Part of the philosophy of ERM in Statoil is never to lean back and consider the job done. While the progress in achieving the necessary buy-in for new approaches is gradual and sometimes slow, the frontiers are pushed ever forward. Decision makers around the company need to have their worldviews challenged, as the thinking goes, and to be provoked into new ways of looking at things.
Exhibit 4.3 Comparing Different Risk Profiles
One area where work is currently being done is giving the concept of risk appetite a content that is meaningful to Statoil. Risk appetite is commonly construed as the amount of risk exposure a company is willing to retain in order to pursue the upside potential it considers appropriate and desirable. True to its tradition of quantifying risk, Statoil frames risk appetite in terms of several quantitative risk measures. The variable, return on capital employed (ROCE), is one of the performance indicators that Statoil considers useful in this regard since it sums up the net effect of a large number of risk exposures. Risk appetite in Statoil is about formulating, for a given upside, how large of a potential shortfall, or tail risk, Statoil is willing to accept in terms of a particular performance indicator; see Jankensgard (2010) for a discussion about constructing shortfall risk measures in an ERM context.
Another area where Statoil is pushing the frontiers concerns the relationship between ERM and strategy. As part of this project, the ERM team has developed estimates of how different strategic paths would contribute to different risk categories, such as reservoir risk, implementation risk, market risk, or risks related to health, safety, and environment. Depending on which strategic path is considered, the composition of the company's overall portfolio of risk would gradually shift in a particular direction (see Exhibit 4.4). This initiative is about clarifying the nature of this impact and making senior decision makers aware of the consequences of their strategic decisions.
This graph illustrates how different strategic paths would, if implemented by management and the board of directors, impact the overall composition of Statoil's portfolio of risks. Each bar represents a strategic path, and the shadings indicate the relative importance of different types of risk (country risk, market risk, implementation risk, and so on). They-axis shows the expected risk (probability/impact)
Exhibit 4.4 ERM and Strategic Risk
associated with each strategic path on both the upside and the downside. Note that certain risk categories appear on both the upside and the downside, and that these impacts need not be equally large. This asymmetry is at hand also for market risk, due to differences in marginal taxation across different income levels for oil companies. In the final decision making, the risk profile of each strategy path would have to be compared with the estimated investment outlays and the expected return on investment (not shown in the graph).