RISK MANAGEMENT
The ORLEN Group conducts ongoing monitoring and risk assessment and takes steps to minimize its impact on the financial situation.
Enterprise RiskManagement System
In 2020, the organisation and underlying principles of the Enterprise Risk Management System did not change relative to the previous year. Based on its Enterprise Risk Management Policy and Procedure, the ORLEN Group monitors and assesses its risk exposures on an ongoing basis and takes steps to minimise their probability and impact.
As required by these regulations, the Financial Control, Risk Management and Compliance Office was established at PKN ORLEN S.A. to coordinate the enterprise risk management (ERM) processes across all levels of the organisation. The Management Boards of all ORLEN Group companies are responsible for risk management at their respective companies.
The Enterprise Risk Management System is a tool used to support effective delivery of the ORLEN Group’s strategic and operational objectives. It provides information on any identified risks and supports effective risk management
Key roles in the Enterprise Risk Management System
Risks are assessed regularly by individual business areas of PKN ORLEN S.A. and the ORLEN Group as part of their self-assessment and risk controls testing. The key objective is to ensure that risk estimation is up to date, and that the risk controls are validated for adequacy and effectiveness. Process and risk owners and in charge of the assessment, based on their positions and remits.
In the risk assessment, the materiality of each risk is determined under three scenarios:
- where there are no risk-specific controls in place (gross risk assessment);
- where the existing risk-specific controls are in place (net risk assessment). The net risk assessment requires testing relevant risk mitigating controls, in line with the guidelines adopted by the Company as part of the ERM Procedure, prepared in accordance with the ERM Policy adopted by the Company’s Management Board;
- where the risk is at a desired (acceptable) level – target risk assessment.
Once the risk assessment and risk controls testing processes are completed, the Company’s Management Board and Supervisory Board receive a report highlighting risks assessed as key by the business segments.
Risks at PKN ORLEN S.A. and other ORLEN Group companies are defined based on a common model, and further detailed at the level of individual business processes or strategic objectives.
In 2020, as part of an annual risk self-assessment process and risk controls tests at PKN ORLEN S.A., 493 risks were assessed based on tests of 982 controls in 145 business processes. The ORLEN Group companies evaluated 678 risks and 1,818 control mechanisms in 171 processes.
In 2020, the ERM system covered the following entities: PKN ORLEN S.A., Anwil S.A., ORLEN Lietuva Group, Unipetrol Group, ORLEN Deutschland GmbH, ORLEN Paliwa Sp. z o.o., and ORLEN Centrum Usług Korporacyjnych Sp. z o.o.
In the Enterprise Risk Model adopted by the ORLEN Group, all identified risks are classified into the following categories:
I. STRATEGIC RISKS – directly related to strategic objectives, specific actions and performance indicators.
II. PROJECT RISKS − events or circumstances which, if they materialise, may have an adverse effect on one or more project objectives. These risks are subject to ongoing assessment during project implementation.
III. PROCESS / OPERATIONAL RISKS – identified in the ordinary course of business; their identification facilitates effective process management. These risks are assessed by business owners annually in a self-assessment process.
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Risks/processes |
Risk description |
Risk mitigation methods |
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STRATEGIC |
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Assumptions |
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Regular checks of the validity of and monitoring of key strategic objectives against the changing environment (regulations, market, key suppliers, etc.). |
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Division of responsibilities
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High degree of employee specialisation, appropriate delegation of duties and responsibilities by precisely defining their scopes. |
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New regulations |
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Participation in public consultations on draft legislation to limit the risk of unfavourable regulations coming into force. |
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Workplace accidents and other hazards |
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Oversight and management of contractors by implementing work safety monitoring tools. Ensuring appropriate mechanisms for continuous monitoring of hazard and risk assessments. Implementation of uniform requirements for contractors and subcontractors in line with ORLEN Group Safety Standard No. 9. |
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PROJECT |
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Budget overruns |
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Regular monitoring of contractor’s activities and potential schedule delays. Regular monitoring of actual costs vs budget. |
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Schedule delays |
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Ongoing supervision of progress of work, assessment of progress against project milestones, and ensuring work completion. |
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Changes to project scope |
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Regular analysis of the project environment. Possibility to change the project scope if circumstances so require. Review of planned and completed work included in the project scope. |
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Division of responsibilities
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Development and implementation of a methodology for division of responsibilities among the project team to avoid conflicts of interest. Proper allocation of human resources during project preparation and implementation. Using a dedicated IT tool to support project management. |
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Systems |
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Identification of alternative IT systems at the project planning stage or testing of other systems to enable project implementation. |
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PROCESS/OPERATIONAL |
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Supplies |
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Regular monitoring of deliveries made by land and sea. Using dedicated statistical and analytical tools, and analysing industry and news sites. Regular review of the market for selected crude grades in terms of their availability and purchase options. Checking and confirming on a case by case basis the economic viability of purchase transactions not covered by contracts. |
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Conducting the supplier selection process in keeping with applicable procedures and documents (market research, lead time analysis, periodic supplier evaluation, etc.). Review of market conditions in terms of availability of required services and feedstocks and their prices. |
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Putting internal procedures in place enabling effective emergency response (direct purchases of services and feedstocks). Monitoring the frequency and quality of production reports and their delivery to organisational units requiring such reports. |
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Refining |
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IT system in place supporting overhaul and maintenance planning for the production plant. Review of the preparation and approval of maintenance shutdown plans. |
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The area responsible for production balancing has tools enabling it to implement the balancing process in an optimal way. The procedures and processes in place specify the responsibility, scope and time frames for providing production balancing input data. Regular checks of the production balance verification process and the level of balance differences. |
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Regular monitoring and review of initiatives based on relevant expertise to ensure that projects offering the greatest potential (efficiency gains) are implemented. Checking compliance of the project’s business rationale with applicable regulations. |
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Distribution and logistics |
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Periodical checking of the levels of pollution (contamination) with petroleum products at fuel terminals. Oversight of air measurements in accordance with legal requirements. | |
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Regular monitoring of the emergency stock levels. Preparation of regular stock volume reports and delivering them to all units concerned. | |
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Periodic inspections of the logistics infrastructure. Regular monitoring of product inventory and planning for complementary shipments. Checking the correctness of the secondary logistics scheduling process. | |
| Retail Sales | ||
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Pricing policy setting the rules of cooperation with trading partners and systemic mechanisms put in place to prevent any irregularities. Checking the parameters of contracts with fleet customers for correctness before entering them in the system and checking customers’ purchasing potential. Regular verification of the correctness of the negotiated price terms. | |
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Checking the applied ethical standards and knowledge of the Code of Ethics, and investigation of any indications of fraud or breach of ethical standards. Regular inspections of service stations and fuel terminals. | |
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Dedicated price management tools ensuring an effective pricing policy. Checking and monitoring the correctness of retail price changes entered into systems and the prices displayed on price totems at PKN ORLEN S.A. service stations. |
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Optimisation of the food and store range offered at service stations. | |
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Regular quality control inspections at service stations. | |
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Regular monitoring of performance against sales and production targets with the assistance of wholesale and supply chain management teams. | |
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Negotiation of commercial terms and execution of contracts as per the powers of attorney in place. There is a formal process in place for contract execution and issuing opinions on contracts. Keeping up-to-date records of long-term contract negotiations. | |
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Making credit decisions based on a financial analysis model. Regular monitoring of past due receivables and collection of debt in accordance with the Policy and Instruction on Enforcement of Security in Commercial Transactions. | |
| Finance1 | ||
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Market risk management policy and hedging strategies defining the rules for measuring individual risk exposures, parameters and time horizons of hedging against particular risks, and the applied hedging instruments. | |
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Short-term liquidity management policy defining the rules for reporting and consolidation of liquidity at PKN ORLEN and other ORLEN Group companies The ORLEN Group pursues a policy seeking to diversify its financing sources and uses diverse instruments to effectively manage its liquidity position. | |
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A bank’s short-term credit rating Short-term liquidity management policy, funding sources diversification policy, and tools for effective liquidity management. | |
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Customer solvency and creditworthiness assessment. Management based on the adopted trade credit and debt collection management policy and procedures. |
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| Laws and regulations1 | ||
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Monitoring of regulatory changes in countries where the ORLEN Group operates and active participation in legislative processes. | |
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Corporate management |
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Having a procedure in place for managing logical access to IT systems, including authorisation of requests for the assignment or modification of user privileges, limited access to the operating system, database and hardware layers, and complex password security level. Checking authority levels on an ongoing basis. | |
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Periodic analysis and updates of operational planning models and regular monitoring of the implementation of the operational plan. Ensuring uniform data formats for corporate planning and preparing precise work schedules. |
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1) For a detailed description of the financial risks as well as the methods applied to measure, manage and hedge the risks, see Section 16 of the Consolidated Financial Statements for 2020.
Regulatoryenvironment
Changes in Polish and EU regulations having an impact on the ORLEN Group's operations and results:
Biofuels – The Act on Biocomponents and Liquid Biofuels of August 25th 2006 (as amended) sets out the obligations for the placing on the market of biocomponents and biofuels (NIT), imposed on producers and importers of transport fuels.
Emergency stocks – producers and traders must pay a ‘stocks charge’ for gradual reduction in the amount of physical stocks they are required to hold. Poland: fulfilment of the physical stocks target – from December 31st 2017: 53 days, the stocks charge maintained at its current level (PLN 43/t of oil equivalent and PLN 99/t of LPG). Supply security stocks are held partly by producers/traders (emergency stocks) and partly by the Material Reserves Agency (agency stocks). Czech Republic: emergency stocks are maintained by a state agency at a level of 90 days’ net imports of crude oil and are financed from the state budget. Lithuania: maintaining stocks equivalent to the higher of 90 days’ average daily net imports or 61 days’ average daily domestic consumption. The amount equal to at least 30 days’ average daily domestic consumption is accumulated and maintained by the state agency as earmarked stocks, with the balance held by businesses.
Regulations on the liquid fuel market and on curbing grey economy in fuel trade – the Act Amending the Value Added Tax Act and Certain Other Acts (the so-called “fuel package”) of July 7th 2016 and the Act Amending the Energy Law and Certain Other Acts (the so-called “energy package”) of July 22nd 2016, which introduced a number of changes to the regulation of the liquid fuel market in Poland, including new rules regarding VAT settlements on liquid fuel imports to Poland, and linked the requirements with licence requirements.
Monitoring of the carriage of goods by road and rail – the Act on the Monitoring System for the Carriage of Goods by Road and Rail and on Fuel Oil Trade of March 9th 2017. The purpose of the Act is to further curtail the informal fuel trade in Poland, and the legislation supplements solutions introduced as part of the fuel package and the energy package. It imposes an obligation to register road and rail transport of goods considered sensitive and to establish a relevant supervision system. The Act is amended o an ongoing basis to include new mechanisms to further curtail grey economy in fuel trade and goods considered sensitive (e.g. fuel oils and LPG).
CO2 – Implementation of the rules of operation of the greenhouse gas emission allowance trading system in the Act Amending the Act on the Trading System for Greenhouse Gas Emission Allowances, including the establishment of a Modernisation Fund, amending the rules for harmonised free allocation of emission allowances and their adjustment due to changes in the scale of operation. Initiating work to amend the Act as a result of publication of the European Commission’s new guidelines on the fourth trading period of the EU ETS.
Natural gas market – December 16th 2020 saw the publication of the government’s bill amending the Energy Law and Certain Other Acts, putting forward, among other things, proposals for the introduction of legal bases for the operation of closed distribution systems (CDS), exempting CDS operators from the obligation to submit tariffs for approval by the President of the Energy Regulatory Office and to prepare development plans.
On December 14th 2020, a bill amending the Act on Electromobility and Alternative Fuels and Certain Other Acts was published, putting forward, among other things, proposals for new regulations governing the operation of natural gas stations and the use of natural gas in transport.
On September 21st 2020, further work was undertaken on the Minister of Climate’s draft regulation on detailed technical requirements for LNG bunkering stations.
Taxation of upstream activities in Poland – tax on production of certain minerals, payable from 2020, calculated individually for each well, at 1.5%–6% of derived revenue, depending on the type of deposits and hydrocarbons (Orlen Upstream pays the tax at 3% of derived revenue). It is possible to deduct from the tax a cumulative tax loss (19% of the loss amount) which – due to the lapse of a five-year period – was not offset against corporate income tax. Production royalty, depending on the volume and quality – for natural gas: PLN 5.74–PLN 26.54/1,000 Nm3 (since 2021); for crude oil: PLN 40.74–PLN 55.5 28/tonne (since 2021). Extraction charge – fixed component (determined on a case-by-case basis) and variable component of 50% of the mineral production royalty for the previous year. Property tax of up to 2% of the initial value of property, plant and equipment, corporate income tax – 19%.
Taxation of upstream activities in Canada (royalties): – payable on wells spudded on or after January 1st 2017. Royalty rate from 5% to 40%, depending on the type of hydrocarbons, market prices, and well output. Exemption on account of incurred costs of drilling and completion – relief in the form of reduced tax liabilities with respect to all new qualifying wells. Royalty of up to 5% on a well’s early production until the well’s total revenue from all hydrocarbon products equals the drilling and completion cost allowance, CIT at the rate of 24%.
Regulation (EU) 2020/852 (Taxonomy) of the European Parliament and of the Council of June 18th 2020 on the establishment of a framework to facilitate sustainable investment. The Regulation establishes a framework for determining whether an economic activity qualifies as environmentally sustainable. It introduces, inter alia, harmonised and transparent funding rules and support criteria for green investment projects; provisions to prevent investing EU funds in carbon-intensive technologies.
Commission Implementing Regulation (EU) 2020/1294 of September 15th 2020 on the Union renewable energy financing mechanism. The Regulation lays down the rules necessary for the implementation of the Union renewable energy financing mechanism. It provides, among other things: support for new renewable energy projects with the aim of covering a gap in the Union trajectory; contributes to the enabling framework supporting renewable energy deployment across the Union.
The Minister of Climate and Environment’s Regulation of November 9th 2020 on the detailed procedure for collecting the capacity charge. Under the Regulation, on November 19th 2020 the President of the Energy Regulatory Office published selected hours of the day during peak demand for power in the system, and will calculate the amounts of the capacity charge for 2021.
The Council of Ministers’ Regulation of December 16th 2020 on the maximum amount and value of electricity from renewable energy sources which may be sold through an auction in 2021. The purpose of the Regulation is to lay down the rules necessary for announcing and conducting RES auctions. Key assumptions: no support for existing and upgraded renewable energy sources; the total volume of electricity to be sold through an auction in 2021 is estimated at 69.6 TWh over a 15-year support period. The total maximum value of those volumes is approximately PLN 25 billion.
The Minister of Climate and Environment’s Regulation of November 11th 2020 amending the Regulation on detailed conditions for the operation of the power grid. The purpose of the Regulation is to amend the provisions concerning, inter alia, the operation of the electricity Balancing Market (BM); connecting equipment to the power grid; the possibility of active participation for further power system users, taking into account the specific nature of individual groups of entities; establishing new rules for determining, calculating and updating certain key prices applied in the Polish BM model; expanding the possibility of creating active scheduling units for different technologies; adapting BM solutions to the requirements specific to units other than centrally dispatched generating units (large system generators).
The Minister of Climate and Environment’s Regulation of November 13th 2020 amending the Regulation on detailed rules for determining and calculating tariffs and settlements in electricity trading. The purpose of the Regulation is to amend the provisions concerning, inter alia: the possibility of establishing a tariff group for customers connected to the grid who use electricity exclusively for the purpose of operation of a publicly available charging station and provision of charging services on that station; the mechanism for taking into account, as part of the regulatory account balance in the tariffs applied by power system operators, the differences between the actual revenue earned by those operators and the revenue planned to be earned based on the tariffs approved for those years; the possibility for final customers to receive electricity bills and information on electricity settlements in electronic form; introducing the possibility of settlement with final customers exclusively in electronic form.
Government’s bill amending the Energy Law and Certain Other Acts. Alignment of the Polish law with EU regulations with regard to the effective operation of the smart metering system in the energy sector. The regulation will expand the possibility of using support mechanisms for renewable energy generation, in particular solar photovoltaics and hydropower. The bill partially takes into account the changes in the capacity market to be discussed as part of amendments to the Capacity Market Act, the work on which was suspended in the fourth quarter of 2020. The key amendments planned to be made to the Act relate to the schedule of AMI deployment, energy storage facilities, changes in the method of calculating penalties for failure to achieve an Operational Milestone as part of the capacity market.
Proposal for a Regulation of the European Parliament and of the Council establishing the Just Transition Fund. The Fund's objective is to provide support to territories facing serious socio-economic challenges deriving from the transition process towards a climate-neutral economy by 2050. The Fund’s assets are to be allocated, among other things, to zero carbon power generation projects (excluding natural gas, for instance with respect to regions which are heavily dependent on coal production and combustion) and to other types of projects, i.e. microenterprises, sustainable tourism, community amenities, universities and public research institutions, energy storage technologies, low-emission district heating, smart and sustainable mobility, digital innovation, projects to combat energy poverty.
Bill amending the Act on Greenhouse Gas Emission Allowance Trading Scheme and Certain Other Acts (pertaining mainly to the Modernisation Fund (MF)). The bill concerns, among other things, regulations dedicated to the establishment of an operator to be responsible for the distribution of funds from the Modernisation Fund (MF) in Poland, to be established for the period 2021–2030. The priority areas for support are: investments in distribution networks; development in RES; energy storage, energy efficiency. The Modernisation Fund, established for 2021–2030, will use the proceeds from the sale of 2 per cent of the total CO2 emission allowance pool. This is the effect of negotiations on changes to the EU ETS. The pool to be allocated from the Modernisation Fund to Poland depends on the price of CO2 emission allowances, and is estimated at EUR 2 billion–EUR 4.8 billion. The Polish operator of funds from the Modernisation Fund will be the National Fund for Environmental Protection and Water Management; in the case of priority investments, it is possible to apply for the financing of up to 100% of the eligible costs, while in the case of non-priority investments – of up to 70% of such costs. The European Investment Bank, which will be the European MF operator, has the right to challenge the whole or a part of the list of projects as being inconsistent with Directive (EU) 2018/410 of March 14th 2018 governing the objectives of the Fund.
The Minister of Climate and Environment’s draft Regulation on the method of determining the connection capacity for internal and external parking spaces designated for public utility buildings and multi-family residential buildings. The Regulation seeks to define the method of determining the minimum connection capacity to be supplied to internal and external parking spaces designated for public utility buildings and residential buildings. Under the new, detailed regulations, the Distribution System Operator will be required to incur capital expenditure on modernisation and new distribution networks.
Act on Projects to Mitigate the Effects of Drought. The Act seeks is to incorporate into the legal system solutions to simplify and accelerate work on preparing for implementation of water retention projects designed to reduce the effects of drought in Poland (applies also to facilities and areas used in hydropower engineering). Following the change in the method of and basis for calculation of the water discharge fee, the costs of discharging water from storage yards, car parks, internal roads, etc. may rise.
The updated draft Poland’s Energy Policy 2040. Assumptions of the updated PEP 2040 project: the target share of renewable energy in Poland in 2030 was set at 21%–23%, instead of 21%; the target share of renewable energy in Poland in 2040 was set at 28.5%; the share of coal in electricity production was set at 56%–60%; the first nuclear power plant units are planned to be launched in 2033−2043 (six NPP units with a total capacity of 6–9 GW will be constructed); energy efficiency is to improve by 23% in 2030 relative to 2007; CO2 emissions are to be reduced by 30% by 2030 compared with 1990. The forecasts presented in the draft document envisage deceleration of some of the existing modernisation efforts with respect to the energy sector (e.g. development of gas-fired generating units), maintaining the relatively stable level of installed capacity of onshore wind farms (the earlier draft provided for a reduction), while presenting a number of initiatives aimed at minimising the negative effects of energy transition in Poland. Coal-fired generation will continue to be a major building block in Poland’s energy mix until 2030. Note: At the European Council summit held on December 10th−December 11th 2021, the EU Member States approved a binding EU target for reducing, by 2030, net greenhouse gas emissions in the EU by at least 55% relative to 1990. This will certainly be one of the key factors, which will also change the final assumptions and shape of Poland’s Energy Policy 2040.
Pre-consultations held as part of the Ministry of Development’s and the Ministry of Climate and Environment’s work on amending the Act on Wind Farm Projects with respect to the distancing /10H rule. The objective is to facilitate the construction of onshore wind farms closer to residential buildings (locating them at a distance of less than 10 times the total height of the turbines) and to re-launch certain projects that were suspended as a result of the entry into force of the 2016 regulations.
Government’s bill on the Promotion of Electricity Generation in Offshore Wind Farms. The project involves increasing the share of renewable energy sources in Poland’s energy mix through introducing a support system and administrative and legal improvements in order to facilitate the construction of offshore wind farms.
Regulation establishing the framework for achieving climate neutrality and amending Regulation (EU) 2018/1999 (European Climate Law). The Regulation sets out a binding objective of climate neutrality, including the achievement of net-zero greenhouse gas emissions (relative to 1990) by 2050 at the European Union level, and requires the European Parliament, the Council and the Commission and the Member States to take measures both at Union and national level to enable the achievement of this objective. Under the Regulation, by September 2020 the European Commission (EC) is to assess the Union’s 2030 target concerning greenhouse gas emission reduction by least 40% relative to 1990, in light of the 2050 climate-neutrality objective. In particular, the Commission will examine the possibility of setting the greenhouse gas emission reduction target for 2030 at 50–55% relative to the 1990 levels and will consider adopting appropriate legislative proposals in this respect.
Non-financialrisks
Risks related to social and employee issues, respect for human rights, environmental, health and safety at work, anti-corruption and bribery may occur in 3 main risk categories (strategic, project, process / operational) in the ORLEN Group.
The list of risks, methods of their mitigation and trends in the development of risks for the above-mentioned issues is presented in the table below.
