Petron Corporation (the “Company”) has established an Enterprise-Wide Risk Management (“ERM”) framework and ERM programs that are designed to enable the organization to achieve its corporate objectives through managing risks that may adversely impact such objectives. Risk management is integrated in the daily operations and performance of the entire organization. Identified risks are analyzed and evaluated and major risks are regularly reported and raised to top management level for continuous monitoring and decision-making. The risk management process is integrated in the yearly business planning of all major divisions and departments, with the resulting annual business plan formulated being presented to the Board for approval. The ERM framework likewise searches for strategic risks that present opportunities and may create or add value to the Company.
ERM Structure
The Company has a Chief Risk Officer who supervises the entire enterprise risk management process of the Company and spearheads the development, implementation, and continuous improvement of the Company’s enterprise risk management processes and documentation. He heads the Risk Management Group, the dedicated risk management group of the Company tasked to lead the enterprise risk management program of the Company. All the heads of the Company’s divisions are designated risk owners of all risks emanating from their respective groups and each group is represented in the Risk Management Committee, the working group which was formed to become the conduit in cascading risk management efforts of Management to all employees and in receiving any feedback from them.
Major Risks
The Company classifies a risk as a major risk if it assesses the risk event to have a relatively high probability of occurring and a substantial adverse impact on the Company if the risk would occur. The major risks identified for 2023 are the following:
- Competition in the Industry. The Company has experienced challenges in domestic demand due to the increased level of competition in the deregulated oil industry its operates in, with over 400 industry players. With this large number of players participating in the market, competition is intense. To mitigate this risk, the Company employs retail and depot network expansion, pricing, and various marketing programs to gain a bigger share of the domestic market. However, Petron’s wide retail and depot network and its full range of products allow it to reach the domestic market more effectively than competition.
- Competition for Personnel. The Company depends highly on skilled, experienced, and qualified personnel. Loss of such personnel, or inability to replace and retrain with sufficient speed may result in disruptions in the Company’s operations, output, and financial performance.
The Company mitigates this risk by its continuous hiring of qualified individuals to replace those who have separated from the organization and ensure that the vacancies are immediately covered. Moreover the Company’s compensation and benefit packages are comprehensive, relevant, and at par with industry standards. Promotions and pay raises are given to recognize outstanding work performance. Performance appraisals are conducted regularly to ensure alignment of employees’ performance towards the Company’s objectives and targets. Meaningful training and other employee programs are planned and conducted to sustain employee engagement and improve retention.
- Crude Supply Risk. As a crude oil importer, the Company is subject to supply risk, with crude availability affected by external factors such as geopolitical developments, stability, and government regulations especially in the Middle East and other oil-producing countries, availability of vessels, weather conditions, and overall global economic conditions.
The Company mitigates this risk through its continuing programs on supply diversification and crude optimization at the Petron Bataan Refinery, evaluation of the mix of term and spot crude sourcing, and assessment of capabilities to store and manage inventories. The Company also evaluates processing and logistics facilities upgrades, such as Petron Bataan Refinery’s Refinery Master Plan 2 (RMP-2) and Petron Malaysia Refinery’s Diesel Hydrotreater unit, to enable the receipt and processing of an improved range of processable crudes.
- Financial Risks. The Company is exposed to financial risk resulting from the volatility in prices of input crude and output finished products. Fluctuations and mismatches in price movements are brought about by changes in global supply and demand for crude oil and finished products, international economic conditions, global conflicts, and other factors over which the Company has no control. Recently, events such as the COVID-19 pandemic and the Russia-Ukraine war have resulted in substantial oil price swings. Such volatility may result in significant cash flow variability and higher financing expenses.
The Company mitigates this risk by entering into commodity hedging for its crude and product exposure. The Company has a Commodity Risk Management Committee that actively evaluates hedging policies and strategies to protect the Company from risks of inventory losses and margin contraction. The Company also regularly assesses refinery utilization considering the latest available price outlook and domestic demand forecast, and prudently manages its capital and operating expenses and receivables, particularly during times of high volatility.
- Foreign Exchange Risk. The risk arises from the difference in the denomination of majority of the Company’s revenues (Philippine Pesos) and the bulk of its costs (US Dollars). In addition, exposure to foreign exchange risk also arises from foreign-denominated debt obligations that are exposed to revaluation and could increase in peso terms with forex fluctuations.
The Company manages this risk by hedging dollar-denominated liabilities using forwards and other derivative instruments and generating dollar-denominated sales. Moreover, the Company uses an enterprise resource planning software that monitors financial transactions. This planning tool allows real-time awareness and response to contain losses posed by foreign exchange exposure.
6. IT Security and Privacy Risk. Information technology plays a vital part in the organization and reliance on technology also exposes assets to security and privacy risks.
To mitigate this risk, the Company has established an IT security infrastructure that is equipped with features which are capable to protect the hardware and software assets of the organization from cyber security risks. To further prevent cyber risks from happening, the Company’s Management Information Systems Division periodically administers a health check to spot early signs of hardware or firmware issues. For long-term protection, regular end-to-end inspection of the entire system are done proactively to identify faults in the hardware as well as bugs in the firmware and apply corrective actions as these are identified. Asset, software, or facility upgrades are regularly identified and funded to protect the Company’s data and privacy.
- Operational Disruptions Risk. These may be caused by unplanned events such as serious process or machine failure, accidents, weather-related events, or human error at the Company’s Refinery terminals and other facilities. These disruptions may result in injury or loss of life, damage to Company property, or damage to other properties in the immediate area where the facility is situated. Such disruptions may result in significant financial losses from product run-outs and loss of sales, loss of margins from product discounting or from required spot purchases, equipment repair or replacement, and insurance cost escalation.
To mitigate these risks, the Company ensures that the Petron Bataan Refinery and terminals adhere to a program of planned and strategic . For the Petron Bataan Refinery, scheduled shutdown maintenance is periodically carried out in accordance with an established turnaround planning cycle. In addition, routine, preventive and corrective reliability and maintenance programs are done, supported by adequate and advanced instrumentation and the latest tools and equipment. The Petron Bataan Refinery, the country’s only oil refining facility, continued to be Integrated Management System (“IMS”)-certified which demonstrates the Company’s continuous adherence to global standards on safety, health, quality and environmental management. The Company’s IMS certification covers the Environmental Management System (EMS, ISO 14001:2004), Quality Management System (QMS, ISO 9001:2008S) and Occupational Health and Safety Management System (OHSMS, 18001:2007).
All of the Company’s 30 terminals have been certified under the ISO 9001:2015 (QMS), while 29 terminals received certification for ISO 14001:2015 (EMS), and ISO 45001:2018 (Occupational Health and Safety Management System) standards. Moreover, the Petron pier facilities are compliant with the International Ship and Port Facility Code which is certified by the Office of the Transport Security under the Department of Transportation.
The Company likewise maintains insurance whose coverage includes property, marine cargo and third party liability, as well as personal injury, accidental death and dismemberment, sabotage and terrorism, and machinery breakdown. One of the main insurance policies of the Company, the Industrial All Risk policy, covers the Petron Bataan Refinery for material damages, including machinery breakdown cover.