In the course of its business, the ORLEN Group conducts ongoing monitoring and risk assessment and undertakes actions aimed at minimizing its impact on the financial situation.

Functioning of the Enterprise Risk Management System

In 2017, the organisation and underlying principles of the Enterprise Risk Management System did not change relative to the previous year. Based on its Enterprise Risk Management Policy and Procedure, the ORLEN Group monitors and assesses its risk exposures on an ongoing basis and takes steps to minimise their impact.

As required by these internal regulations, the Audit, Financial Control and Enterprise Risk Management Office was established to coordinate the enterprise risk management (ERM) processes across all levels of the organisation, to provide independent assessment of risk management and internal control systems, and to analyse business processes. Management boards at each ORLEN Group company, supervised by their respective supervisory boards, are responsible for risk management.

The Enterprise Risk Management System is a tool used to support effective delivery of the ORLEN Group’s strategic and operational objectives. It ensures identification of strategic risks and  control mechanisms as well as their assessment.

Key roles in the Corporate Risk Management System

The assessment of risk by the business areas in PKN ORLEN and the ORLEN Group companies is carried out every year, as part of the process of self-evaluation, and its purpose is to provide an update of risk assessment which are most significant for the organisation. The process and risk owners are responsible for its performance. The most significant element of the methodology applied involves the comparison of two risk assessments: gross risk assessment (value of risk in the absence of control mechanisms and preventive measures) and net risk assessment (value of risk estimated taking into account the efficacy of the control mechanisms and preventive measures for the specific risk that are in place).

As a result of periodic assessment of control mechanisms by control owners, plans of corrective actions are defined for the individual risks and controls, which main aim is to achieve an acceptable net risk level. The report on the most significant risks and planned method of their limitation is submitted to the Management Board and the Supervisory Board Audit Committee after completion of risk assessment and control mechanisms testing process.

The adopted methodology allows to identify risks in the ORLEN Group on a basis of a common model and link them with business processes and strategic objectives.

Audit and control tasks are carried on the basis of annual control and audit plans, approved and accepted by the Management Board, Supervisory Board Audit Committee and the Supervisory Board. Ad hoc audits and controls are also commissioned by the Supervisory Board and the Management Board of the Company.

In 2017, the process of risk self-assessment and control mechanism testing carried out in PLN ORLEN encompassed the assessment of 521 risks by testing 1,251 control mechanisms in 83 business processes. In the ORLEN Group companies 1,036 risks and 2,750 control mechanisms in 215 processes were assessed.

In 2017 the ERM system was implemented in the following ORLEN Group companies: PKN ORLEN, Anwil, Grupa ORLEN Lietuva, Grupa Unipetrol, ORLEN Deutshland, ORLEN Paliwa i ORLEN Centrum Usług Korporacyjnych. The implementation was stated also in the ORLEN Południe Group.

As part of the implemented in the ORLEN Group Corporate Risk Model, all identified risks are classified according to the following categories:
I. STRATEGIC RISKS – risks directly connected with the strategic goals, referring to specific actions and to the degree of their performance. For the purposes of detailed identification of strategic risks, partial strategies are created for the individual areas attributed to the business owners, who perform quarterly risk assessments.
II. PROJECTS RISKS – events or circumstances which may have a negative impact on at least one project goal realization, if they occur. They are assessed on a systematic basis during work projects, and in any case at least once a year as part of the self-assessment process.
PROCESS / OPERATIONAL RISKS - identified within the existing business processes, refer directly to key business goals as well as enable efficient processes management. These risks are assessed annually as part of the self-assessment process by the business owners. The intention of the process is to confirm the effectiveness of the control mechanisms  and keeping the net risk at the defined level.

Risks and processes classification along with control mechanisms within the ERM functioning

¹For detailed description of the financial risks as well as the methods applied to measure, manage and hedge the risks, see section 9.3 of the Consolidated Financial Statements for 2017.
²The principal legislative acts regulating the oil sector include:
Biofuels – the Act amending the Act on Biocomponents and Liquid Biofuels and Certain Other Acts of November 24th 2017, which entered into force on January 1st 2018 – the purpose of the amendment is to facilitate the implementation of the National Indicative Target (NIT) by fuel companies and change the structure of its implementation. The regulations essentially remove the quantitative limit on the amount of biocomponents (liquid bio-hydrocarbons, HVO) added to diesel oil; introduce quarterly measurement of the fulfilment of the compulsory blending targets; introduce a mechanism of double counting of ‘advanced biocomponents’ (mainly derived from waste) in NIT; introduce the possibility of 15% derogation from the NIT in exchange for an emission charge; and lower penalties for failure to meet the NIT.
Emergency stocks – producers and traders must pay a substitute fee for gradual reduction in the amount of physical stocks they are required to maintain. Poland: fulfilment of the physical stocks target – from December 31st 2017: 53 days, the substitute fee maintained at its current level (PLN 43/t of oil equivalent and PLN 99/t of LPG). Czech Republic: emergency stocks are maintained by a state agency for 90 days of net imports of crude oil and are financed from the state budget. Lithuania: maintaining stocks equivalent to the higher of 90 days of average daily net imports or 61 days of average daily domestic consumption. The amount equal to at least 30 days of average daily domestic consumption is collected and maintained by the state agency as earmarked stocks, with the balance maintained by businesses.
Regulations on the liquid fuel market and on curbing grey economy in fuel trade – the Act Amending the Value Added Tax Act and Certain Other Acts (the so-called “fuel package”) of July 7th 2016 and the Act Amending the Energy Law and Certain Other Acts (the so-called “energy package”) of July 22nd 2016, which introduced a number of changes to the regulation of the liquid fuel market in Poland, including new rules regarding VAT settlements liquid fuel imports to Poland, and linked the requirements with licence requirements.
Monitoring of road freight transport  – the Act on System of Monitoring Road Freight Transport of March 9th 2017. The purpose of the act is to further curtail the grey economy in fuel trade in Poland,  and the legislation supplements the solutions introduced as part of the fuel package and the energy package. The act imposes an obligation to register road transport of goods considered to be sensitive and to establish a system for monitoring such transport.
Energy and electricity efficiency – the Act Amending the Energy Law and Certain Other Acts, which regulates such matters as the cogeneration support mechanism (until the end of 2018), revenue from yellow and red certificates, costs of fulfilling the obligation towards end users of electricity (green and purple certificates), and costs of emission charges in the event of a failure to hold the required number of certificates of origin.
CO₂ – Maintaining in 2018 free CO₂ emission allocation for the ORLEN Group following designation of its units as exposed to the risk of carbon leakage. Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading is being reviewed – potential implications go beyond 2018.
Restricted Sunday Trading – the Act on Restricted Trading on Sundays and Public Holidays and Certain Other Days of January 10th 2018, which regulates retail trading as from March 2018. The Sunday trade ban will not apply to service stations and shops located at railway stations.
Natural gas market − the Act Amending the Energy Law and Certain Other Acts of November 30th 2016, which introduced a roadmap for the deregulation of gas prices in Poland as from October 2017, and imposed on importers the obligation to maintain mandatory stocks of natural gas.
Taxation of upstream activities in Poland – tax on production of certain minerals, payable from 2020, calculated individually for each well, at 1.5%–6% of derived revenue, depending on the type of deposits and hydrocarbons. Production royalty, depending on the volume and quality – for natural gas: PLN 5.34–PLN 24.73/1,000 Nm³; for crude oil: PLN 38.0–PLN 51.5/tonne. Extraction charge – fixed component (determined on a case-by-case basis) and variable component of 50% of the mineral production royalty for the previous year. Special hydrocarbon tax – payable from 2020, at 0%–25% of net cash flows, depending on the ratio of accumulated revenue to accumulated expenses, real property tax of up to 2% of the initial value of property, plant and equipment, CIT at the rate of 19%.
Taxation of upstream activities in Canada: royalties – payable on wells spud on or after January 1st 2017. Royalty rate from 5% to 40%, depending on the type of hydrocarbons, market prices, and well output. Exemption on account of incurred costs of drilling and completion – relief in the form of reduced tax liabilities with respect to all new qualifying wells. Royalty of up to 5% on a well’s early production until the well’s total revenue from all hydrocarbon products equals the drilling and completion cost allowance, CIT at the rate of 27%.

Risks relating to social, employee, and environmental matters, respect for human rights, anti-corruption and bribery may occur in the three main categories of risks in the ORLEN Group listed above.

Specific risks and methods of their mitigation in the above areas are presented below.

Effect of controls and risk response plans:

Types of
risks

•   very low
•   low
•   average
•   high
•   critical

•   design
•   strategic
•   operating
•   financial

The Gross Risk Map is a graphic presentation of risks existing when no risk respons plans are in place.

Gross risks

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Probability

The Net Risk Map is a graphic presenation of risks existing when risk response plans have been implemented.

Net risks

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Probability

• Gross risk − value of risk if no controls are applied,
• Net risk − value of risk taking into account the effectiveness of the existing controls designed to mitigate the impact and reduce probability of the risk materialisation.

If controls (risk management strategies) are applied, risk is reduced to acceptable levels.