Section 1: Introduction The energy value chain is a vital component of the global economy, an industry whose outputs underpin the growth and productivity of all other sectors of the global economy. The future business prospects of the companies that are part of this value chain range widely and depend on both internal and external forces. In this case study, we present the application of scenario stress tests to energy value chain companies as a systematic approach for highlighting potential futures and assessing risks which may impact an organisation, sectors, or economies and for managing emerging risks.
The general objectives of our overall research programmes are to better understand current views, practices, and mitigations of risks at corporations and how they are adapting to meet future challenges and opportunities. While this report focusses on global corporations within the energy value chain, we expect organisations from other sectors to find considerable overlaps on the definition and application of scenarios as part of their risk management processes.
Futures scenarios may range from a business-as-usual perspective without major disruptions to its production or consumption, or the extreme converse - massive fundamental shifts to the energy landscape. This range of futures challenges strategic planning at companies, in particular, their risk management departments who have added responsibilities for incorporating this wide array of futures into their standard risk frameworks. Emerging risks pose particular risks to energy value chain companies. Given their capital investments and size, energy companies are often less agile to respond to internal and external risks that threaten their business models. These companies often have high capital investments in physical infrastructure, real estate and highly specialised staff, all of which make it difficult to execute rapid strategy changes. Good practices in risk management serve to avoid or respond effectively to crises whether the risks are recognised or emerging. We argue that current risk management practices of global corporations may need to be rethought, or even reinvented to address tail risks - including processes for their identification, evaluation, mitigation, and monitoring. Traditionally, risks associated with regulation, natural hazards, geopolitics and macroeconomics have been key drivers of risk for the energy sectors. While high severity shocks in those risk areas will always be relevant, trends such as changes in climate and social sentiment regarding environmental issues represent new classes of risks which have yet to fully manifest through company balance sheets. The research presented in this report is part of the Cambridge Centre for Risk Studies’ research track on corporate risk profiling.2 In partnership with the Institute for Risk Management, it is informed by views from risk management specialists representing companies within the energy value chain. These views were elicited through a combination of individual interviews, workshops, focus groups, live polling and an online survey.
2 (Cambridge Centre for Risk Studies 2018) Scenario Applications: Stress Testing Companies in the Energy Value Chain
8
Cambridge Centre for Risk Studies
