Risks

The ERM (Enterprise Risk Management) System is one of key tools supporting effective implementation of the Company’s strategic and operating objectives.

The ORLEN Group monitors and assesses its risk exposures on an ongoing basis, taking steps to minimise their effect on its financial position. PKN ORLEN’s Audit and Enterprise Risk Management Office coordinates the enterprise risk management process at all levels of the organisation.

Structure of the ORLEN Group enterprise risk management system

SUPERVISORY BOARD (AUDIT COMMITTEE)
Performs an annual assessment of the effectiveness of the Enterprise Risk Management System, monitors the level of risks affecting the achievement of business objectives, provides the General Meeting with an evaluation of the internal control system and risk management system
MANAGEMENT BOARD
Supervises the process of enterprise risk management, accepts the objectives and principles of risk management, provides the Supervisory Board with comprehensive information about the business risks and how they are managed
AUDIT AND ENTERPRISE RISK MANAGEMENT OFFICE
Supervises the process of enterprise risk management, develops policies and procedures for risk management at the corporate level, periodically reports risk assessment results to the Management Board and the Supervisory Board’s Audit Committee
MANAGEMENT TEAM FINANCIAL RISK COMMITTEE
The management team involved in risk management is responsible for the monitoring, identification, assessment and analysis of risks and implementation of recommendations on the management of each risk under the adopted policies Market risk Credit and liquidity risk Operational risk
Management of the risk of changes in market prices of commodities (including refining and petrochemical margins, Brent/Urals differential, crude oil and product prices, and prices of CO2 emission allowances), and the risk of exchange rate and interest rate movements Liquidity and credit risk management Working capital management
Market risk management policy Internal policies and procedures Internal policies and procedures

PKN ORLEN has developed and implemented the Enterprise Risk Management Policy and Procedure, which comprehensively regulate the operation of its Integrated Enterprise Risk Management (ERM) system. It provides access to relevant information when needed, which facilitates information management. It is one of the key tools supporting implementation of the Group’s strategic and operating objectives.

Integrated enterprise risk management system

KEY RISKSRISK SCOPE / IMPACTMEASURES UNDERTAKEN
MARKET RISK Commodity risk relates mainly to:
  • Mitigation of the adverse impact of market factors by applying a consistent hedging policy across the ORLEN Group
  • Selection of the appropriate hedging strategies, including the principles for measuring individual risk exposures, the parameters and time horizon of hedging specific risks, and hedging instruments
  • The risks of changes in refining margins, crude oil and/or product prices, and the Brent/Urals differential are hedged
  • The risk related to economic currency exposure is hedged on a regular basis using currency futures
  • The Group hedges its consolidated exposure to cash flow changes caused by interest rate movements   

  • changes in refining and petrochemical margins on products sold  
  • changes in the Brent/Urals differential 
  • changes in the prices of CO2 emission allowances 
  • changes in crude oil and refining product prices associated with the obligation to maintain mandatory stocks of crude oil and fuels 
Currency risk relates to: 
  • capital expenditure made in foreign currencies
  • balance-sheet exposure to currency risk associated with foreign currency denominated assets (trade and other receivables, cash and cash equivalents, other) and liabilities (trade payables and other liabilities, bank borrowings, debt securities, other)
The ORLEN Group is also exposed to the risk of cash flow changes caused by interest rate movements. Certain assets and liabilities held by the Group generate interest income and expense based on floating interest rates. 
LIQUIDITY AND CREDIT RISK  Liquidity risk is the risk of being unable to pay liabilities as they fall due. The risk is related to the ratio of current assets to current liabilities. Financing used by the ORLEN Group is provided mostly by the banking sector in the form of credit facilities. The Group has also launched two bond issue programmes (PLN-denominated bonds and Eurobonds) to diversify its financing sources. 
  • Ensuring the security and financial stability of the ORLEN Group by ongoing monitoring of the maturity structure of assets and liabilities
  • Policy of diversifying the financing sources
  • A cash pool system used to optimise finance costs and manage current liquidity
  • Assessment of trading partners’ financial standing and creditworthiness and insuring receivables as part of a trade credit insurance programme 
The Group’s credit risk exposure is mainly related to its cash and bank deposits, guarantees issued to its trading partners, as well as to the risk of default by customers with whom sales transactions are executed.   

SECTOR RISKS 

including:

   
Fuel consumption Risk related to changes in fuel consumption levels affecting sales volumes and prices of the ORLEN Group’s products and its financial standing. The ORLEN Group’s fuel trading operations are subject to risk resulting from the existence of the grey market, chiefly involving the practice of marketing cheaper fuel combined with tax evasion. According to the Polish Organisation of Oil Industry and Trade (POPiHN), in the case of diesel oil the grey market may account for more than 20% of total consumption.
  • Taking and promoting legislative measures to curb the possibility of marketing cheaper fuels with tax evasion 
Crude processing / feedstock supplies  Risk of disruption to crude processing activities as a result of irregular feedstock supplies, unavailability of pipeline transport or unstable situation in oil-producing countries. Changes in the parameters of supplied crude may also result in lower yields of ‘white’ products. The extension of existing and the construction of new refineries in Russia as well as the greater oil demand in China may limit the availability of crude oil to European customers, which may affect the supply of the ORLEN Group’s products. 
  • Diversification of supply sources 
Gas purchases are made by the ORLEN Group under a long-term agreement with PGNiG and short-term contracts with alternative suppliers. Due to the lack of the pricing mechanisms which are present on liquid European gas markets, gas prices in Poland may be lower or higher than those on neighbouring deregulated markets. 
  • Adapting production facilities to the processing of various grades of feedstock 
With respect to product logistics, the ORLEN Group is largely dependent on local companies, such as PERN and its subsidiary OLPP in Poland or ČEPRO in the Czech Republic. In terms of product logistics, the Mažeikiai refinery relies on a single provider of rail transport services – AB Lietuvos Geležinkeliai. 
  • Implementing exploration and production projects with a view to securing own sources of natural gas and crude oil
Regulatory risks, including:     
National Indicative Target (NIT) costs  Risk related to the obligation to achieve the National Indicative Target (NIT), which specifies the minimum share of biocomponents and other renewable fuels, calculated according to their calorific value, in the total amount of fuels and liquid biofuels consumed during a calendar year in the transport sector. If NIT is not met, a penalty of approximately PLN 17.5 thousand may be imposed for each tonne of biocomponents below the specified minimum amount. Starting from 2015, all biocomponents used to fulfil the NIT obligation must meet the criteria of sustainable development. As of the beginning of 2012, fuel producers may apply a lowered NIT, adjusted by a reduction index which corresponds to 0.85 of the NIT for a given year, if they use in fuel production at least 70% of biocomponents supplied by domestic producers listed in the producer register of the Agricultural Market Agency. A decision on whether the NIT reduction mechanism will be maintained for the years 2016–2017 will be made in 2015. 
  • Meeting a lowered NIT, adjusted by a reduction index corresponding to 0.85 of the NIT for a given year
Moreover, implementation of the provisions of Directive 2009/30/EC will force fuel producers to meet the National Reduction Target (NRT) related to a 6% mandatory reduction of greenhouse gas emissions (GHG) by the end of 2020 compared with 2010. 
CO2 emission allowances  On February 26th 2014, the European Commission approved a draft list of installations eligible to receive free CO2 emission allowances and the initial allocations. As the emission allowances allocated to the ORLEN Group free of charge may be insufficient to meet its regulatory obligations, it may be necessary for the Group to purchase additional emission allowances at market prices or to limit production.
  • Annual monitoring of CO2 emissions and the balancing of any deficit/surplus through intragroup transactions or transactions on the forward and spot markets 
Industrial emissions  Risk of exceeding the applicable sulfur dioxide, nitrogen oxides and dust emission standards. The Industrial Emissions Directive has introduced more stringent sulfur dioxide, nitrogen oxides and dust emission requirements as of 2016. 
  • Building flue gas desulfurisation, denitrification and dust removal units, which will reduce emissions of sulfur dioxide and nitrogen oxides by more than 90% 
‘Colour’ certificates  ‘Colour’ certificates are designed to provide support to utilities producing electricity from renewable energy sources and in high-efficiency cogeneration. The Act Amending the Energy Law and Certain Other Acts has reinstated the certificate-based support mechanism for high-efficiency co-generation until 2018. The risk is related to the amount of ‘colour’ certificates allocated free of charge. The certificates are allocated in an amount corresponding to the amount of energy produced and the structure of fuel used.
  • Building new power generation capacities (Włocławek and Płock CCGT units) and upgrading existing assets to develop industrial cogeneration 
Mandatory stocks  Risk related to higher operating costs. Maintaining mandatory stocks forces the ORLEN Group to incur additional cost of their financing and storage and may have a non-cash effect on the Group’s operating performance where changes in market prices lead to revaluation of the stocks. 
  • The change in the mandatory stocks system will have a positive effect, enabling the ORLEN Group to release capital thus far tied up in physically maintained mandatory stocks of crude oil and fuels
In 2014, as part of the implementation of EU legislation, amendments were made to the laws on mandatory stock levels. In line with the new regulations, producers and traders − in exchange for a gradual reduction of the level of physical stocks required to be maintained for the purpose of stocks held by the Material Reserves Agency (from the equivalent of 76 days to the equivalent of 53 days of the average daily production of fuels or imports of crude oil or fuels at the end of December 31st 2017) − are under the obligation to pay, starting from January 1st 2015, a stocks charge to be applied for the financing and maintaining of the growing reserves of the Agency. In 2015, the level of mandatory stocks will be reduced by the equivalent of 8 days, to the equivalent of 68 days, and the stocks charge will amount to PLN 43 per tonne of crude oil and PLN 99 per tonne of LPG
Shale gas The amended Geological and Mining Law has established new rules for shale gas production. In addition, in March 2014, the Polish Council of Ministers approved a draft Act on Special Hydrocarbon Tax and on Amendments to the Act on Tax on Production of Certain Minerals and Certain Other Acts. Pursuant to the above legislative acts, starting from 2020, a special hydrocarbon tax will be charged on production of minerals such as crude oil and gas. Investors will have to pay fees on mineral production at a target rate of aproximately 40%. The production fees will comprise a special hydrocarbon tax, levied at a rate of between 0% and 25%, depending on the ratio of revenue to expenses, and tax on production of certain minerals, which will be 3% for conventional gas, 1.5% for unconventional gas, 6% for conventional crude oil, and 3% for unconventional crude oil. At the same time, the mining royalties paid to municipalities, counties and provinces, as well as to the National Fund for Environmental Protection and Water Management, are expected to rise from PLN 6 to PLN 24 per thousand cubic metres of natural gas, and from PLN 36 to PLN 50 per tonne of crude oil.   
In view of the foregoing, the introduction of additional charges under the hydrocarbon law may affect the economics of the ORLEN Group’s operations in the Upstream segment. 
Gas market liberalisation  Risk related to deregulation of the gas market. Potential consequences of the gas market deregulation for the ORLEN Group may include changes in gas prices resulting from the abolition of tariffs. 
  • Gradual reduction of the use of long-term agreements and building a portfolio of suppliers based on short-term contracts 
New business areas  Risk related to the development of new business segments. The upstream and power generation projects carried out by the ORLEN Group are subject to a number of geological and operational risks, as well as risks of higher gas prices and adverse regulatory changes, which may prevent the Group from earning expected profits or expose the Group to temporary losses.
  • The Group’s focus on the development of new business segments, including upstream and power generation, is aimed at diversifying the Group’s business, currently concentrated in the downstream segment 
Operational and incidental losses  Risk related to the adverse consequence of losses. The ORLEN Group is exposed to the risk of losses incurred in the course of its operations and the risk of incidental losses.
  • A professional insurance programme tailored to the ORLEN Group’s individual needs 
Court and regulatory proceedings, tax, customs and excise duty inspections Risk related to the outcome of court proceedings as well as tax, customs and excise duty inspections. The final outcome of any currently pending or future proceedings may have an adverse effect on the ORLEN Group’s performance or financial standing.
  • Centralisation of legal and advisory services within the ORLEN Group
  • Cooperation with leading law firms 
Regulatory risk  Risk related to changes in laws and regulations. Changes in existing regulations or the implementation of new regulations may have a material effect on the ORLEN Group, its financial position and performance. 
  • Active participation in consultations on new laws and regulations applicable to the Group’s operations 
Risks related to the stability and security of IT systems and data Risks related to the stability and security of IT systems and data. As the ORLEN Group relies on complex and advanced IT systems in many areas of its business, to the extent typical of a corporate organisation, the Group identifies certain risks associated with proper operation of its IT systems. 
  • The ORLEN Group applies security measures for its IT systems which are in line with the world’s best practices in ICT system security