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Enterprise Risk Management Reining in Risk-PIC Experience Nov 26, 2012 Eng. Hessa Aljinaidel Eng ERM Team Leader


PIC ‐ Introduction

Petrochemical Industries Company K.S.C (PIC) is a subsidiary of Kuwait Petroleum Corporation  (KPC), was incorporated by an Amiri decree on July 23, 1963 being the first chemical fertilizer  complex both in Kuwait and the region. A Historical perspective for PIC …..  1963 : Started with Fertilizers business  1997 : PP Plant and EQUATE Complex successfully commissioned  2004 M.E.Global & Equipolymer joint ventures  were formed   2008‐09 : TKOC and TKAC/TKSC were commissioned d / d

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PIC Business Portfolio PIC- Strategic PICBusiness Units Fertilizer-SBU

Olefins-SBU

International Investments GPIC-Bahrain (33 .33%) 33%) Partners: NOGA, SABIC Ammonia : 500,000 MT, Urea: 600,000 MT,  Methanol: 400,000 MT

Local Investments PIC Fertilizer (100%) Ammonia : 620,000 MT, Urea: 1,040,000 MT

Polypropylene (100%) PP: 140,000 MT

MEGlobal-HO Dubai (50%) Partner: Dow EG: 1,022,000 MT, PET: 340,000 MT

Equate (42.5%) Partners: Dow, Boubyan, y Q Qurain PE : 825,000 MT, EG: 550,000 MT TKOC (42.5%) Partners: Dow, Boubyan, Qurain EG: 600,000 MT

Aromatics-SBU

KARO (40%) Partners: KNPC, Qurain

TKSC (57.5%)* Partner: Dow SM: 450,000 MT

KPPC (100%)* PX: 829,000 MT, HA:  80,000 MT, BZ:  393,000 MT

* PIC does not have direct ownership in TKSC and KPPC plant.

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PIC a challenging environment for ERM  PIC is unique as its nature  of business include ,  Manufacturing, Marketing,  Capital Projects, JV  Capital Projects JV portfolio etc.

PIC ‘s markets  are spread  across the globe

PIC  has more than one  partner with different  percentage of ownership  in its JV, thus needs to  in its JV thus needs to manage each JV  differently

Diversified range of  products namely Ammonia,  Urea, PE ,PP, EG, Px ,  Benzene & Styrene  Benzene & Styrene

Production Process

This makes Enterprise Risk Management highly valuable to PIC, as well as a unique challenge to implement

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Journey of ERM at PIC 2006

KPC ERM strategic directives calling upon subsidiaries to establish their own risk management functions. PIC starts its ERM project design phase based on PIC needs & aligned to KPC requirements

2007

ERM design phase is completed. ERM implementation phase is completed in PIC by the end of the year ERM Go live

2008

CFaR modeling initiated for Market risk (price and Foreign exchange) Pilot Risk Monitoring & Treatment activities

2009

Running CFaR model Risk Monitoring & Treatment activities enhanced to development of RMT plan and linking them to Department objectives

2010

ERM in PIC migrates its Risk Register to KPC RCS Avanon system Risk Monitoring & Treatment activities grows encompassing treatment implementatio n.

2011

ERM 2030 strategy initiatives commenced Developed PIC Risk profile based on root cause analysis. Risk Monitoring & Treatment activities grows as a continuous process.

2012

Cash Flow at Risk modeling for PIC risks involving Market risks, Fx, Project risk, political, credit..etc

2013

Continue implementatio n of ERM 2030 strategic initiatives

2014

Complete ERM 2030 strategic initiatives.

International Risk management Certification for ERM employees

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Current state of ERM at PIC The ERM capability analyzes the current risk portfolio and sets up risk responses and controls. Knowledge of the  company’s risks and responses drive the evolution of ERM capability thus supporting PIC in making informed decisions  while delivering its business strategy. 

PIC ERM policy approved by PIC board . PIC risk appetite is in line with PIC & KPC  business strategy. PIC implemented multiple levels  of governance and responsibility  for risk management – more  about this later.

Strategy

PIC selected risk management  PIC selected risk management methods in line with its   business needs

Risk Register All identified  risks  are  captured in risk register and  are actively managed

Capability PIC develops risk management  skills in its personnel across  departments and encourages  the use of these skills in  everyday work

Technology

PIC follows documented  processes to identify, assess,  treat, monitor, and report on  its risks

PIC employs a variety of IT tools to support its risk  g , g g management activities, ranging from Excel  to Avanon  tools that is aligned with KPC. For quantification utilized  advanced simulation  modeling to quantify PIC CFaR

Risk Assessment Risk Monitoring and Treatment Plan  ERM Policy review ERM Model update Risk Monitoring & Treatment

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PIC Risk Governance Structure Strategic  Level L l

Top Management  & BOD

Top Management & Board of Directors •Ensure that Risk Management strategy is aligned and supports the  overall PIC strategy •Monitors the management of key risks i h fk i k •Take decisions on key issues

Tactical Level Risk Oversight Committee (ROC)

Operational Level

ERM  Department &  Department Focal Points

Departments (Focal Point) •Communicating risk information to the ERM Unit •Assist the ERM Unit in identifying risks •Assist the ERM Unit in analyzing risk issues when necessary •Conduct local risk treatment activities

Risk Oversight Committee •Provides guidelines and directives to ERM Unit •Provides guidelines and directives to ERM Unit •Measures and monitors the overall effectiveness of  Risk Management in PIC •Approves key risk management decisions •Reports to Top Management and to the Board of  Directors on risks and risk management activities Enterprise Risk Management Unit •Responsible for day‐by‐day risk management 

activities •Coordinates risk management policies and  procedures •Aggregates and analyzes the overall risk faced by  PIC •Provides periodic reports to the ROC, Top  Management, the Board of Directors, and KPC 7


Risk Categories

Risks driven by  intern nal factors

Risks driven by extern nal factors

Risk category

Definition

Market risk Market risk

the risk arising from unexpected changes in the market  supply, demand, or price l d d

Credit risk

the risk arising from the inability of a counterparty to  meet a payment or delivery commitment

Business risk

the risk arising from unexpected changes in business  environment

Operational risk Operational risk

the risk arising from inadequate physical infrastructure  (asset failure) risk control or risk infrastructure (process (asset failure), risk control or risk infrastructure (process  failure) 8


The Enterprise Risk Management Cycle • Enterprise Risk Management can be defined as the systematic approach to identifying, categorizing, quantifying, and proactively dealing with all risk in an organization, in order to protect and enhance value. value •By using an aggregated/consolidated portfolio approach, it provides new performance and compliance information to optimise decision‐ making across geographies/commodities at a corporate level.

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Risk Identification New Risk Submitted online

ERM  department analyzes  the risk

ERM  department prepares  recommendation for ROC Risk Oversight Committee  (ROC)  approves/rejects the  risk If approved ,Risk is added to  PIC Risk register else  rejected  ROC Decision is informed to  Submitter

Submitter of the approved  risk is rewarded risk is rewarded

All PIC employees and contractors are involved in risk identification process. Risk Identification form is available on our local intranet for any employee or contractor that enable  p p them to submit a new risk for their own department or related to another department. After submission a new risk is then analyzed and goes through a process of validation and accepted if  found to be valid.  10


Risk Assessment Risk Assessment: PIC periodically conducts risk assessment activities.ERM interacts with each PIC  Department to identify, analyze and integrate PIC risks. Reports are provided to PIC Management,  PIC Board of Directors, and to KPC. KPC CRMD

Risk register

PIC Board of  Directors

Report on major  PIC risks

PIC Management

Risk Oversight  Ri kO i h Committee

Report on PIC  risks

Guidelines No

Enterprise Risk  Management  Department

Risk catalogue

1.1 Plan risk  assessment

Departments

Approve d

Yes

Updated risk  catalogue

1.2 Identify and   review risks

1.3 Analyze risks

1.4 Integrate cross  department risks

Input on risk  identification and  review

Input on risk  impact and  likelihood

Input on cross  department risks

1.5 Update/  review  risk  catalogue

1.6 Report

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Risk Monitoring & Treatment Risk Monitoring and Treatment Monitoring and treatment of risks are key steps of  Enterprise Risk Management that ensure that the  Enterprise Risk Management that ensure that the company’s risks remain under control and they are  addressed and properly handled. PIC ERM initiated Risk Monitoring & Treatment  activities in PIC since 2008., Risk monitoring and  treatment activities are carried out for the key risks in  the company after evaluation by the Risk Oversight  Committee. 

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PIC’s Key Risks Summary PIC Heat Map Im pact

1 - Incidental

2 - Minor

3 - Moderate

Medium

High

H igh

2 - Likely - Over once in 5 years up to once in 10 years (<0.2 to 0.1)

Medium

High

H igh

3 - Possible - Over once in 10 years up to once in 25 years (<0.1 to 0.04)

Medium

Medium

4 - Unlikely - Over once in 25 years up to once in 100 years ((<0.04 to 0.01))

Low

5 - Rare - Over once in 100 years up to once in 1000 years (<0.01 to 0.001)

Likelihood 1 - Frequent - Up to once in 5 years (>1 to 0.2)

6 - Very Rare - Once in 1000 years or m ore (<0.001)

4 - Major

5 - Severe

3 Risks

Very H igh

Very H igh

4 Risks

Very H igh

3 Risks Very H igh

H igh

H igh

8 Risks Very H igh

Medium

H igh

H igh

Low

Low

Medium

Medium

1 Risks High*

Low

Low

Medium

Medium

High

16% Credit Risk

Keey Risk   Cattegory  Distrribution

42%

Business Risk 42%

Operational Risk

High*

The figure shows PIC Key risks plotted on the  heat map and the category wise distribution. Risk Monitoring & Treatment activities are  directed towards moving the risk from the  top right quadrant to the lower one 13


ERM Embedded in PIC Business

ERM is Embedded in PIC Business  through  the following: Part of PIC  Corporate  BSC

KPC ERM 2030 Strategy

Risk Assessment in  Project Gate System

Six Sigma Projects for  Operational Risks

Sustainability Risks

Reports to ROC,  Management and BoD (ERM Dash Board) (ERM Dash Board)

Linked to PIC’s  other  department incentives department incentives

Part of Joint Venture  Governance

Risk Management  competency in Senior  Job Descriptions 14


PIC : Silo Risk Management vs. ERM Category

Traditional Risk Management

Enterprise Risk Management

No risk policy/ appetite risk policy/ appetite

Defined risk policy, appetite and work  ‐Defined risk policy appetite and work processes ‐ERM 2030 Strategy

‐Limited risk management (credit,  i insurance, operational) ti l) ‐Silo and qualitative risk assessments

‐Enterprise‐wide risk assessment  (i l di (including market and strategic) k t d t t i ) ‐Quantified “portfolio” risk assessment (Cash Flow at Risk)

Risks with unclear ownership

Defined risk affected and accountability

Risk Monitoring &  Treatment

‐Traditional performance  measurement ‐Limited‐risk Limited risk mitigation scope  mitigation scope

‐Risk‐adjusted performance metrics ‐Tangible and “intangible” risk mitigation

Reporting

Lack of standardization across business  Reporting and metrics are standardized  units or corporate at different levels in the company (BoD,  Top Management, ROC, Departments)

Risk Strategy

Risk Assessment

Risk Ownership Risk Ownership

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Using ERM in Everyday work Continuous Training PIC continuously engages its employees to be “Risk Aware“. ERM Department conducts awareness  sessions for ERM focal points on various aspects of Enterprise Risk Management and specifically on  i f f l i i f i ik d ifi ll the use of various tools e.g. RMT Tool, RCS, Cash Flow at Risk Modeling software's etc. New Risk Submission All employees are involved in risk identification and new risk submission is IT enabled wherein any  employee can submit a new risk which is then analyzed and goes through a process of validation and  accepted if found to be  a valid risk. Risk Assessment Process Various ERM processes are also used by departments to assess & prioritize their individual risks e.g Quantitative and Qualitative impacts and Likelihood (PIC Impact Scale) Quantitative and Qualitative impacts and Likelihood (PIC Impact Scale) Integration ERM – Six Sigma Enterprise Risk Management in PIC integrates with six sigma activities where departments use six  Enterprise Risk Management in PIC integrates with six sigma activities where departments use six sigma projects to manage risks and improve processes. 16


Achievements & Lessons Learned Achievements Over this short span of six years ERM initiative has scored some major achievements  in  terms of management of key risks and the value that it brings to the company. The company management is aware of its top risk exposures and is able to better focus its  resources . Treatments for key risks have been implemented  Enterprise Risk Management elements are incorporated into PIC Project Gate System for  overall execution of Capital Projects. ERM encompasses sustainability related risks and their management. Promoting enterprise risk management in PIC JV’s PIC employees speak a common language in terms of enterprise risk management Lessons learned Implementing ERM should be gradual process. p g g p Successful ERM implementation depends on contribution in decision making process Being proactive in response rather than active response

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Enterprise Risk Management at PIC

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