Home
Governance

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 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 new energies strategy

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

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. The Group’s backlog is concentrated in emerging markets, which may increase our vulnerability to adverse geopolitical events.

Mitigation and management

The Group Risk Committee and the Board actively monitor geopolitical 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 2022, we performed detailed assessments and continuously evaluated the impact of the evolving situation relating to Ukraine. This involved keeping our people and operations
safe, ensuring we remained compliant with new sanctions, and making sure our contractual commitments in Russia were met.

Assessment: No change

The risk remained unchanged during 2022. While there was an increase in our risk profile, this was driven by the conflict between Russia and Ukraine. Although our exposure in these countries is very low, new sanctions enforced created new compliance requirements for the Group. This increase was, however, offset by reduced economic and geopolitical risks in our major markets due to the increase in commodity prices and the reduced impact of Covid-19.

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. In 2022, we focused on addressing evolving client needs in areas such as increased in-country value and improved sustainability performance. We further enhanced our competencies in new energies and improved our bidding competitiveness by becoming a leaner organisation.

We continued to secure new orders during 2022, including projects in Algeria, Australia, and the United States, albeit the overall level of new orders secured in E&C was lower than expected. We see a diverse pipeline of bidding opportunities in the coming years across markets and geographies.

Assessment: No change 

The increase in the principal risk due to the Russia-Ukraine conflict and lower than expected order intake, especially in E&C, was offset by a positive outlook, mainly driven by stable oil and gas prices, and good visibility of the pipeline for 2023. We were able to return to bidding in key markets from which we had been temporarily excluded during the SFO investigation.

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 all stakeholders 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 the Group Executive 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 Group Risk Committee 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 2022. Key achievements for the year included:

  • Embedded our new technical services organisation (1tec)
  • Continued execution of our formal in-country value programme to help us drive growth and support delivery in our core and new geographies
  • Continued establishing new partnerships
  • Continued push into new markets including progress with a one-stop shop solution for integrated decommissioning

Assessment: No change 

We made progress across all our strategic initiatives, and the risk remained stable during 2022.

4. Failure to deliver new energies 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. Our new energies services line was established to respond to this change, and the Group has outlined a medium-term ambition for 20% of revenue to come from this over the medium-term. An inability to meet changing market needs will limit our future growth, and would hinder our commitments with regards to our response to climate change.

Mitigation and management

New energies 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 by: partnering in relevant technologies and with established developers; monitoring relevant government policies; and supporting the new energies organisation with 1tec expertise to successfully execute and deliver new energies projects.

In 2022, we:

  • Established a significant new partnership with Hitachi Energy in offshore wind
  • Continued to embed our technical services organisation (1tec) fully into our new energies offerings and organisation
  • Continued improvements in our ESG performance, as demonstrated by positive ESG ratings (e.g. AA rating from MSCI)

Assessment: Increased

The risk increased in 2022 due to delays in awards. These were largely driven by reduced funding and government support for energy transition initiatives in our targeted markets.

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

1. Operational and project performance

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

Mitigation and management 

Key risks to project delivery are initially identified at the tender stage, through the risk review process by relevant risk review committees and escalated to the Group Risk Committee or the 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 2022, we continued to embed 1tec, ensuring the value assurance framework was integrated to govern all aspects of project delivery across our operations. Project recovery plans were maintained, and project delivery remained a significant area of focus for the Executive team and the Board throughout the year.

Assessment: No change

Despite various project and operational challenges faced during the year, the financial impact of the project risks that had previously been identified were recognised during the year. The risk profile of our operational assets was reduced, the impacts of the pandemic were reflected and therefore the overall risk level remained the same as last year but with a reduced portfolio of projects.

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 security/cyber-security programme and have a cloud strategy to maintain a resilient IT platform.

In 2022, we continued to improve our information security controls through:

  • A review of our information security practices with regards to global standards and best practices
  • The migration of our enterprise storage solution to meet the needs of our organisation

In 2023 we will proceed with the opportunities identified during the review of our information security practices.

Assessment: No change

The risk remained stable during 2022.

3. HSE incidents 

There are several factors that could impact our ability to operate safely. These include safety and asset integrity risks and they 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 fundamentally important and intrinsic to Petrofac’s behavioural DNA. It 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.

In 2022 we improved on an already strong HSE performance with a new HSE strategy. Key achievements for the year include:

  • Enhanced leadership visibility and oversight on site performance through site visits and safety scorecards
  • New campaign and use of driving improvement applications to enhance our Driver Safety Programme
  • Collaboration with contractors through annual performance reviews and rollout of Safety Hotspots at worksites to improve their respective safety performance
  • Improved communication and engagement with worksites through the use of digital technology

Assessment: No change

Despite some recent high-potential incidents, the risk remained stable in 2022 and was mitigated by the implementation of our new HSE strategy.

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 a 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.

We maintained our credit rating, retained an appropriate capital structure, secured an extension for our bank debt facilities, and reduced cash held in joint ventures and in highly regulated jurisdictions. However, the Group’s liquidity position in the mitigated severe but plausible downside scenario considered in the Group’s going concern assessment is reliant on a small number of collections from clients, which are not entirely within the direct control of the Group.

In 2023, we will continue to focus on cash collection and will maintain financial discipline.

Assessment: No change

Despite the challenges we experienced during the year in respect of financial performance resulting in the renegotiation of our debt facilities financial covenants, we have maintained our credit rating, secured an extension for our bank debt facilities, and observed a marginal improvement on the availability of guarantees.

2. Misstatement of financial information

We execute complex projects in a dynamic environment across various jurisdictions with numerous clients. Our business performance and financial results reflect our current assessment of assumptions and financial estimates, however actual outcome may vary. These may negatively impact investor confidence.

Mitigation and management

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

In 2022, we continued to improve our controls in this area with the ongoing implementation of a new Enterprise Resource Planning platform, which will continue in 2023. Furthermore, in response to the identified deficiencies in internal control and prior year adjustment in respect of the Thai Oil Clean Fuels contract, we implemented additional assurance activities. These included specific verifications that any updated bills of quantities information had been reflected in the contract cost forecasts, and if necessary, the financial statements.

Assessment: No change

In 2022, control deficiencies were identified with respect to the timely identification of increases in contract costs for the Thai Oil Clean Fuels contract and prior year adjustments were identified. With respect to the Thai Oil Clean Fuels contract, management performed additional assurance activities to satisfy itself that there were no other similar occurrences within the broader E&C portfolio. Following the implementation of these additional assurance procedures in response, the overall risk remained stable.

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 continued to enhance this programme during 2022, including:

  • Reviewed and revised our controls using new online tools relating to gifts and entertainment and conflict of interest processes
  • Revised our due-diligence controls, including new documentation and enhanced oversight of the Third-Party Review Committee Priorities for 2023 will be determined upon the completion of independent external reviews.

Assessment: No change

The overall risk level remained unchanged in 2022, this was due to the changes and
improvements implemented following the SFO investigation, which concluded in 2021.

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 positive 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.

In 2022, we established a new resourcing plan and initiated a recruitment drive to meet our future human capital requirements. These efforts were coupled with improvements in our overall benefit structure and reward and remuneration initiatives. Diversity and inclusion initiatives were also implemented successfully, including the launch of two additional Employee Networking Groups.

Assessment: Increased

The risk increased since our last update due to a higher attrition rate in a tight job market. However, this continues to have limited impact on our operations.

Download

Download Petrofac 2022 Annual Report
2022 Annual Report

Rebuilding for the future

Download the 2022 Annual Report