should be reproducable
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It should be runnable on aggregate portfolios and should aggregate risk
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It should make sense for simple portfolios (I.e. if a swap has a VAR of X, twice the
position should give double the VAR)
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It should be “non-linear”. Options aren’t a “free risk strategy”.
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It should be timely.
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Checking VAR
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Data data data data data
You must retain data on actual historical outcomes for books, portfolios, etc
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Historical daily PnL numbers for last night’s positions (this is critical)
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Historical daily PnL numbers for each book including day trades (which you already
do…)
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Historical daily VAR numbers at a variety of probability levels (75%,90%,95%,99%?)
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This should be done at each level of aggregation
Once you have accumulated enough data (3 months?,6 months?) back test and mine the
data. If your VAR methodology is correct, then the distribution of actual PnL for last
night’s trades should match the distribution that your VAR implies.
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For example, one day in four, last night’s positions should lose more than your 75% VAR,
one day in 10, last night’s positions should lose more than your 90% VAR.
The volatility of your total daily PnL is a more traditional risk return measure: the sharpe
ratio.
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Presentation of ”the risk picture” for top
management.
 Executive board
 Monthly
 Annually
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Section I: Tactical Risk
The main market risk is in
physical oil and plain paper
instruments like futures,
swaps and forwards, only
minor risk in options, and we
see that risk is focused on
products like Brent, WTI, Fuel
oil, gasoline and naphta.
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VaR
22,00
4,00
20,00
Long Term Debt
Base
Proprietary
Base + Proprietary
20
5
25
13,00
2,00
14,50
-0,06
0,08
0,03
NG
UK
US
2
2
1,50
1,50
0,20
0,20
Aggregate VaR
Base
Base & Proprietary
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28,00
29,00
-2,20
-2,30
O&S
Base
Proprietary
Base + Proprietary
9-11 Scenario Stress Test Results vs. VAR @95%
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9-11 stress test
PERCENT
VAR @95%, 1day
20
10
0
-20
VaR per instrument type
VaR per physical product
Base & Proprietary
Base & Proprietary
Base
Base
Physical
Futures
Forwards
Swaps
26.okt.04
21.okt.04
25.04.05
18.okt.04
13.okt.04
28.03.05
08.okt.04
05.okt.04
30.sep.04
28.02.05
27.sep.04
31.01.05
22.sep.04
17.sep.04
14.sep.04
-30
03.01.05
09.sep.04
06.sep.04
25.aug.04
30.jul.04
21.jul.04
09.jul.04
21.jun.04
-10
08.jun.04
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-5
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-26
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-50
Mandate
O&S Total Portfolio
mUSD
Change
last month
-1,76
-0,43
-2,01
02.jun.04
Low to medium risk in tactical
trading.
VaR figures (95% - 1 day)
Spec
Propr.
Options
Brent
WTI
ME crd
Gasoline Distillates Fuel oils
Naphtha
LPG
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Section II: Strategic Risk
The Kernel distribution is
based on market forward
prices and historical volatilities
and correlations.
Hedge Status
Instrument
Put option
Put option
Put option
Brent
Brent
Brent
Brent put options 2006
0,80
X
X
X
Strike
Hedged
USD/bbl
(mill bbls)
Y
Y
Y
Z
Z
Z
% of production
after tax
%
%
%
Brent forward curves
USD/bbl
USD/bbl
Brent forwards at historical
very high level. Option prices
at low level due to high
forward level combined with
moderate volatility in the
market
Period
50
(quarterly settled)
$ 24
$ 22
0,60
45
$ 20
40
0,40
35
25 Feb 05
0,20
28 Jan 05
30
15 Des 04
0,00
20.9.04
25
20.10.04
20.11.04
20.12.04
20.1.05
20.2.05
2006
2007
2008
2009
2010
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Section II: Strategic Risk
Risk
Scores
Country risk levels as assessed by
WMRC (World Markets Research
Centre), a subsidiary of Global
Insight.
Fixed
Assets
Country risk levels and Statoil's Fixed Assets
Extreme
Sep 04
Feb 05
Fixed assets 04
Very High
High
Significant
Medium
Moderate
Low
Ira
q
N
ig
er
ia
la
A
ng
o
Ira
n
a
Ve
ne
ai
ja
rb
ze
U
A
zu
el
n
a
by
Li
ia
er
lg
A
us
s
ia
l
R
zi
ra
B
ke
y
Tu
r
ic
o
M
ex
er
th
O
at
St
ni
te
d
N
or
w
es
ay
Negligible
Fixed assets development
Country Risk Scores
Upstream portfolios - Global Insight 2003
CAPEX 2005 - -2009
Year X
Other
Unspec. INT
Unspec. INT
Venezuela
Nigeria
Algeria
Azerbaijan
Angola
Other
Other Europe
Other Scand.
Norway
NHY
Statoil
Con/Phil
BP
Shell
Repsol
Total
P2004
Venezuela
Nigeria
Norway
Algeria
Azerbaijan
Angola
Other Europe
Other Scand.
Year
2 009 X
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Section III: Credit Risk
Credit exposure by risk class
Exposure and default probability by Statoil risk class
* Default
probabilitiy
Based on the
20-year
statistical
average
probabilities
published by
S&P and
Moody’s.
Statoil Risk Class
Limit
Expected
Losses
AAA
15 000
10 000
0,00 %
0
AA
15 000
10 000
0,00 %
0
A+
15 000
10 000
0,05 %
5
A
15 000
10 000
0,05 %
5
A-
15 000
10 000
0,10 %
10
50 000
High
Medium
10 000
5 000
0,30 %
15
B
10 000
5 000
0,40 %
20
B-
10 000
5 000
0,50 %
25
15 000
60
C+
5 000
2 500
0,70 %
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C
5 000
2 500
1,00 %
25
C-
5 000
2 500
2,00 %
50
R1
5 000
2 500
3,00 %
75
R2
5 000
2 500
8,00 %
200
R3
5 000
2 500
12,00 %
300
S **
5 000
2 500
0,00 %
0
Sum High risk
Total
%of total exp.
140 000
Low
15 000
50 000
20
B+
Sum Medium risk
Initially high
risk, now
covered by LC
or Parent
Company
Guaranty
Default
Probabiliy *
17 500
Sum Low risk
** Statoil risk
class S
Exposure
Total exposure: 82500
17 500
668
82 500
748
Expected loss by Risk Class
Total expected losses: 748
20
High
60
Medium
Low
668
0,91 %
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Section III: Credit Risk
Risk Concentration Statoil Group
Comment
Credit exposure by BU & utilization of total credit line
Exposure (mUSD)
Utilization
Exposure
Low Risk
> 400
Company A (550)
Company B (500)
Company C (450)
Company D (400)
Medium Risk
30 %
Company E (300) Company H (250)
Company F (250) Company I (200)
100 - 400 Company G (200) Company J (150)
Company P (50)
Company Q (40)
20 - 50
< 20
Total
NG
FIN
GAR
25 %
Company K (100) Company M (100)
Company L (80) Company N (80)
Company O (60)
50 - 100
O&S
High Risk
50 000
Share of
Total
Exposure
15 000
17 500
15 %
10 %
20 %
100 %
AVI,MET
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Section IV: Insurance
Insurance by asset
Capital structure and exposure
Market
Comment
Risk Capital
OIL/ sEnergy
Equity
Stafor
Post one
event
A second
platform
Post two
events
As
One
platform
As
Current
capital
se
t1
se
t
As 2
se
t
As 3
se
t
As 4
se
t
As 5
se
t
As 6
se
t
As 7
se
t
As 8
se
As t 9
se
t
As 10
se
t
As 11
se
t
As 12
se
t
As 13
se
t
As 14
se
t
As 15
se
t
As 16
se
t
As 17
se
t
As 18
se
t
As 19
se
t2
0
Statoil ASA self insurance
STAFOR insurance structure
Overall risk distribution Statoil insured assets
Comment
External market inkl.
Lloyds/London, USA &
Europe
Q/S
Statoil ASA self
insurance
STAFOR
STAFOR
Mutuals &
OIL / sEnergy
Market
STAFOR
STAFOR
Statoil self insurance
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