Risk Management Since 2004, the Company has implemented the enterprisewide risk management policies to handle the uncertainties which could affect the business goals, to assure of goal achievement and enhance the operational success under the good corporate governance practices amid fierce competition and volatile business conditions. The Board of Directors established the Enterprisewide Risk Management Committee (ERMC), having experts in the area as directors to work with the Company’s directors and high-ranking executives. The committee is tasked to set the administrative direction, develop the efficient enterprisewide risk management system through cooperation from all levels of the organization, keep the overall risk management in the acceptable level, and formulate the appropriate risk management structure. There is the risk management unit as the central body in coordinating with other units in assessing and accumulating all types of risks. There is a risk coordinator at each business to push forward the risk management system for the following reasons: 1. Identify risks which could affect the organization’s core targets. 2. Evaluate the impacts and chance of damage possibly arising from each type of risk, to prioritize risks. 3. Prepare the appropriate risk management system in accordance with risk priorities, with efficient use of limited resources. 4. Having the information technology-supported risk management monitoring system and submitting periodical reports to the Board of Directors. In the past year, the Company continued with the workshop to brainstorm ideas from all departments, to map the plan to handle risks to the Company’s core targets in the organizational and department levels. The Company also initiated the risk management plan for the lower levels as well as hosted activities to create the atmosphere and raise awareness of all employees in the virtues of risk management. Beside, the Company linked risk management with employee performance evaluation, the strategy which went in line with the goal to have employees exercise risk management principles and tools in their daily work, to create the corporate culture. The Enterprisewide Risk Management Committee convened every 2 months to improve the risk management monitoring. With realization in the significance of business continuity, it monitored the crisis management plan, by modernizing the plan and requiring periodic exercise to prepare for any negative impacts, mitigate the impacts to business, and get the Company back to normal stage as soon as possible. In business doing, the Company inevitably faced changes. The Company is thus required to prepare for the risks which could affect the Company in different areas, chiefly business risks, financial risks, operational risks, and risks from the Product Quality Improve Project. The Company is handling the risks as follows: 94 1. Business risks 1.1 Risk from refining technology which could affect competitiveness With the sharp drop of demand in bunker oil among domestic power plants and industrial plants which switched to natural gas and coal, the Company suffered a larger impact on its refining capacity than other refiners as the Company’s refinery is the Hydro Skimming Refinery which produces a high ratio of bunker oil while competitors are Complex Refinery. Demand for bunker oil could further drop and this would further hurt the Company’s refining capacity. As bunker oil is of low price compared to other types of refined oil, the value of the Company’s refined oil is thus lower than the value posted by complex refineries. This resulted in the lower refining fee (gross margin before production expenses) for the Company, and the spread varies, depending on the price spreads of bunker oil and other types of fuel at the time. To reduce the impact on competitiveness to increase revenue, the Company had focused on refining crude oil with low bunker oil ratio, such as crude oil from the Middle East, and condensate. It also partnered with other domestic refineries to refine bunker oil at cracker units and shared the profits. While the Company benefited from the higher capacity utilization of the cracker unit, partner refineries also gained from the extra capacity utilization. To cope with the risk, the Company embarked on the Product Quality Improvement Project (PQI) to raise the portion of gasoline and diesel from the refining process, through the installation of the hydrocracking unit and other supporting units. The project will lower the portion of bunker oil from over 30% to 10% of refining capacity, which is close to other domestic refineries’ figures, and generate the appropriate return on investment. 1.2 Risks from absence of government supports following financial restructuring which ended the Company’s state enterprise status In the past (prior to 14 August 2003), the Company had been a state enterprise, having the Ministry of Finance holding 48% and PTT Public Company Limited holding 24% of the Company’s total 522.04 million shares. Prior to financial restructuring, the Ministry had extended financial assistance through the loan guarantee and direct lending worth Bt8,100 million as well as the letter of comfort issued to commercial banks which loaned Bt4,000 million to the Company. Totally, the obligations accounted for 62% of total borrowing of about Bt19,500 million. 95 Annual Report 2007 The Bangchak Petroleum Public Company Limited After the financial restructuring, through the issuance of depository receipts on common shares, the government holding dropped below 50% and automatically ended the state enterprise status. The Company may not earn any direct government support. However, the Ministry of Finance maintains the guarantee on the outstanding Bt7,000 million principal of depository receipts which have not yet converted to common shares for another 6 years (ending in 2014). Therefore, though no longer a state enterprise, the Company is confident that the government will further support the business for positive returns and satisfactory capital gains, so that the government guarantee would not turn sour and create future burden to the government. If The Company’s performance misses the target and results in the sale of all depository receipts to the Ministry of Finance under the provided condition, the Ministry will resume the major shareholder status and the Company will become a state enterprise again. 1.3 Risk on refinery location, environment and safety At present, the Company’s refinery is the only one located in Bangkok area. Without proper control, it could hurt the environment and safety of nearby communities which could affect the Company’s business as well as lead to the review of the appropriateness of the refinery location. However, the Company is confident that there is no reason for such review as; The Company has maintained proper environment and safety management. The Company has operated the business with great care in safety and environment. There are risk management measures for the refinery, for instance, by strictly following safety laws, assessing risks in all work process, maintaining production equipment in specified period and organizing drills for related persons so that they are proficient in handling emergency. The Company has earned standard certificates as, for example, TIS 18001 - OHS00007/007 as Thailand’s first refinery with health and safety standard. In 2004, the Company was awarded OHSAS 18001 and the ISO 14001 certificate has been maintained since 1997 in recognition of the entire process of petroleum refining, supervision and environment quality monitoring. The government has a clear policy to have the oil depots of Bangchak and PTT Public Company Limited in Bangchak and Phra Khanong serve as the central oil distribution centers in Bangkok and peripheral provinces. At present, Bangchak and PTT have worked together to turn the depots as the central distribution centers in line with the government policy. The Treasury Department has extended the lease of land where the refinery is located by another 18 years, to totally 30. The lease will end in 2033. 2. Financial risks 2.1 Risk from global oil prices Crude oil represents over 90% of the Company’s cost. Crude oil and refined oil prices vary on global levels. The Company usually purchases crude oil 1-2 months in advance (the normal practice of refineries). Specified in the contracts are the type of crude oil, delivery date and other conditions used in calculating the price of each purchase. Mostly, the conditions based on the benchmark crude oil price of the month of delivery. After delivery, the crude oil is transported to the refinery and the refined oil is stored for future distribution. Refined oil prices are based on the average prices of refined oil in Singapore at the time of delivery. This creates time discrepancy of 2-3 months, from the order of crude to the distribution of refined oil to consumers. This could incur risk in managing the raw material cost for the highest gross refining margin. 96 To mitigate the risk, the Company established the risk management committee on price and finance, to formulate the policies and targets in managing risks from price volatility. The committee closely monitors global oil markets, to ensure minimum impact on business from volatility. The committee is utilizing risk management tools available in markets like the advance setting of spread of refined oil and benchmark crude oil prices and the purchase of futures on crude oil and refined oil inventories. Since 2002, the Company has joined with business partners in shipping crude oil from the Middle East, which not only lowers the transportation cost but also reduces the volume of each order and oil inventory - a way to reduce risks on oil prices. Moreover, the Company has struck a long-term contract for the supply of more crude oil from local fields such as Pattani and Jasmine crude. This brings down the cost of crude oil and logistics, with crude oil at similar grade with imported one.