Title: Risk management versus incentives

Authors: Eyvind Aven, Kjell Lovas, Petter Osmundsen

Addresses: Section for Petroleum Economics, University of Stavanger N-4036 Stavanger, Norway. ' Section for Petroleum Economics, University of Stavanger N-4036 Stavanger, Norway. ' Section for Petroleum Economics, University of Stavanger N-4036 Stavanger, Norway

Abstract: Portfolio theory indicates that risk management should take place at the group level. Hedging at the project level or in the individual business areas may lead to suboptimal results. However, the efficiency of a profit centre depends on its management|s being able to influence factors that are crucial to the unit|s financial results. Price hedging could be one such factor. In the wider perspective, this constitutes part of the balancing between centralisation and decentralisation. This article covers important elements of risk management and incentive design. It goes on to discuss the balancing of overall risk management at the group level and incentive design in profit centres and corporate units. Throughout the article, the oil industry serves as a case.

Keywords: risk management; incentive systems; decentralisation; petroleum industry; portfolio theory; price hedging; incentive design; oil industry; group level; financial results; energy finance.

DOI: 10.1504/IJGEI.2006.009728

International Journal of Global Energy Issues, 2006 Vol.26 No.1/2, pp.158 - 169

Published online: 08 May 2006 *

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