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Risk management

We operate in challenging environments and understand that risks are an inherent part of our business. Identifying and managing risks and opportunities is key to the successful delivery of our strategy.

Our knowledge and insight coupled with the right set of tools help us understand the factors that lead to risk and allow us to manage them effectively. Identifying and managing risks and opportunities is key to the successful delivery of our strategy. We operate in challenging environments and understand that risks are an inherent part of our business.

Our system of risk governance comprises several committees and management processes which bring together reports on the management of risk at various levels. The Group Risk Committee (GRC) is responsible for the oversight of the Enterprise Risk Management framework agreed by the Board, including review of Group policies and the management of the Group’s Delegated Authorities.

Risk Management framework

Risk Governance framework

Strategic risks
  1. Adverse geopolitical and macro-economic changes in key geographies
  2. Low order intake
  3. Failure to deliver strategic initiatives
  4. Failure to deliver NES strategy

1. Adverse geopolitical and macro-economic changes in key geographies

The Group’s backlog is concentrated in emerging markets, which may increase our vulnerability to adverse geopolitical events. Recent global economic conditions and the enduring impact of the COVID-19 pandemic is having an impact on economies that are exposed to the downturn in commodities.
This, in turn, places greater pressure on governments to find alternative means of raising revenues and increases the risk of social and labour unrest. The impact of adverse geopolitical changes in our key geographies includes risks to the successful delivery of our strategy, our operations and associated impact on margins, the safety of our people, security issues, material logistics, and travel restrictions.

Mitigation and management

The Group Risk Committee (GRC) and the Board actively monitor political developments and seek to avoid or minimise our exposure to jurisdictions with risk levels beyond our appetite. A detailed risk analysis is conducted before entering any new country and while pursuing and executing projects in new geographies. We have good experience in project execution and maintain positive relationships with key stakeholders.

Careful consideration is given to contractual terms and security conditions through our detailed risk review process and we seek external advice on specialist issues as required. The delivery model is modified to suit each project and we limit exposure to single sources of supply and service. We limit our fixed asset commitment within each contract and closely monitor and manage our cash flow and commitments.

Our Business Continuity Management System considers response to and recovery from geopolitical incidents. There is also continued focus on evacuation and emergency response.

Our operations are assessed and executed in accordance with our security policy and security standards. In 2021, we continued to enhance our Business Continuity Management System and expanded it to cover all the key geographies where we operate and execute projects.

Assessment: Increased

The risk remained unchanged in absolute terms. However, due to recalibration of financial materiality thresholds it increased in 2021. The increase in our risk profile was mainly driven by re-entry into countries such as Libya. It was offset by reduced exposures in countries exposed to high geopolitical risks and growth of our backlog and pipeline in the EU and the UK. The recent increase in geopolitical risks due to the conflict between Russia and Ukraine is offset by reduced exposure in this country.

2. Low order intake

The risk is that our clients exercise capital discipline, which impacts the demand for our services through the cancellation or delay of planned investments. The potential impact is that the Group could fail to deliver its anticipated backlog and growth targets.

The Group wins most of its work through a competitive bidding process, and as competition increases, there is a risk that we could fail to maintain differentiated margins.

Mitigation and management 

Our order intake is driven by our strategy, the development of which is overseen by the Board. Our service lines work together to identify, review and win opportunities. We regularly analyse our business development activities, bid-to-win ratios and our competition.

We responded to the reduced number of awards in all our key markets in 2021 and prepare Petrofac for a recovery by addressing client objectives such as increased in-country value and improving sustainability.

Notwithstanding the challenging environment, we continued to secure new orders during 2021, including projects in Oman, the UK, Azerbaijan, Libya, Bahrain and Lithuania. We continue to focus on converting opportunities in target adjacent geographies and sectors. We see a good pipeline of bidding opportunities
for 2022 and 2023 in our core markets and targeted growth in selective new markets. We anticipate tendering activity will pick up in response to a recovery in the oil price and increased capital investment by clients.

Assessment: No change 

The increase in the principal risk during the first half of 2021 was offset by the resolution of the SFO investigation.

We expect further improvement when we are able to return to bidding in markets from which we have been temporarily excluded in recent years.

3. Failure to deliver strategic initiatives

Each of our strategic priorities is supported by various strategic initiatives that are overseen by senior management and the Board.

To build enterprise value, we ensure each initiative is de-risked and respective success targets are met, assuring shareholders and opinion formers that we are pursuing an appropriate strategy capable of delivering shareholder value.

The impact is reflected in the appetite from new investors and, consequently, the market valuation of the Group.

Mitigation and Management

Each strategic initiative is governed by a stage-gate process and overseen by GEC or a formal Group-level steering committee. The Board regularly assesses our strategic initiatives and overall strategic plan to satisfy itself that the right balance of risk, capability and reward is maintained.

We conduct detailed sensitivity analysis to assess the robustness of our plans. The GRC reviews all material new business opportunities and projects, new country entries, joint ventures, investments, acquisitions and disposals.
In a challenging environment, we continued to deliver our strategic initiatives in 2021.

Key achievements for the year include:

  • Finalisation of our structural cost reduction programme and introduction of the new operating model including creation of 1tec, a single technical services organisation
  • Establishment of digital solutions, bringing tangible benefits to more clients, including cost savings, emissions reductions, and optimised uptime
  • Approval and execution of a formal ICV programme with key targets and strategies agreed in order to drive growth in our core and new geographies
  • Setting up of new partnerships and continued push into new territories
    The priorities for 2022 include leveraging the new operating model to drive our excellence agenda; preserve our cost competitiveness; further strengthen our ICV proposition in core markets; and continue to digitalise the business.

Assessment: No change 

Good progress has been made in all our strategic initiatives,
and the risk remained stable during 2021.

4. Failure to deliver New Energy Services strategy

Due to climate change and the energy transition, our markets are changing and the portfolios of our clients are going through a major transformation. New Energy Services (NES) was established to respond to this change, and the Group has outlined a medium-term ambition for 20% of revenue to come from this area by 2025. An inability to meet changing market needs will limit our future growth, and would hinder our commitments with regard to our response to climate change.

Mitigation and management

NES focuses on four clearly defined segments of the market, namely offshore wind, CCUS, hydrogen and waste-to-value where we have a strong track record and relevant experience. The growth will be facilitated through partnering in relevant technologies and with established developers; monitoring of relevant government policies; and supporting the NES organisation with 1tec expertise to successfully execute and deliver NES projects.

In 2021, we:

  • Established an agile NES organisation and aligned 1tec to support the core team
  • Extended our reach to government and representative bodies of relevant industries
  • Agreed several strategic partnerships, including Protium and Boya Energy
  • Demonstrated rapid progress in NES by securing new
    contracts in 2021

Assessment: New risk

This emerging risk aims to assure the success of our response to changing market needs due to the energy transition. Good progress in pursuit of our medium-term ambition was made in 2021, with 6 FEED awards, new alliances and partnerships signed, and a NES pipeline of US$9 billion of opportunities.

Operational risks
  1. Operational and project performance
  2. Insufficient IT resilience
  3. HSSE incidents

1. Operational and project performance

Our portfolio typically includes a relatively small number of large value contracts, a larger number of smaller value contracts and some sizeable oil and gas assets. Cost or schedule overruns on any of the large value contracts, or operational issues affecting production within our key assets could negatively impact the Group’s profitability, cash flows and relationships with key stakeholders.

Mitigation and management 

Key risks to delivery are initially identified at the tender stage, through the risk review process by relevant risk review committees and escalated to the GRC or Board, as required.

On award, detailed execution strategies are further developed. During the execution phase, emerging risks and opportunities are managed through assurance, operational and project reviews. Lessons learnt are cascaded through leadership lines and our quality initiatives are focused on a ‘right first time’ approach.

In 2021, a new operating model was established including the creation of 1tec (a single technical services organisation focused on technical excellence). A new, independent assurance function was also introduced, and a value assurance framework was devised to govern all aspects of project delivery across our operations.

Due to the COVID-19 pandemic, we continued to monitor closely contractual and execution challenges in our supply chain, with our subcontractors and our clients. Project recovery plans were maintained and project delivery remained a significant area of focus executive management and the Board throughout the year.

Assessment: No change

Project risks increased further during 2021 as the COVID-19 pandemic created execution challenges. However, the pandemic became more contained in the final quarter of the year, and the risk was reduced to 2020 levels.

2. Insufficient IT resilience

The Group’s performance is increasingly dependent on the ongoing capability and reliability of our IT platforms. We (as with all companies) continue to be exposed to external cyber-security threats.

Mitigation and management 

We operate a Group-wide information/cyber-security programme and utilise a ‘cloud’ strategy to maintain a resilient IT platform.

In 2021, we continued to improve our information security controls through:

  • Establishment of new enterprise storage and network access control solutions
  • Limiting the use of flat networks
  • Upgrading, retiring or re-engineering existing applications in order to upgrade older servers
  • Implementing a specific cyber-security programme to
    protect our industrial systems and networks

Assessment: No change

The risk remained stable during 2021. A number of initiatives were implemented during 2021 to further enhance our resilience.

3. HSSE incidents 

There are several factors that could impact our ability to operate safely. These include safety and asset integrity risks and extend to a range of environmental risks. The risk is the potential harm to our people, and the commercial and/or reputational damage that could be caused.

Mitigation and management

Safety is a core value for Petrofac and the risk is governed largely by our operating framework, Group policies, and systems that cover all elements of occupational health and safety, security, environmental and asset integrity programmes.

Following up on the lessons learnt from some isolated incidents in 2020 and in the first quarter of 2021, we launched and executed a ‘Safety – Back to Basics’ campaign to enhance our already strong safety culture.

A Driver Safety Programme was also rolled out to enhance driver monitoring. Our response to the COVID-19 pandemic was extended to cover the mental wellbeing of our employees.

Assessment: Decreased 

The risk reduced in 2021 as a result of further improvements to our safety culture, and enhanced situational awareness.

Financial risks
  1. Loss of financial capacity
  2. Misstatement of financial information

1. Loss of financial capacity

Failure to maintain adequate liquidity or provide guarantees to our customers could adversely affect our ability to deliver our strategy and may ultimately result in financial loss and/or ability to comply with our financial covenants.

Costs of debt may rise as a result of rating agency downgrades or reduced access to funding. Access to funding is critical to our sustainability and future growth. Reduced access to funding could hamper the Group’s growth and/or adversely affect the Group’s financial performance.

Mitigation and management

We maintain an adequate level of liquidity in the form of readily available cash, short-term investments, or committed credit facilities and ensure minimum level of liquidity as defined by the Audit Committee is maintained.

Debt, cash and liquidity balances are monitored on a daily basis We prepare cash flow forecasts on a quarterly basis aligned to our reforecast cycle, and rolling cash forecasts on a monthly basis to help manage liquidity and short-term forecasting. Our financial policy targets BBB investment grade credit metrics over the long term.

In 2021, we further reduced our overhead and project support cost. In 2022, we will continue to collect cash and maintain financial discipline.

Assessment: No change

Through a successful, comprehensive refinancing in late 2021, we strengthened the balance sheet, and secured a sustainable, long-term capital structure. However, in 2021 the overall risk rating remained unchanged as key financial measures – liquidity, leverage and credit rating were below target.

2. Misstatement of financial information

We execute complex projects in a dynamic environment across various jurisdictions with numerous clients. Due to operational volatility and financial complexity, our assumptions and financial estimates may not accurately reflect our business performance and financial results, or provide inadequate information to key decisions. These may negatively impact investor confidence.

Mitigation and management

Our Financial Control Framework ensures that adequate controls are identified, implemented and monitored throughout all of our key financial activities. Adequacy of these controls are certified and reviewed by various assurance activities and overseen by the Audit Committee.

External auditors review and test our financial accounts. In 2021, we continued to improve our controls in this area with implementation of a new Enterprise Resource Planning (ERP) platform, and the project will continue in 2022. We continued to upgrade our IT systems and platforms to further enhance the operating effectiveness of the Group’s financial controls.

Assessment: No change

In 2021, the risk remained stable despite a reduction in financial materiality thresholds.

Legal and compliance risks
1. Breach of laws, regulations, and ethical standards

Non-compliance with laws, regulations and ethical standards due to failures in our compliance controls or unethical behaviour, including but not limited to bribery, corruption, money laundering, trade sanctions and labour rights may result in fines and/or adverse impact on our reputation.

Mitigation and management

We operate a Group level compliance programme overseen by the Compliance and Ethics Committee. We have continued to enhance this programme during 2021. Specifically, we have:

  • Created a new compliance risk assessment methodology
  • Enhanced our compliance training programmes
  • Conducted an independent review and subsequent regular audit process on the effectiveness of our compliance processes and culture
  • Built further awareness to encourage open reporting
    through our Speak Up tool

Assessment: No change

Risk of a future breach is reduced due to improvements in our compliance programme.

However, the overall risk level remained unchanged due to the sustained impact of the
SFO investigation.

People risks
1. Inadequate leadership and talent management

Our operations are heavily dependent on our ability to attract, retain and lead the right level of skilled and experienced personnel. Failure to do so could negatively impact our distinctive, delivery-focused culture, and prevent us from maintaining our operational capability and relationships with clients.

Mitigation and management

We remain confident that our policies to attract, retain, train, promote and reward our people are appropriate for the Group, and will enable us to meet our strategic goals.

We continued fine-tuning our organisational structure in 2021, including the creation of 1tec and the establishment of NES to capitalise on the energy transition. Diversity and inclusion initiatives were extended with creation of our employee network groups, and the introduction of more ambitious targets to hire and promote a diverse workforce, including
leadership roles.

The Workforce Forum meetings continued in 2021, providing an additional avenue for employees to directly engage with Board Directors and senior management.

Assessment: Increased

The risk has increased since our last update due to a higher attrition rate, although this had a limited impact on our operations in a quieter year for project execution.

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2021 Annual Report

A platform for growth

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