Enterprice-wide risk management

1. Enterprice-wide risk management Energy Risk Europe, 4th October 2006 London

2. The Statoil groupShort on history – long on achievements Competitive returns1) Return on Average Capital Employed 2004 • Production (2004): 1.1 mmboepd • Reserves (2004):4.3 bn boe • 24,000 employees • Activity in 29 countries • Operating 2.7 mmboepdof NCS production • Marketing 2/3 of NCS gas volumes • World’s 3rd largest crude oil seller 1 Source: Lehman Brothers Oil and Gas Quarterly Scoresheet (10 February 2005), rolling 12-month ROACE.

3. Designing an effective enterprise-wide risk management framework

4. Enterprise-wide Risk ManagementCorporate Risk Management (blue font) Tactical risk • Market (prices) Strategic risk • Market (prices) • Country • Tax • Reputation Credit risk Operational risk • Accidents • Catastrophe • Environment • Reservoir • Project • HSE • Administrative Insurable risk via Captive Short term Long term

5. CRC advicery role CRC decision vehicle Information to CRC / training Corporate Risk Committee • Corporate Risk Committee (CRC) at group level (advisory role / responsible for): • Strategic market risk policy • corporate hedging policy and strategies • strategic market views • Insurance policies • Insurable risks • Credit risk • Trading methodologies issues • Risk reporting • Risk assessments of large projects with difficult business risks • Portfolio risk assessments • Participants: • CFO (head of CRC) • Head of Country Risk and Social Responsibility • Head of Refining & Marketing • Head of Oil Trading and Supply • Head of Financial Services • E&P Norway • International E&P Strategy and Control • Natural Gas Finance & Control • Natural Gas Long Term Market • Corporate Risk Management

6. CRC cases (overview 2003-2005)

7. Strategic risk management policySummary • Statoil’s corporate risk management defines crude oil price, natural gas price and production of crude oil and natural gas as the corporate’s core risks. • Main goals in the corporate’s risk management policy: • contribute in ensuring Statoil’s long term strategic development and reaching targets through protecting financial flexibility, i.e. avoiding different categories of financial distress, downrating and protecting cash flow, making the corporate able to • start and accomplish profitable projects/acquisitions and • avoiding forced divestments even in periods with bad market conditions.

8. Dynamic measurement of risk.

9. Some challenges for the energy sector? • In a bank a currency trader knows that when he has bought some foreign currency, he has a position ! • When is an oil trader getting a position? • All future potential positions? • All proven reserves? • All ”lifted” production? • All sold cargoes? • When is the mark to market zero? • When the oil is sold a fixed price? • When the oil is sold a the floating market price? • Is it possible to use the same principles for oil, oil products, gas, lng, electrisity, coal???

11. Oil price Large Natural gas price Project Production Currencies Country 0 Probability Credit Op. damages / accidents Pot. reputation effect Catasthropic events Large Risk comprises both the upside and downside outcomes Positive impact Negative impact

12. Country riskAsymmetric outcomes • What does asymmetric risk mean for expected net present value (E(NPV)):Example: Event: X2 Event: X1 Event: Enforceability of Government Contracts NPV 90% 10% Base case (“Best case”) Country risk impact 6 months delay 100 40 • E (NPV) = 100 x 90% + 40 x 10% = 94 • Interpretation: • 10% probability means that in one out of ten countries (at this risk level) we will get 40, while the other nine, we will get 100 • At portfolio level you will get approx. 94 (‘never’ 100 or 40 assuming many projects with country risk)

13. High Buy- backs PSC NCS Tax level UK GoM Low Positive Negative Neutral ”High upside, low downside” ”Low upside, high downside” Tax asymmetry Tax Asymmetry versus tax levelIllustrative

14. Risk and reward our different businesses

15. Risk elements– Implementation risk Business plan is a base case with an assessed risk for success Other scenarios are relative to Business plan. Scale is divided into 1-2 green, 3-4 yellow and 5-6 red

16. Monitoring, controlling and reviewing your risk management framework.

17. Price responsibility only on corporate level Business units have limited price reponsibility (internally) Hedging on profit center level (internally) Hedging on profit center level (externally) Different Risk frameworks • Utilizing correlation is easy to understand, but what are the challenges in practice ? • The main issues with regard to price risk responsibility : • who should have the price risk responsibility • how to report the effects • how to avoid suboptimization • how to deal with tax and accounting issues • Different concepts with regard to:

18. Reviewing VAR • Decide on a probabilty of loss • Decide on a frequency • Very low probability high frequency events give more comfort (99.9% daily var) • But….how do you test this? • On average you’re going to exceed your VAR once every 1000 days (or four years) • Higher probability lower frequency events give better testability (75% weekly var) • But….you lose more than your VAR every one week out of four • How do you know what you could lose in extreme movements • However VAR is calculated, the methodology must have the following characteristics • It should be reproducable • It should be runnable on aggregate portfolios and should aggregate risk • It should make sense for simple portfolios (I.e. if a swap has a VAR of X, twice the position should give double the VAR) • It should be “non-linear”. Options aren’t a “free risk strategy”. • It should be timely.

19. Checking VAR • Data data data data data • You must retain data on actual historical outcomes for books, portfolios, etc • Historical daily PnL numbers for last night’s positions (this is critical) • Historical daily PnL numbers for each book including day trades (which you already do…) • Historical daily VAR numbers at a variety of probability levels (75%,90%,95%,99%?) • This should be done at each level of aggregation • Once you have accumulated enough data (3 months?,6 months?) back test and mine the data. If your VAR methodology is correct, then the distribution of actual PnL for last night’s trades should match the distribution that your VAR implies. • For example, one day in four, last night’s positions should lose more than your 75% VAR, one day in 10, last night’s positions should lose more than your 90% VAR. • The volatility of your total daily PnL is a more traditional risk return measure: the sharpe ratio.

20. Presentation of ”the risk picture” for top management. • Executive board • Monthly • Annually

21. Section I: Tactical Risk Low to medium risk in tactical trading. The main market risk is in physical oil and plain paper instruments like futures, swaps and forwards, only minor risk in options, and we see that risk is focused on products like Brent, WTI, Fuel oil, gasoline and naphta.

22. Section II: Strategic Risk The Kernel distribution is based on market forward prices and historical volatilities and correlations. Brent forwards at historical very high level. Option prices at low level due to high forward level combined with moderate volatility in the market

23. - Year X Year X Section II: Strategic Risk Country risk levels as assessed by WMRC (World Markets Research Centre), a subsidiary of Global Insight.

24. Section III: Credit Risk * Default probabilitiy Based on the 20-year statistical average probabilities published by S&P and Moody’s. ** Statoil risk class S Initially high risk, now covered by LC or Parent Company Guaranty

25. Section III: Credit Risk Comment

26. Section IV: Insurance Comment Comment