STATOIL CASE STUDY
1. Risks faced by Statoil
Capacity Expansion Risks: Statoil's future production was heavily dependent upon its
success in finding or acquiring and developing additional reserves. If unsuccessful,
Statoil might not meet its production targets, and total proven reserves and production
would decline, adversely a ecting the company.
Acquisitions Risks: Statoil pursued growth opportunities by acquiring businesses or
properties that complemented or expanded its existing portfolio. The success of this
strategy depended on factors such as identifying acceptable opportunities, negotiating
favorable terms, developing the performance of new market opportunities or acquired
properties, integrating acquired properties or businesses into its operations, and
arranging financing if necessary.
Operations Risks: Statoil was exposed to various operations risks, including reservoir
risk, risk of loss of oil and gas production, and o shore catastrophe risk. These risks
were managed through insurance, reinsurance programs, and working with the
corporate risk management department.
Political Risks: Statoil had assets located in unstable regions around the world, making
it vulnerable to disruptions due to war, terrorism, expropriation, nationalization of
property, civil strife, and other political factors in countries where it operated.
Health, Safety, Environmental and Catastrophe Risks: Statoil incurred substantial
capital and operating costs to comply with increasingly complex laws and regulations
covering the protection of the environment and human health and safety. This included
costs to reduce air emissions, discharges to the sea, and remediate contamination at
various facilities.
Equity Price Risks: Equity instruments were exposed to price risk, and Statoil used
derivatives to manage this risk. The fair value of these instruments was based on quoted
market prices, and risk was estimated as the potential loss in fair value resulting from
adverse changes in quoted market prices.
Foreign Exchange Risks: Statoil's cash flows were largely denominated in currencies
other than NOK, exposing the company to movements in foreign exchange rates. Statoil
used forward foreign exchange contracts and currency options to manage existing
receivables and payables.
Interest Rate Risks: Statoil was exposed to the risk of interest rate fluctuations due to
the existence of assets and liabilities earning or paying variable rates of interest. The
company used derivatives to manage this risk.
Credit Risks: Statoil was exposed to fluctuations in underlying interest rates, foreign
exchange rates, and commodity prices. The company used derivatives to reduce the
risks in overall earnings and cash flows, managing total exposure at the portfolio level in
accordance with the strategies and mandates issued by the ERM Program and
monitored by the Corporate Risk Committee.
2. Impact of these Risks.
The impact of the risks outlined in the document varies depending on the specific risk.
Here are the impacts of each risk:
Capacity Expansion Risks: If Statoil is unsuccessful in finding or acquiring additional
reserves, its production targets may not be met, leading to a decline in proven reserves
and production levels.
Acquisitions Risks: Statoil's ability to successfully pursue growth opportunities through
acquisitions depends on various factors, including identifying acceptable opportunities,
negotiating favorable terms, and integrating acquired properties or businesses into its
operations. Failure to do so could impact the company's growth and profitability.
Operations Risks: Various operational challenges, such as cost overruns, lower oil and
gas prices, equipment shortages, technical di iculties, and environmental issues, can
impact the success and profitability of development projects.
Political Risks: Assets located in unstable regions are vulnerable to disruptions due to
war, terrorism, expropriation, civil strife, and other geopolitical factors, which can
impact Statoil's operations and investments in those regions.
Health, Safety, Environmental, and Catastrophe Risks: Compliance with complex laws
and regulations, costs related to environmental protection, and hazards associated with
oil and gas exploration and production can impact Statoil's capital and operating costs,
as well as its financial performance.
Equity Price Risks, Foreign Exchange Risks, Interest Rate Risks, and Credit Risks: These
financial risks can impact Statoil's earnings, cash flows, and overall financial stability.
Fluctuations in equity prices, foreign exchange rates, interest rates, and credit risk
exposure can lead to potential losses in fair value and impact the company's financial
position.
3. How did Statoil Mitigate these risks?
Statoil employed various strategies to mitigate the wide range of risks in their
operations.
To address Capacity Expansion risks, Statoil focused on successful exploration
and development activities to maintain production levels and reserves.
For Acquisitions Risks, the company aimed to identify acceptable opportunities,
negotiate favorable terms, and integrate acquired properties or businesses into
its operations.
In terms of Operations Risks, Statoil insured all installations and managed other
insurable operational risks through a captive insurance company and
reinsurance program.
To mitigate Political Risks, the company monitored and managed assets located
in unstable regions and was prepared for potential disruptions due to war,
terrorism, or expropriation.
Health, Safety, Environmental, and Catastrophe Risks were addressed through
compliance with complex laws and regulations, investment in pollution control
equipment, and certification to international standards.
Statoil managed Equity Price Risks, Foreign Exchange Risks, and Interest Rate
Risks through the use of derivatives to reduce overall earnings and cash flow
risks.
Finally, the company managed Credit Risks by monitoring and managing market
risks through an Enterprise-Wide Risk Management Program and the Corporate
Risk Committee.
