Risk Management at Pertamina EP

MBA - ITB

|

BUSINESS

| SCHOOL

MM6029 – Corporate Risk Management

Mid Test Assignment

Pertamina EP Risk Analysis

Surya Agung W H

29109355

MASTER OF BUSINESS ADMINISTRATION INSTITUT TEKNOLOGI BANDUNG MARCH 2011

Surya Agung w H / 29109355

Executive Summary PT Pertamina (Persero) (formerly known as Oil and Gas Mining Company) is a state-own company that is responsible for managing the extraction of oil and gas in Indonesia. Managing Director (CEO) who served at this time was Karen Agustiawan inaugurated by the Minister for State Enterprises Syofan ministers on February 5, 2009 replaces the old CEO Ari Soemarno Hernanto. Karen Agustiawan inauguration of this important historical record since he became the first woman to successfully occupy the top positions in largest state owned companies. Pertamina in conducting business activities in the field of energy and petrochemicals, is divided into upstream and downstream sectors, and supported by the activities of subsidiaries and joint ventures. Consider the size of the company, Pertamina facing many risk exposure that can endangere the company. With risk management, it can help company to mitigate the risk, increase the fund for the investment. There are some framework that we can use to manage the risk, which are Risk Identification, Risk Measurement, Risk Management, Risk Mapping and Risk Calculating. PERTAMINA's scope of business incorporates the upstream and downstream sectors. The upstream sector covers oil, gas and geothermal energy exploration and production both domestically and overseas. The foregoing is pursued through own operations and through partnerships in the form of joint operations with JOBs (Joint Operating Bodies), TACs (Technical Assistance Contracts) and JOCs (Joint Operating Contracts), whereas the downstream sector includes processing, marketing, trading and shipping. Commodities produced range from Fuel (BBM) and Non Fuel (Non BBM), LPG, LNG, petrochemicals to Lube Base oil. In this assignment, we only discuss about the subsidiary of Pertamina which called Pertamina EP. To reach the company’s goal, Pertamina facing several risk related with financial risk, operational risk, strategic risk and externality risk. With this assignment, writer try to analyze several risks that Pertamina EP faced and provide recommendations to mitigate several risk that could occur.

1|P a ge Risk Management Mid Test

Surya Agung w H / 29109355

I.

PT. Pertamina EP Profile Pertamina is the combined result of the company PERTAMIN with PERMINA

which was established on December 10, 1957. This merger occurred in 1968. PT PERTAMINA (PERSERO) was established under Notarial Deed of Lanny Janis Ishak, SH No. 20 of September 17, 2003, and ratified by the Minister for Law & Human Rights under Decision No. C-24026 HT.01.01 on October 9, 2003. The above proceeded in accordance with the provisions set forth in Law No. 1 of 1995 relating to Limited Liability Companies, Government Regulation No. 12 of 1998 relating to Public Companies (Persero), and Government Regulation No. 45 of 2001 relating to Amendment to Government Regulation No. 12 of 1998. PT Pertamina EP (PEP) is engaged in managing the upstream oil and gas production through a more manageable exploration and exploitation activities. Adding to that, PEP has been undertaking other supporting businesses, which have been intended to back up the main business directly or indirectly. Presently, Pertamina EP production level for oil is around 120 thousand barrel oil per day (BOPD) and around 1,003 million standard cubic feet per day (MMSCFD) for gas. Pertamina EP Working Areas of 140.000 km2 were once largely PT Pertamina (Persero)’s Oil and Gas Mining Authority Zone. The working areas are managed through own operation and partnership cooperation, comprise 3 contracts of Joint Operating Body Enhanced Oil Recovery (JOB-EOR) and 33 contracts of Technical Assistant Contract (TAC). Thus geographically, Pertamina EP operates in nearly all territory of Indonesia, from Sabang to Merauke. Pertamina EP Working Areas consist of three regions namely Sumatra, Java and Eastern Indonesia Regions. All JOB EOR and TAC operations are managed from Headquarter while own operations are managed by each region respectively. The operation of those regions comprise 12 Field Areas, namely Rantau, Pangkalan Susu, Lirik, Jambi, Prabumulih and Pendopo in Sumatra, Subang, Jatibarang and Cepu in Java as well as Sangatta, Bunyu and Papua in Eastern Indonesia. Beside the management of working areas as stated earlier, other business pattern is management through projects, such as gas development project of Pagar Dewa in South Sumatra, Gundih in Central Java and Matindok in Sulawesi. 2|P a ge Risk Management Mid Test

Surya Agung w H / 29109355

Fuel Products: o Biopertamax, o Pertamax, o Biopremium, o Pertamax Plus, o Premium, o Solar, o Bio Diesel, o Pertamina DEX, o Kerosine, o Pertamax Racing.

Figure 1. Fuel Products of Pertamina

Other than oil, Pertamina also produce: o Non-oil: Minarex, HVI 90, HVI 160, Lube Base, Green Coke, Asphalt, o Gas: LPG, Fuel Gas (CNG), Vigas, LPG, CNG, Musicool o Lubricants: FASTRON lubricating oil is basic ingredient engine with Prima XP Semi-synthetic SAE 20W - 50 is produced by Pertamina lubricants for gasoline engines Mesran Super SAE 20W-50 is a gasoline engine oil-LEVEL 2T Super-X is a two-stroke gasoline engine lubricant such as outboard engine cooling water or speed boat. This oil is produced by Pertamina. Also suitable for use in outboard motors and engines of smaller crabs, saw machine, threewheel and bemo. The objective of the Public Company is to: 1.

Exploit profits based on the principle of effective and efficient PERSERO management.

2.

Contribute toward improvement of economic conditions for the welfare and prosperity of the people.

In order to achieve the above aims and purposes, the Public Company engages in the following: o Oil and gas exploitation and the processed products and derivatives thereof. o Geothermal energy exploitation existing at the time the PERSERO was established, including Geothermal Power Plants (PLTP) in the final stages of negotiations and which the Perseroan has managed to gain possession of. 3|P a ge Risk Management Mid Test

Surya Agung w H / 29109355

o Liquefied Natural Gas (LNG) exploitation and other products generated by LNG refineries. o Other exploitation associated with or in support of the undertakings referred to in points above.

Vision, Mission and Values Pertamina EP has split its visionary aspirations into a three-year strategic planning period: 1.

Three-Year Development Plan I Vision (2006-2008): "Respectable Cost Effective and Efficient Oil & Gas Producer".

2.

Three-Year Development Plan II Vision (2009-2011): "No.1 Oil & Gas Producer in Indonesia".

3.

Three-Year Development Plan III Vision (2012-2014): "PEP World Class". In order to achieve those visions, Pertamina EP states its mission as follow: To run

the oil and gas business efficiently, effectively, and within a safe and healthy environment, thus increasing value for the stakeholders.

Figure 2. PEP’s top 10 oil and gas producer.

PT Pertamina EP (PEP) is an operating subsidiary business unit that focuses on managing the upstream oil and gas production through a more manageable exploration and exploitation activities. Adding to that, PEP has been undertaking other supporting businesses, which have been intended to back up the main business directly or indirectly. PEP has been dedicating to undergo its core business with strong commitment, to work hard 4|P a ge Risk Management Mid Test

Surya Agung w H / 29109355

and be productive, have motivated PEP in elevating Indonesia’s position as a net oil importer. Consequently, PEP has strived to constantly increase the oil and gas production capacity, to which its daily capacity of production indicate 120 thousand of barrels oil per day (BOPD) and 1,000 million standard cubic feet per day (MMSCFD) of gas. Supported with the capacity of oil production, PEP feels confident to reach the raw oil production targeted by the government for export. Meanwhile, PEP’s gas production is fully produced to support domestic industry needs, as part of PEP’s contribution to add to Indonesia’s competitive advantages within the industry.

Corporate Values: Clean, professionally managed, avoid conflict of interest, never tolerate bribery, respect trust and integrity based on Good Corporate Governance principles Competitive, Able to compete both regionally and internationally, support growth through investment, build cost effective and performance oriented culture. Confident, Involve in national economic development as a pioneer in State owned Enterprises' reformation, and build national pride. Customer Focused, Focus on customers and commit to give the best service to customers Commercial, Create added values based on commercial oriented and make decisions based on fair business principles. Capable, Managed by professional, skilled, and high quality leaders and workers, committed to build research and development capability.

Pertamina Transformation Agenda -

Paradigm change on management and human resources.

-

Activities transformation in upstream sector as the main profit generator.

-

Activities transformation in downstream sector as the front line to interact with customers

-

Corporate restructuration transformation on Finance, Human Resource, Legal, IT and General Administration including Asset Management.

The objectives of the transformation are to create corporate management as: Confident, Clean, Customer-focused, Competitive and efficient and To be a role model company in Indonesia. Achieved targets with continuous improvement since July to December 31, 2010: 5|P a ge Risk Management Mid Test

Surya Agung w H / 29109355

-

Phase I of Breakthrough Projects in 100 days has generated income of + USD 15 million.

-

The potential cost reduction of Rp.2 trillion in supply chain through the improvement on field distribution efficiency.

-

5 gas station have met the standards of "Pertamina Way".

-

The roll out of gas stations quality and quantity assurance.

-

The cooperation with world-class oil & gas companies.

Pertamina EP Excellence Values In order to create a harmonious working environment, Pertamina EP workers always refer to commonly agreed basic values as excellence values. These excellence values are expected to build synergetic strength in order to become the propeller toward Pertamina EP World Class vision through Company's strategic mission. The values are guidance to realize Company's vision and mission, comprise Focus, Integrity, Visionary, Excellence and Mutual respect (FIVE-M). In line with Pertamina EP's transformation program, FIVE-M values were further developing into FIVE-M GO PEP with additional values of Good Corporate Governance, Optimization, Personal Quality, Empowerment, Peerless Shareholder Value and Proper HSE.

Corporate Business Strategy The company’s corporate strategy was constructed to reach the company’s goal, which is achieve its vision and mission using the corporate value. There are three corporate strategy related with the company’s goal, which are expansion, synergy, and excellence. Here is the explanation of every corporate strategy. A. Upstream: Exploration and Production 

Increasing production from existing fields.



Expanding business activities and operations, including using inorganic methods (acquisitions).



Developing the potential of CBM in Pertamina areas.



Forming strategic alliances to support the expansion and building specific skills.

6|P a ge Risk Management Mid Test

Surya Agung w H / 29109355

Figure 3. PEP’s top 10 oil and gas producer.

B. Upstream: Non Exploration and Production 

Increasing the domestic gas trading business while taking the opportunity to expand the gas.



Transport and process business through synergy with other Pertamina subsidiaries.



Being pro-active in formulating pricing policy, in accordance with national policies.



Building capacity and specific skills in drilling services to support oil and gas expansion plans. PEP Working Areas are those previously managed by PT PERTAMINA (PERSERO) through its Oil and Gas Mining Zone Authority. The Company's exploration and production activities cover nearly every part of Indonesia territory, from Sabang to Merauke.

Figure 4. Working Area of Pertamina EP

7|P a ge Risk Management Mid Test

Surya Agung w H / 29109355

Presently, the Upstream Directorate managed 6 subsidiaries in the oil, gas, and geothermal business, namely: PT Pertamina EP (PEP), PT Pertamina Hulu Energi (PHE), PT Pertamina Gas, PT Pertamina Geothermal Energy (PGE), PT Pertamina EP Cepu (PEP Cepu), and PT Pertamina Drilling Services Indonesia (PDSI), as well as developing the upstream support technological function carried out by the Exploration & Production Technology Center (EPTC).

Figure 5. Working Region of Pertamina EP

At this stage, PEP owns four main backbone fields for their high production capacity. As a consequence, any impacts resulted from those fields will eventually affect the whole PEP production. The four working fields are Tambun, Limau, Sukowati and Poleng. Capacity wise, total production of Tambun field is 14,000 BOPD, Limau field is 8,000 BOPD; Sukowati field is 19,000 BOPD, and Poleng field is 8,500 BOPD. In total, all the four main fields contribute 49,500 BOPD or 40 percent of the targeted 125,000 BOPD. The main focus of each subsidiary and of the supporting function is as follows:

PERTAMINA EP PEP was established on 13 September 2005, to manage oil and gas operations (own operations) based on a Cooperation Contract (KKS) with BP Migas signed on 17 September 2005. As an upstream sector subsidiary, PEP carries out exploration and production of oil and gas in domestic working areas covering 140,000 km² formerly managed by PERTAMINA. PEP’s working area is divided into three regions: The Sumatra, Java, and Eastern Indonesian (KTI) Regions. The Sumatra Region covers the Rantau, Pangkalan Susu, Jambi, Pendopo and Prabumulih Fields, as well as the 8|P a ge Risk Management Mid Test

Surya Agung w H / 29109355

Pertamina EP Business Units (UBEP) at Jambi, Limau, Lirik, and Adera (ex JOB-EOR PERTAMINA Lekomaras, 22 April 2009). The Java Region covers The Cepu, Jatibarang, Subang and Tambun Fields. The Eastern Indonesian Region (KTI) covers: The Bunyu, Sangatta and Sorong Fields as well as the Tanjung and Sangasanga-Tarakan UBEPs.

PERTAMINA GAS Pertamina established PT Pertagas on 23 February 2007, and it became PT Pertamina Gas in 2008. The company undertakes gas transportation, trading and processing. In the gas transmission business, Pertamina owns a gas pipeline network with a total volume of 34,000 km-inches in Northern Sumatra, Central Sumatra, Southern Sumatra, Western Java, Eastern Java, and East Kalimantan In January 2009, PT Pertamina Gas obtained a Transportation Permit and in February 2009, it received a Exclusive Right from BPH Migas for gas transportation along 43 transmission routes. These Permit and Exclusive Rights complemented the Business Permit that had been issued previously (in September 2008). By obtaining a business license and special rights, PT Pertamina Gas now has a regulatory basis to play the principal role in the gas business in Indonesia.

PERTAMINA GEOTHERMAL ENERGY PGE was founded on 12 December 2006. This Pertamina subsidiary carries out geothermal exploration and exploitation in 15 working areas (WKP) in Indonesia, namely: Sibayak-Sinabung, Sibualbuali–Sarulla, Sungai Penuh-Sumurup, Tambang Sawah-Hululais, Lumut Balai, WaypanasUlubelu, Cibereum-Parabakti, Pengalengan (Patuha-Wayang Windu), Kamojang-Darajat, Karaha-Telagabodas, Dieng, Iyang-Argopuro, Tabanan-Bali, Lahendong-Tompaso and Kotamobagu.

PERTAMINA EP CEPU PEP Cepu, which was established on 14 September 2005, is a subsidiary of PT Pertamina (Persero) that focuses on the upstream oil and gas business. In the Cepu Block, Pertamina has a 45% interest in partnership with Mobil Cepu Ltd (as the operator) and the Regional Owned Enterprise (BUMD) that manages the KKS for the Cepu Block.

9|P a ge Risk Management Mid Test

Surya Agung w H / 29109355

PERTAMINA DRILLING SERVICES INDONESIA PT PDSI was established on 13 June 2008 as a drilling service management business entity. The services provided comprise drilling, workover activities, and drilling services that use a Daily Rate and Integrated Drilling Management (MPT) system for oil, gas, and geothermal wells. Presently, PT PDSI owned 34 drilling rigs (28 owned by PT PDSI and 6 transferred from PT Usayana). PERTAMINA UPSTREAM ENERGY PHE is one of the Upstream Directorate subsidiaries working in the oil and gas upstream business, and is also an upstream business vehicle for managing the domestic and overseas cooperation portfolio in the form of: Production Sharing Contracts (PSC), Joint Operating Body-Production Sharing Contracts (JOB-PSC), Indonesian Participating / Pertamina Participating Interests (IP/PPI) and Badan Operasi Bersama (BOB). PHE’s overseas working areas covered: Western Desert Block 3,Iraq; Block 10&11.1, Offshore South Vietnam; Block SK-305, Offshore Sarawak, Malaysia; Sabratah 17-3 Block, Offshore Libya; Sirte 123-3 Block, Libya; Block 13, Red Sea, Offshore Sudan; Block-3, Offshore Qatar; and Basker Manta Gummy Block, Australia.

10 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

Figure 6. Pertamina EP Structure

11 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

II.

Risk Management Process

2.1 Risk Analysis There are many kinds of corporate risk, depends on the nature of the company and its exposure to risk. To simplify, corporate risk can be divided into four main risks which are financial risk, operational risk, strategic risk, externality risk, and other risks. Financial risk is the risk that faced by a company which related with the financial matter. There are several risks which categorized into financial risk, such as: 

Market Risk Market risk is the risk of loss due to changes in market prices. This includes interest rate risk, foreign exchange risk, commodity price risk, and share price risk.



Liquidity Risk Liquidity risk is the risk that amounts due for payment cannot be paid due to a lack of available funds or cash.



Credit Risk Credit risk is the risk that a counterparty may not pay amounts owed when the due date comes.



Funding Risk Funding risk is the risk that the company may not be able to finance the investment fund needs.



Equity Risk Equity risk is the risk that one's investments will depreciate because of stock market dynamics causing one to lose money.



Commodity Risk Commodity risk refers to the uncertainties of future market values and of the size of the future income, caused by the fluctuation in the prices of commodities. These commodities may be grains, metals, gas, electricity etc.



Forex Risk Foreign exchange risk is the risk that the exchange rate will change unfavorably before the currency is exchanged.



Interest Rate Risk

12 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

Interest rate risk is the risk borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa. Operational risk is the risk that faced by a company which related with company’s daily operation. There are several risks categorized into operational risk, such as: 

People Risk People risk is the risk of loss that caused by the company’s human resources condition, capacity, or capability.



Productivity Risk Productivity risk is the risk of loss due to having ineffective or inefficient process and the risk of having under utility.



Technology Risk Technology risk is the risk of loss due to technological development or improvement inability.



Innovation Risk Innovation risk is the risk of loss when the company launch a new innovation, both process and product / service innovation



System Risk System risk is the risk of loss that caused by the lack of company’s information system, communication system, control system, etc.



Process Risk Process risk is the risk of loss due to rejected products or high overhead cost caused by inappropriate process.

Strategic risk is the risk that faced by a company which related with company’s strategic decisions. There are several risks categorized into strategic risk, such as: 

Business Risk Business risk is the risk of failing to achieve business targets due to inappropriate strategies, inadequate resources, or changes in the economic or competitive environment. The risk also means that a company will not have adequate cash flow to meet its operating expenses.



Leverage Operational Risk

13 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

Leverage operational risk is the risk of loss due to highly leverage operation cost structure which caused by the condition of having a high fixed cost. 

Strategic Transaction Risk Strategic transaction risk is the risk of loss due to the effect of strategic transaction which can be foreign exchange risk, commodity price risk, etc.

Externality risk is the risk that faced by a company which not directly caused by the company itself. There are several risks categorized into externality risk, such as: 

Environmental Risk Environmental risk is the risk that an organization may suffer loss as a result of environmental damage caused by themselves or others which impacts on their business.



Reputational Risk Reputational risk is the risk that the reputation of an organization will be adversely affected.



Legal Risk Legal risk is the risk of loss that a company may suffer due to legal matter or changes in regulation. The loss caused by this risk including the additional legal expenses, trial expenses, fine, etc.



Political Risk Political risk is the risk that there will be a change in the political framework of the country which may suffer the company.

2.2 Risk Measurement and Mapping After analyze of the done, the next step is measure the risk. When we talk about the measurement, then we talk about the number. In order to understand the risk, first we need to know how the risks impact the company, than we able to make meaningful decisions about risk issues. Each risk that may happen in the company, risk should be measured objectively. Risk measurement has two components. The first component is to measure risk impact. The second component is to measure risk probability. The measurement of risk should be done by the risk owner and decide what to do next after mapping it since the risk owner is the expert and know the most about the company. As an example, in the case of Pertamina EP

14 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

and in the next section would be used to measure any kind of risks. Here are the risk probability and impact classification.

Point

Criteria

Parameter

1–2

Low

Certainly will never happen

3–4

Unlikely

Unlikely to happen

5–6

Moderate

50% happen 50% not happen

7–8

Likely

Likely to happen

9 – 10

High

Certainly happen

Table 1. Probability classification.

Point

Criteria

Parameter

1–2

Insignificant

Work still can be done

3–4

Minor

Lower specification

5–6

Medium

Reducing area of work

7–8

Major

Staging procurement

9 – 10

Catastrophic

Work must be stopped

Table 2. Impact classification.

After we done measured the risk, the next step that we need to do is make the available risk and make the plotting out of it. Risk metric would show the analyst the risk position, whether it low, medium, high or critical, such as: 10 9 8

Impact

7 6 5 4 3 2 1 0

1

2

3

4

5

6

7

8

9

10

Probability Low Risk

Medium Risk

High Risk

Critical Risk

Figure 7. Risk Mapping

15 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

To know it better, let us see the risk level with this image:

Low risk

Medium risk

High risk

Critical risk

2.3 Risk Mitigation And for the last step of risk management process is the risk mitigation or people usually call risk management. This step objective is the way for manager to manage the risks that have been mapped before. The company usually retains the risk with low probability of occurrence and low impact. The company can transfer the risk with high impact but low probability of occurrence, while the risk with high probability of occurrence with low impact can be controlled. The last kind of risk is the risk with high probability of occurrence and high impact. This kind of risk should be avoided by the company. There are four ways to manage risk that could be implemented:

1. Retain the Risk: -

Capital Allocation

-

Post Loss

-

Contingent Capital

-

Self-Insurance

2. Transfer the Risk: -

Transfer by Contract

-

Transfer by Subcontract

-

Transfer by Insurance

-

Transfer by Hedging (Derivatives)

3. Control the Risk: -

Prevention System

-

Detection and Control System

-

Protection System 16 | P a g e

Risk Management Mid Test

Surya Agung w H / 29109355

-

Administration

-

Engineering

4. Avoid the Risk: -

Avoidance by Substitution

-

Avoidance by Termination

-

Avoidance by Process Change

17 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

III. COMPANY’S RISK ANALYSIS First of all, this is the list of risks and perils that company have and the lost that they make to the company:

No

Peril

Risk Group

Loss

1

Planning do not appropriate with the law

Prosecuted by law

2

Existing product look bad

3

Oil spill

4

Marine pollution due to garbage

Extra expense in cleaning

5

Bad company service

Losing clients

6

Price of commodity rise

Extra expense in fuel

7

High HR cost

Lower the margin

8

Declining market share

Lower market share

9

Economic crisis

10

High account receivable

11

Fail claiming the insurance

Losing source of fund

12

Increase of company debt

Increase of WACC

13

Customer cancel the agreement

Decrease source of fund

14

Lack of human resource

No innovation

15

New trend in renewable energy

Lower market share

16

Asset manipulation

Losing money

17

Suppliers cannot meet demand

Decrease productivity

18

Material Surplus

Higher storage cost

19

Data manipulation

Losing money

20

Work accident

High injury level

21

Material loss

Decrease productivity

22

No obvious career path

Instability of production

23

Extra workforce to hired

Decrease source of fund

24

Technology stealing by competitor

25

Internal system failure

26

Low integrity of worker

Decrease productivity

27

Incompatibility of construction

Decrease productivity

28

Worker strike

Decrease productivity

29

Employee fall into the sea

High injury level

30

Damage of the ship

Operational delayed

31

Breakdown of oil pump

Decrease productivity

32

Crane breakdown

Operational delayed

33

Gas explode

Extra expense in cleaning

34

Platform burn because of short-circuiting

Extra expense

35

Arrival of the uninvited

Decrease productivity

Externality Risk

Financial Risk

Operational Risk

Many people claim Extra expense in cleaning

Decrease source of fund Decrease source of fund

Reduce competitive advantage Decrease productivity

18 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355 36

Hearing impaired due to the gas turbine

37

Very bad weather

38

Many competitor arise

39

Late delivery of fuel for the engines

40

Production do not meet target

41

Interference of government

High injury level Pure risk

Whole loss Decreasing market share

Strategic Risk

Losing productivity Reduce sales Reduce company's autonomy

19 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

IV. COMPANY’S RISK MEASUREMENT AND MAPPING In the risk analysis chapter, I have identified 41 perils that could generate loss for PT. Pertamina EP. After we had done found the perils, the next step in risk management is to measure the risk which has identified before. We can applied the total score for each of peril and sum it altogether to get the total company’s risk score. Risk measurement process started with the process of collecting data and information related with the identified risk. The information needed to measure risks consist of the information related with the how often the perils happened and how big they will give impact to the company. Usually, the risk owner is the most capable in giving the score in impact and probability. In this case, I measured the risk with limited data. This is the risk measurement of the company:

No

Peril

Risk Group

Prob.

Severity

Score

2

4

8

2

7

14

2

8

16

1

Planning do not appropriate with the law

2

Existing product look bad

3

Oil spill

4

Marine pollution due to garbage

3

3

9

5

Bad company service

2

6

12

6

Price of commodity rise

5

6

30

7

High HR cost

2

5

10

8

Declining market share

3

6

18

9

Economic crisis

3

8

24

10

High account receivable

4

6

24

11

Fail claiming the insurance

4

3

12

12

Increase of company debt

4

5

20

13

Customer cancel the agreement

2

7

14

14

Lack of human resource

7

4

28

15

New trend in renewable energy

6

7

42

16

Asset manipulation

3

7

21

17

Suppliers cannot meet demand

4

8

32

18

Material Surplus

2

4

8

19

Data manipulation

5

6

30

20

Work accident

3

7

21

21

Material loss

2

6

12

22

No obvious career path

2

8

16

23

Extra workforce to hired

4

8

32

24

Technology stealing by competitor

3

6

18

25

Internal system failure

6

4

24

26

Low integrity of worker

6

4

24

Externality Risk

Financial Risk

Operational Risk

20 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355 27

Incompatibility of construction

4

7

28

28

Worker strike

3

7

21

29

Employee fall into the sea

3

2

6

30

Damage of the ship

3

4

12

31

Breakdown of oil pump

6

9

54

32

Crane breakdown

3

5

15

33

Gas explode

2

6

12

34

Platform burn because of short-circuiting

1

4

4

35

Arrival of the uninvited

2

3

6

36

Hearing impaired due to the gas turbine

4

3

12

7

6

42

3

6

18

3

8

24

5

6

30

5

7

35

Pure risk

37

Very bad weather

38

Many competitor arise

39

Late delivery of fuel for the engines

40

Production do not meet target

41

Interference of government

Strategic Risk

Total

838

Then after we get the numerical data, we can make the mapping for the whole risk that available above. This is the risk mapping of the company: 10 31

9 8 7 Impact

6 5 4

34

3

3 22 2 13 5 33 21 7

9 39 16 28 20 8 38 24 32

1 18 35

30 4

17 23 27 10

41

15

6 40 19

37

12 25 26

14

11 36

29

2 1 0

1

2

3

4

5

6

7

8

9

10

Probability

Low Risk

Medium Risk

High Risk

Critical Risk

From the Risk Metric above, we can see that how many risks that include in critical risk, that need a lot concern from the company. Especially risk number 31 that have highest score of risk, which is the “breakdown of oil pump”.

21 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

V.

COMPANY’S RISK MITIGATION The last process in company risk management process is the risk mitigation. In this

step, we decide what kind of action that company should do to mitigate the effect of the risk. This is the list:

No

Peril

1

Planning do not appropriate with the law

2

Existing product look bad

3

Oil spill

4

Risk Group

Action

Mitigation

Avoid

Terminate the planning

Control

Improve product quality

Control

Oil spill cleaner

Marine pollution due to garbage

Control

Waste control management

5

Bad company service

Control

Good corporate management

6

Price of commodity rise

Transfer

Forward commodity price

7

High HR cost

Transfer

Give employee reward system

8

Declining market share

Avoid

Make better process and product

9

Economic crisis

Retain

Capital allocation

10

High account receivable

Transfer

Contract the payment duration

11

Fail claiming the insurance

Control

Protect insurance system

12

Increase of company debt

Transfer

Swap contract

13

Customer cancel the agreement

Transfer

Forward contract

14

Lack of human resource

Control

Employee training

15

New trend in renewable energy

Control

Doing research and development

16

Asset manipulation

Retain

Capital allocation

17

Suppliers cannot meet demand

Transfer

Contract the agreement

18

Material Surplus

Control

Improve warehouse management

19

Data manipulation

Control

Using high security software

20

Work accident

Transfer

Give employee insurance

21

Material loss

Control

Using good quality equipment

22

No obvious career path

Avoid

Change company structure

23

Extra workforce to hired

Avoid

Change recruitment process

24

Technology stealing by competitor

Control

Secure classified data

25

Internal system failure

Avoid

Software backup

26

Low integrity of worker

Control

Give employee incentive

27

Incompatibility of construction

Control

Periodically review system

28

Worker strike

Control

Manage labor union

29

Employee fall into the sea

Control

High safety standard

30

Damage of the ship

Avoid

Another backup ship

31

Breakdown of oil pump

Control

Periodic check

32

Crane breakdown

Transfer

Equipment insurance

33

Gas explode

Control

Reinforce rule for employee

34

Platform burn because of short-circuiting

Control

Reinforce rule for employee

Externality Risk

Financial Risk

Operational Risk

22 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355 35

Arrival of the uninvited

Control

Enhance security

36

Hearing impaired due to the gas turbine

Avoid

Use noise reducer

37

Very bad weather

Retain

Post loss

38

Many competitor arise

Retain

Capital allocation

39

Late delivery of fuel for the engines

Avoid

Extra fuel reserve

40

Production do not meet target

Avoid

Find new oil source

41

Interference of government

Retain

Manage company structure

Pure risk

Strategic Risk

VI. RISK CALCULATOR The risk management process is done. Now we know what alternative that company can do to mitigate the risk that could happened to the company. Then, by using the risk exposure calculator, the company’s internal risk could be identified easily; it will show the early signal of risk. To manage the company’s risk, the only way to do is running the risk management. GROWTH Pressures for Performance

+

2

Rate of Expansion

Inexperience of Key Employees

+

3

=

1

SCORE

6

CULTURE Reward for Entrepreneurial

+

4

Executive Resistance

+

Level of Internal Competition

=

2

1

SCORE

7

INFORMATION MANAGEMENT Transaction Complexity

+

4

Gaps in Diagnostic

+

1

RISK EXPOSURE CALCULATOR

Decentralized Decision

5

=

SCORE

10 TOTAL SCORE

23

23 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

VII. CONCLUSION With risk management framework which consists of risk identification, risk measurement, risk measurement, risk management, and risk monitoring we can understand more about the risk exposure that Pertamina EP have so that the company always has enough funds to finance their investment. PT Pertamina EP is exposing to so many different types of risk. Most of the risk exposed to the company, basically come from operational risk, which can transform themselves after the company trying to handle them. This main risk is the crucial risk that the company should dealt with, because it has the most impact and the higher probability for Pertamina EP.

This Risk is mainly related to: o The international exposure that effect the company a lot also come from the world oil and gas price that tend to ascending. Whether it will increase the company’s income or make company suffer potential loss. o The fuel price risk that being used by the company which is gasoline, affect the company a lot, include the availability of the fuel, the quality and the supply. o The Indonesia current economic condition also drives the company’s operation which is the government interferes, in international agreement, national oil and gas demand and the law.

24 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

EXHIBIT 1

25 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

EXHIBIT 2

EXHIBIT 3

26 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

EXHIBIT 4

27 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

EXHIBIT 5

28 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

EXHIBIT 6

29 | P a g e Risk Management Mid Test

Surya Agung w H / 29109355

EXHIBIT 7

30 | P a g e Risk Management Mid Test