Energy, Risk & Competitive Advantage: The Information Imperative

323 Pages·2008·14.6 MB·English

by  Scott Randall

Scott Randall
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Disclaimer
The recommendations, advice, descriptions, and the methods in this book
are presented solely for educational purposes. The author and publisher
assume no liability whatsoever for any loss or damage that results from the
use of any of the material in this book. Use of the material in this book is
solely at the risk of the user.
Copyright © 2008 by
PennWell Corporation
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Library of Congress Cataloging-in-Publication Data
Randall, Scott, 1958-
Energy, risk, and competitive advantage : the information imperative / Scott
Randall.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-1-59370-134-5
1. Energy industries--Information technology--Security measures. 2. Energy
industries--Information technology--Management. 3. Energy industries--Risk
management. I. Title.
HD9502.A2R36 2008
333.79068’4--dc22
2007050316
All rights reserved. No part of this book may be reproduced,
stored in a retrieval system, or transcribed in any form or by any means,
electronic or mechanical, including photocopying and recording,
without the prior written permission of the publisher.
Printed in the United States of America
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Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii
1 Five Fundamentals for Reasonable Assurance . . . . . . . . . . . . . . . 1
Information integrity and corporate risk management—the two
are inseparable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Competently gathered, locally sourced market research . . . . . . . . . . . 3
Criticality is key: understanding what is important as well as the
sensitivity of market model inputs . . . . . . . . . . . . . . . . . . . . . . . . 5
Good and poor quality data sources and the ability to discriminate
between them. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
A regular, ongoing market intelligence gathering system, with a trend
tracking capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A well-documented data register that is searchable, secure,
and auditable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Sound corporate governance and reasonable assurance . . . . . . . . . . 10
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 The Rise of Enterprise Risk Management and the
Information Imperative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Poor information integrity in the energy industry: two examples
of failing to pull back the curtain. . . . . . . . . . . . . . . . . . . . . . . . 19
Destroying Value: Part I of the Why behind Information Integrity. . . . . . 22
Value killer analysis conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . 27
Competitive Advantage: Part II of the Why behind Information Integrity. 33
The institutional investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
The credit rating agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
The international banking and finance community. . . . . . . . . . . . . 42
The financial statement auditors . . . . . . . . . . . . . . . . . . . . . . . . . 44
The petroleum reserves estimators and auditors . . . . . . . . . . . . . . . 45
Best practices and emerging risk standards: COSO, EFQM,
and the CCRO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
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Reliable External Information: A Conceptual Framework . . . . . . . . . . . . 50
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
3 Information Integrity Implementation—Tools, Techniques,
and Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
External Information Integrity and Enterprise Risk . . . . . . . . . . . . . . . . 57
Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Discovery Toolbox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
The Quick Financial Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Discovery Tool 1: The Quick Financial Analysis . . . . . . . . . . . . . . . . . . . 66
The quick look . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
High-level financial ratio calculations . . . . . . . . . . . . . . . . . . . . . . 68
Risk factors—standard financial statement disclosures . . . . . . . . . . 69
Management’s discussion and analysis (MD&A) . . . . . . . . . . . . . . . 70
Enterprise Value Chain Mapping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Discovery Tool 2: Enterprise Value Chain Mapping. . . . . . . . . . . . . . . . . 71
Enterprise risk management application . . . . . . . . . . . . . . . . . . . . 70
Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Stakeholder Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Discovery Tool 3: Stakeholder Analysis. . . . . . . . . . . . . . . . . . . . . . . . . 77
Enterprise risk management application . . . . . . . . . . . . . . . . . . . . 77
Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Other considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Selected Workshop Facilitation Techniques . . . . . . . . . . . . . . . . . . . . . 82
Discovery Tool 4: Workshop Facilitation Techniques . . . . . . . . . . . . . . . 83
The role of the organizer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
The role of the neutral catalyst . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
The role of the motivator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Delphi Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Discovery Tool 5: Delphi Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Enterprise risk management application . . . . . . . . . . . . . . . . . . . . 88
Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Cause and Effect Diagramming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
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Discovery Tool 6: Cause and Effect Diagrams . . . . . . . . . . . . . . . . . . . . 93
Using oil price increase example. . . . . . . . . . . . . . . . . . . . . . . . . . 98
Surveying and Interviewing Techniques. . . . . . . . . . . . . . . . . . . . . . . .101
Discovery Tool 7: Selected Surveying and Interviewing Techniques. . . . . .102
Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104
Discovery Vignette . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107
San Felipe Resources takes up the enterprise risk challenge. . . . . . . .107
San Felipe Resources and enterprise risk—the genesis . . . . . . . . . . .108
Criticality—Barry finds out what’s important. . . . . . . . . . . . . . . . .109
Competence:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .118
Night flight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .124
Discovery: Parting Shots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
4 Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Assessment Toolbox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132
Starting at the Top: Corporate Governance Guideline for
Information Integrity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132
Governance Guideline: Criticality, Consistency, Accuracy,
Transparency, and Competence . . . . . . . . . . . . . . . . . . . . . . . . . . . .132
Assessment Tool 1: Corporate Governance Guideline for Information
Integrity—A Checklist for Directors, Officers, and External Analysts . . .133
A Framework: The Information Testing and Validation Process . . . . . . . .136
Assessment Tool 2: Information Testing and Validation . . . . . . . . . . . . .137
Enterprise risk management application . . . . . . . . . . . . . . . . . . . .138
Initial data screening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .138
Basic validation techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140
Advanced validation of the process and data . . . . . . . . . . . . . . . . .141
Modeling and simulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143
Other considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Graphical Spot-Checking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Assessment Tool 3: Graphical Spot-Checking . . . . . . . . . . . . . . . . . . . .145
Enterprise risk management application . . . . . . . . . . . . . . . . . . . .150
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Validation through Simulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153
Enterprise risk management application . . . . . . . . . . . . . . . . . . . .153
Assessment Tool 4: Validation through Simulation. . . . . . . . . . . . . . . . .153
Enterprise risk management application . . . . . . . . . . . . . . . . . . . .154
The simulation process, its inputs and outputs . . . . . . . . . . . . . . . .155
Summary and other considerations. . . . . . . . . . . . . . . . . . . . . . . .156
Quantitative Modeling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157
Assessment Tool 5: Quantitative Modeling . . . . . . . . . . . . . . . . . . . . . .158
Models designed for communication (not just computation). . . . . . .159
Consistency of the process—the auditor’s viewpoint . . . . . . . . . . . .169
Enterprise risk management application . . . . . . . . . . . . . . . . . . . .162
Other considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162
Stress Testing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163
Assessment Tool 6: Stress Testing—A Framework for Assessing and
Quantifying Financial and Operational Risks. . . . . . . . . . . . . . . . . . .163
Definitions and requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . .166
Stress test development steps. . . . . . . . . . . . . . . . . . . . . . . . . . . .171
Other considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .172
Assessment Vignette. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174
Blessed assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174
The road to reliability: timeliness and consistency . . . . . . . . . . . . . .186
Assessment: Parting Shots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .189
5 Disposition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Disposition Toolbox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .194
Scenario Planning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .194
Disposition Tool 1: Scenario Planning . . . . . . . . . . . . . . . . . . . . . . . . .195
Enterprise risk management application . . . . . . . . . . . . . . . . . . . .199
Other considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .199
Political Risk Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Disposition Tool 2: Political Risk Analysis. . . . . . . . . . . . . . . . . . . . . . .201
Enterprise risk management application . . . . . . . . . . . . . . . . . . . 202
Detailed description of the political risk process . . . . . . . . . . . . . . 202
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Documentation Guidelines for Assumptions and Externally
Gathered Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
Disposition Tool 3: Documentation Guidelines . . . . . . . . . . . . . . . . . . 207
Other considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Enterprise risk management application . . . . . . . . . . . . . . . . . . . .210
Enterprise Risk Register. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .211
Disposition Tool 4: Enterprise Risk Register . . . . . . . . . . . . . . . . . . . . .211
Enterprise risk management application . . . . . . . . . . . . . . . . . . . .216
Other considerations and further enhancements. . . . . . . . . . . . . . .217
Environmental Scanning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .217
Disposition Tool 5: Environmental Scanning. . . . . . . . . . . . . . . . . . . . .218
Disposition Vignette . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Scenario development and executive summary. . . . . . . . . . . . . . . 227
Blessed assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
Coup de grâce: the big day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .241
Disposition: Parting Shots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
6 The 21st Century Energy Merchant
and the Alpha Advantage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
“Feeding and care” of the stakeholders. . . . . . . . . . . . . . . . . . . . . 257
3M’s Deep Satisfaction of Customer Needs . . . . . . . . . . . . . . . . . . . . . .259
Sustained competitive advantage . . . . . . . . . . . . . . . . . . . . . . . . .261
Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
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Preface
Sound governance requires reasonable assurance that the assets of the
corporation are safeguarded and that stakeholder value is being created.
The concept of reasonable assurance is fundamental to the auditing of
internal controls over financial statements. However, making sure the
financial recording and reporting process is robust is not the same as
making sure the inputs to these processes are reliable. Thus, an analogous
standard to reasonable assurance should be applied to the integrity of
information that feeds every material aspect of a company’s operations.
In this sense, ensuring information integrity goes beyond merely financial
statement compliance and strikes squarely at the heart of the emerging field
of Enterprise Risk Management.
The goal of Enterprise Risk Management (ERM) is to reduce the band
of uncertainty for both the probability and impact of occurrence of events
representing threats and/or opportunities to growth stakeholder value,
consistent with an organization’s pre-established risk appetite. This is
quite a mouthful, but what it means is that we have confidence that we
are taking the appropriate risks to ensure an adequate return. Reduction
of uncertainty relies upon more information in the form of new, validated
data. In the absence of gathered information obtained through a process of
market research for example, Monte Carlo sampling techniques can be used
to simulate the outcomes, thus acting as a kind of proxy for validated data.
There is a place for Monte Carlo techniques in quantitative risk analysis,
but if the overall goal is important enough (i.e., investor confidence, market
projections, sales forecasting), simulation is probably not sufficient to ensure
that you have a robust process. Taking this “simulation short cut” is not
adequate since it means that, although you are willing to postulate a range
of uncertainty and a distribution around an event, you are admitting that
you don’t really understand the drivers behind those events. It is ludicrous
to assume that reasonable assurance of either corporate governance or risk
management can be achieved if the inputs, or the information upon which
decisions are made, are fallacious or their drivers are not well understood.
Therefore, the integrity of the information, assured by the proper gathering,
validating and processing of this information is paramount to establishing
good strong management and thus ensuring good corporate governance.
Furthermore, ERM by its nature is more than simply sub-optimizing
the risk taking activities at each level or division of the organization. Instead
ERM is a strategic level activity, drawing it out of the realm of “that’s the line
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