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Accenture 2013 Global Risk Management Study Focus on findings for the Energy and Utilities sector 2 Contents About the research 4 Executive summary 5 Key findings 7 Section 1 10 Current market pressures Section 2 12 Managing regulatory and compliance risks Section 3 14 Managing emerging and operational risks Section 4 20 Risk capability goals for 2015 Section 5 24 Four things to do differently Research and interviews were conducted by Accenture and Oxford Economics, who collaborated to write this report. 3 About the research This report on energy and utilities firms is a sector- specific supplement to the Accenture 2013 Global Risk Management Study.1 This report is based on a quantitative survey taken in 2013 of executives from 105 organizations in the energy and utilities industries. Respondents were C-level executives involved in risk management decisions. Organizations were split among Europe (30.5%), North America (27%), Latin America (12%), and Asia Pacific (30.5%). Just over half the companies had annual revenues between $1 billion and $5 billion, and 48%, had annual revenues over $5 billion. Respondents included Chief Risk Officers (CROs, 30%), Chief Executive Officers (CEOs, 17%), Chief Financial Officers (CFOs, 31%), and Chief Compliance Officers (CCOs, 22%). We also conducted in-depth interviews in 2013 with senior leaders at nine energy and utilities companies across regions. These provide supporting insights for our data- driven research, while presenting useful perspectives from companies in the sector. 4 Executive summary It is not surprising that over half of Broad regulatory reform to help address For example, as the size and the energy and utilities respondents both financial derivative activity and complexity of energy company to the 2013 Global Risk Management asset integrity can be a challenge projects continue to grow, so do Study, on average, expect risks to rise to companies investing heavily in the risks associated with delivering more significantly over the next two complex production and delivery major capital projects on schedule, years when compared to respondents infrastructures, and operating within within budget and scope.2 Forty in other industries (see Figure 1). In a daunting business environment. percent of our research respondents our experience, energy and utilities Large-scale capital expenditure now have risk officers identified, and companies have historically viewed programs will likely continue to be assigned specifically to their capital market and credit risks as the key exposed to numerous operational projects programs (see Figure 13). risks to mitigate. These seem inherent risks as well as shareholder scrutiny. This compares with roughly 60% to their core business due to the Increased competition is pushing firms having risk officers for credit, market, volatility of the commodities that to explore new frontiers and to make and operational risk management they produce and utilize as feedstock unconventional plays, placing further efforts, and raises the critical for refining and generation. strains on production efficiency and question of whether organizations safety. Energy and utilities firms may are dedicating their scarce talent to In the past few years, tragic, high- need to move from incremental add- the most important areas of risk. profile operational risk failures could ons to more significant step changes be seen as contributing factors in in enhancing risk management Risk analytical capabilities, such as the destruction of shareholder value, capabilities. Most survey respondents cash flow-at-risk, rigorously applied significant fines from regulators, and are still expending significant during upfront planning and throughout exposure to reputational risk. In some effort on manual tasks such as data the project lifecycle can trigger early cases, litigation stemming from the management for both market risk and intervention strategies. Similarly, operational risk failures has added credit risk management, consuming these techniques can support risk- additional costs to the regulatory more than a quarter of their risk adjusted capital allocation, liquidity fines. Although operational risk management resources (see Figure 16). management and, capital-adequacy failures are not new to the energy considerations as energy and utilities and utilities industry, these events, In our view, this sector might benefit companies evaluate competing coupled with aging infrastructure from the recognition that a robust risk investments across their portfolios. and a changing workforce, may have management function can help support helped intensify regulatory and policy the organization’s response to increased The survey results indicate a greater shifts in terms of compliance. legal and regulatory compliance risk emphasis on the risk management exposure. By expanding beyond a function. And, the skills and capabilities This regulatory focus on aging assets traditional approach to enterprise of the people in the function speak to may have helped create the turbulent and trading risk management, energy the greater role respondents feel risk climate through which today’s risk and utilities companies managing management can play moving forward. professionals plot a course to their compliance with an eye towards For example, the 2013 Global Risk next destination. Energy and utilities business and culture transformation– Management Study results cite one area companies use derivative instruments embedding a centralized approach of focus over the next several years to to help manage the volatility of the within the risk management function— be the development of risk technology commodities core to their businesses; can gain efficiencies that may help and data to achieve Risk Mastery (see as the uncertainty about the regulatory offset the costs associated with Figure 15). Along with the difficulty of oversight of the market has helped add increased compliance. embedding risk analytics in management a layer of complexity to the landscape. processes, survey respondents also Policy uncertainty and regulatory highlighted the importance of infusing complexity may have also affected a culture of risk in the organization. companies in areas ranging from production planning to trading and customer relationships. 5 Organizations could benefit from Looking ahead, we believe energy and identifying and correcting sources of utilities firms need to consider focusing operations risk vulnerability, not only on the following four areas, discussed in to help improve value creation but to greater detail in Section 5: enable competitiveness in new business environments and unconventional • Extend the capabilities of the risk projects. New technologies capable of management function–to help firms capturing operational data at remote manage the full suite of risks to which sites such as offshore platforms and they are exposed compressor and transmission stations • Manage compliance through a can provide new opportunities to transformational lens–centralized strengthen traditional risk cultures in management and aligned with these sectors. business objectives that can also deliver on regulatory requirements Creating a risk culture that extends all the way from top management and the • Identify and correct sources of Board of Directors to each employee can operations risk vulnerability–focused no longer be an aspiration for energy on both “macro” threats and “micro” and utilities firms—it is a fundamental issues key to success. • Focus on the “human element” of risk—to turn obstacles into We explore these themes and more opportunities for successfully in the following sections, starting deploying risk analytics with Section 1, “Current market pressures,” Section 2, “Managing regulatory and compliance risks,” and Section 3, “Managing emerging risk and operational risk.” We then present survey respondents’ capability goals for 2015 in Section 4. 6 Key findings Energy and utilities firms are more likely to expect risks to rise… 53% 48% 45% 41% 36% Banking, Healthcare, Insurance Public Capital markets Life sciences services Energy, Utilities Averaging across risk types, 53% of energy and utilities firms believe risks will rise over the next two years …and perceive legal and regulatory risks as their A large share of firms—especially in energy—spend top threats one-quarter of their operational risk time on aftermath of risk incidents 72% Legal 42% risks 62% Emerging Regulatory risks requirements 51-75% 15% 50% 58% Strategic Business risks risks 26-50% 44% 36% Organization 50% 58% Liquidity Market risks risks Energy Utilities 51% 55% Credit Operational risks risks What do executives see as the biggest risks over the next two years? % of respondents claiming to spend at least one quarter of their operational risk management time dealing with the aftermath of risk events Under-resourcing of capital projects programs may lead to more undetected operations risk events To a larger degree To a moderate degree Safety 43% 46% Only 20% of energy and utilities firms report a large Execute/Construction 64% of projects degree of operations—capital 24% project integration in the early project phase Utilization/Efficiency 50% 34% Early phase/Stage 63% gates of projects 20% Degree that operations personnel are integrated with the capital projects program in each area. 7 8 9 Section 1 Current market pressures We at Accenture believe that policy Figure 1. Proportion of respondents expecting risks to rise, by sector shifts, new sources of
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