The methodology of risk management
Corporate risk management system is aimed at ascertaining potential risks and providing an opportunity to take timely measures for risk elimination or minimisation. It provides an opportunity to make corrections in business planning, investment plans, and social policy. With due consideration of dynamic development of the business environment as well as the ongoing changes introduced in the aggregate of different factors affecting the activities of the Group, their nature and intensity, the risk management system is being upgraded on a regular basis in order to ensure timely response.
The management of the Group has prepared a detailed list of risks that can affect the sustainability of the company. All the risks in the list have been divided into four groups:
- strategic risks – related to the Group's long-term goals (changes in the market and competition);
- operational risks – related to the Group's processes (operations of employees and equipment);
- financial risks – related to direct financial loss (interest rates, exchange rates);
- compliance risks –- related to regulations (laws, guidelines)..
The analysis of potential risks looks at external and internal factors.
- External factors: conditions related to the market, sector of the economy, socio-economic, political, financial, cyclical conditions and other conditions related to the activities of the group and its subsidiaries.
- Intra-group factors: related to management, production and staff, social, ecological, and other.
In connection with every type of risk, the assessment has been provided as for the likelihood of its occurrence and the scale of potential effect. Proceeding from that, the risks of critical importance have been selected, the likelihood of the occurrence of which is high, and the effect is significant. Such risks are described in the Risk Management Report of the Group, they have been assessed, a member of the Board responsible for each risk has been assigned, and the action plan aimed at the reduction of risk has been agreed upon.
The three most important risks are listed below.
Risks related to the availability of raw materials
Since the main goal of VKG is adding value to oil shale, the most critical factor in terms of the continuation of the activities of the company has been the provision of the oil shale resource. In 2012, the VKG Ojamaa mine was opened, in the result of which the risk related to the availability of oil shale has been significantly reduced. The Ojamaa mine will cover about 85% of the need for oil shale at VKG until 2030. The missing 15% is provided by long-term supply contracts with other oil shale extractors or at the expense of the existing warehouse stock. If it is not possible to purchase oil shale from the market under suitable conditions, and the warehouse stock runs out, the load at the plants is decreased, and they operate with a partial load.
In order to provide the consistent availability of oil shale after 2030, the Group is actively working on obtaining new extraction permits. Considering the factors related to environmental protection and economic situation, the most suitable would be the permit for extraction oil shale from Uus-Kiviõli extraction field, which is located nearby the Ojamaa extraction field. The plan is to provide the supply of oil shale until the year 2045 within the next two years.
Risks related to world market prices of crude oil
Since the main product obtained in the course of adding extra value to oil shale is shale oil, the economic success and stability of the Group are directly dependant on the price the global energy market would be ready to pay for shale oil. The reference product of shale oils is the fuel oil with 1% content of sulphur, whose price, in its turn, depends on the price of the crude oil. Since the price of the crude oil can fluctuate significantly as a result of even the slightest changes in offer and demand, the profit obtained from the sale of shale oils tend to fluctuate as well. Depending on the price of oil at the global market, the revenue from the sale of shale oils can make up 50-90% of the total amount of profit of VKG.
VKG is actively dealing with the minimisation of risks related to the prices for crude oil at the global market. In the event of a sudden decrease in sales revenue, the Group has two mutually reinforcing measures at hand which will provide the sustainability of the company:
- 1. Fixing the sales price of shale oils by means of future transactions.
- 2. Accumulation of liquidity buffer.
In accordance with the existing policy, VKG grounds the price of the reference product for shale oils by 25-65% from the expected production volume in the next 18 months. In the event of an increase in the liquidity buffer, the share of future transactions from the total amount of sales can decrease.
Since VKG is a representative of the processing industry and a manufacturer of the fuel containing carbon, significant environmental risks accompany the activities of VKG, which manifest themselves both in oil shale extraction, boosting its value, and marketing oil shale products. The goal of VKG is to become a pioneer in this branch of industry and set an example of how it is possible to resolve environmental risks within traditional production in a smart and rational way, using modern technologies. Within the past 15 years the Group has made an investment in the total amount of ... million EUR into different environmental project, aiming at minimising its environmental footprint. Investments has mainly been focused on the efficient use of resources and the minimisation of accompanying environmental effects. This type of work is carried out on a regular basis, and it will continue in the future, since in the long-term perspective it will definitely pay off.
In addition to the minimisation of environmental risks that accompany production activities, it is as important to talk publicly about them as well as involve different interest groups into the discussion of how to change things for the better. With that purpose in mind, VKG holds an Environmental Day every year. The Environmental Day held in 2017 was focused on environmental effects.