TECOP

Israeli off-shore explorationand 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. PwC 2 Dealing with risk is a critical business priority No industry is immune from the risks that can bring down a business!!! PwC 3 . 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 Aug‘10 Sep‘10 Oct‘10 Graph: BP 5-year CDS price during the third quarter of 2010 PwC 4 . 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 PwC 6 . Risks effect all 3 sectors of the industry Upstream Midstream Downstream PwC 7 . TECOP Model For Risk Evaluation Identifying Risks by Categories Technical Risks Economics Risks Commercial Risks Organizational Risks Political Risks PwC 8 . Oil spill) • Storage facilities (Blowouts. leaks) • Backup pipe (Lack of redundancy) • Maintenance (skilled manpower) • Safety (endangering lives • IT and Cyber PwC 9 .TECOP Model For Risk Evaluation Risks related to the Reservoir: • Geological risks(Dry holes. Estimated life ) Technical Risks • Aging infrastructure (Maintenance. Missing target layers) • Development (Duration and costs of construction) • Production (Accelerated depletion. Price control) Risks • LNG market • Taxes. Levy and royalties • Export permits PwC 10 .TECOP Model (Cont’) • Drilling and production Cost estimation (ROI) • Capital raising and financing • Exchange Rates • Price and pricing (Supply & Demand) Economics • Regulation (Antitrust. TECOP (Cont’) • Long term contracts • Regulation • Energy prices • Customers Commercial Risks • Competition • Legal • Insurance PwC 11 . TECOP (Cont’) • Supply chain (weak link) • Cooperation between teams along the chain • Internal and External Experience • Professionalism Organizational Risks • Project management • IP • Fraud PwC 12 . TECOP (Cont’) • Government involvement • Regulatory Environment • Environmental issues Political Risks PwC • Construction permits • Stake holders • Geo-political risks 13 . 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 PwC 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 11 . 00 15 .00 5.00 2.00 4.00 3.Heat Map – Risk Map (Example) 5 OS5 OS3 S4 OP15 F3 4 OS1 S2 C4 OS2 S3 S7 C2 F2 F4 OP3 F7 OS4 C1 OS6 S5 F5 F6 OP5 3 S6 OP14 OP10 S1 OP8 F1 OP9 OP13 OP2 OP12 OP11 OP4 2 OP7 OP1 C3 OP6 1 0 0.00 PwC 1. What is risk management? . to ensure the nature and amount of risk taken by the organisation is aligned to the pursuit of its objectives.Risk management is: The systemic. PwC 17 . structured and transparent process of : identifying. analysing. monitoring and reporting risks. managing. 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. 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. Likelihood Very Likely I Likely C Possible Unlikely Very Unlikely T Minor PwC Moderate Major Severe Impact /Consequence Critical 18 .Inherent risk. Controls can mitigate the likelihood and/or the consequence of a risk. PwC Risk management phases Evaluation Development Implementation PwC • 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 19 . The Targets and Goals of Risk Management Proactive Mechanism to identify Risks Establishing Business Flexibility to Survive Risk Events PwC Connecting the Business Strategy to the Risks It is exposed to 20 . appetite • Focus beyond safety and operations • Consider supply chain risk • Monitor early warning risk indicators • Run integrated.key messages to Executives and Management Strengthen checks and balances 1 2 3 Understand what’s really going on 4 Understand risk better Raise readiness to respond PwC • Clarify investor risk appetite • Review asset portfolio vs. 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 21 . What are the four key lessons? PwC Understand risk better Be prepared Strengthen checks & balances Understand what’s really going on . . All rights reserved.Be Aware! Be Prepared ! Be Proactive! Eitan Glazer Energy Practice Leader PwC Israel ©2013 Kesselman & Kesselman.