The nutritional importance of oils and fats in human consumption has always been a point of discussion. Oils are the most important energy source in food products; more than one third of the colorific value of a mean daily food intake, comes from the oils and fats present in the different food products.
Beside essential components like vitamins, essential fatty acids and other minor components, the latter from which only still little is known. (Marc 1997; 1-3)
To become suitable for human consumption, most oils are purified. Mostly a light colour, a bland taste and a good cold and oxidative stability is required. To achieve this, oils are subject to several refining and modification stages, in order to adapt their oganoleptic quality to the required standard.
Today, more attention is paid now to the trans-fatty acid content and natural vitamin content of oil and fats. The polymeric triglycerides and secondary oxidation products which are produced during the successive refining and modification stages are gaining increasing interest. However, the extraction method can either be done through direct pressing or solvent extraction. In solvent extraction, a low boiling petroleum is usually used. The solvent is separated from the extraction oil through a distillation process. Both the extraction and refining process are prone to risk. Commonest among these are fire, explosion, pollution (spillage) and related risks.
Management is concerned with planning, organizing, directing and controlling the directives and use of resource in such a manner as to achieve some designed objectives.
Risk management remains essential to good project management. But before risk can be managed, they have to be thoroughly understood – this is the essence of risk assessment (pm-network: March; 2003). The oil industry is faced with many risk of various stages of their operation, most are very unique in their nature the process of oil Extraction and production is faced with risk of fire, accident (transportation and industrial) explosion, lighting, contamination, food, environmental pollution, criminal perils (burglary and robbery). Other perils that cannot be ruled out are war, landslide, (Bello 1989). Occurrence of the above risk will effect production. Proper care is taken to evaluate this risk to determine its impact on production.
Based on this, there is need for management of risk so that losses can be reduced.
Many firms in Nigeria have failed to remain in business due to failures resulting from bad business judgements on one hand and risk failures on the other hand.
Consequently, they are unable to render their statutory functions. Many factors have contributed to such failures. The causes of such failures revolve around the relationship between risk management and productivity/profitability and strategies that enhance effective control operations in the oil industry.
Having identified the problem facing the Nigerian Vegetable Oil Industry the study will focus on the imminent problem they encounter in the course of their operations and effects on the general productivity of the firm. Its main objectives are to: (1) Determine the risk control measures exhibited by the different industries. (2) To determine if the oil sectors are performing efficiency in managing the risk that occurs in the course of their operation. (3) To determine if the level of risk management can combat risk and increase production thereby effecting profitability.
The study will review issues on the concept of risk, risk assessment, classification of risk, method of risk evaluation, risk management process, measures of productivity as well as suggest controls measures to reduce risk and resolve also the persistent occurrence of risk that abound in our risk management techniques.
Finally, strategies and methods will be recommended for the Nigerian oil industry for improvement.
Significance of the Study
This work will be useful to the Nigerian Vegetable Oil Industry both to those already operating and those already in the system. It will also provide a useful material for future researches as to throw more light to the subject of risk management in the Nigerian oil industry and its offset in producing.
It will also provide a means of combating the risk threatening the operation in the Nigerian Vegetable Oil Industry, which includes fire, accident, and contamination. Also it will provide option for choice of project to the oil firm before execution.
There is no significant relationship between risk management and production.
There is no significant relationship between risk management and profit performance.
There is no significant relationship between effective control of operations and risk management in firms.
Scope/limitations of Study
The emphasis on vegetable oil industry in Nigeria, the questionnaire and interview are limited to Kitchen Vegetable Oil Industry, Aba, Polymer Oil Mill Industries Ltd, Aba and PLANNET Oil Industries Ltd, Aba. This research work was constrained by time for data collection, lack of adequate information keeping data from company concern. Also denial of certain information considered by firms as top secret is another constraints. However, this did not affect the research study.
Concept of Risk Management
What is risk management? It is a discipline for living with the possibility that the future events may cause adverse effects. Risk management is fundamental to the success of any major project. However, the variations in using risk management practices are considerable and are dependent on numerous factors such as the industry sector, size of the project and stage in the project life cycle. (Bassey 1994;11-12)
Years of experience in the Nigerian Vegetable Oil Industry have established activities that are thought to directly offset specific threats in the oil industry. Examples of such activities are inspection, patrolling, value maintenance, Riser cladding and so many other activities. Many of these activities are mandated by government agencies. When the activity is not deemed to be effective in addressing a threat (identified threat), the activity is changed or accepted. This activity that list is being refined on continuing basis (Michael 2003)
In Risk Management all activities that influence or affect the Nigerian Vegetable Oil Industry must be considered – even if comprehensive statistical data on the effectiveness of the particular activity is not reliable. Also industry experience and operators can also be included in the Risk picture. But, what is Risk? Is it synonymous with hazard and is it related to high productivity?
The word Risk is used in activity of contexts and in variety of senses. Generally, it can be defined as the possibility of an undesired consequence to occur, but is often regarded as a function of probability and consequence. A large risk may refer to the seriousness of the consequences of an event occurring or the high probability that it will occur or a combination of both. In an easy context, risk is used to mean the likelihood of damage or injury to occur. For example, risk is defined as “likelihood per unit time of death, injury or illness to individuals (Van Hore 1988). Basically the term risk is used when the outcome are uncertain.
In technical term, risk is defined as the possibility that a harmful event (death, injury or loss) arising from exposure to biological, chemical or physical agent may occur under specific condition. Hence Risk can be considered as Hazard Exposure (Richardson 1972).
Henry et al (1987) have listed definition of objective risk, which are common in literature: it is the probability and size of loss. Again, risk is equal to the variance of the probability distribution of all consequence of a risky course of action. However, risk is a weighted linear combination of the variance and expected value of distribution of all possible consequences. This is the statistician view of Risk.
According to Bello (1989), Risk may be classified into fundamental, particular, speculative and pure risk.
Fundamental risk arises out of the nature of the society or form occurrences beyond human control. Examples are war, inflation and unemployment.
This is also known as insurable Risk. These arise from loss or damage to physical assets.
Particular Risk has their origin in individual and their impact is felt locally example of a road accident or domestic fire accident.
Speculative Risk arises from unexpected changes in the economic productivity of a given capital investment. They arise from market, political and management source and result in profit loss or break-even.
Before any risk assessment study is done, one basic question is asked, “why is this study being done”? This is because the word “SAFE” cannot be defined. Therefore risk assessment is done to prove that a system is never completely safe. A system that is being considered safe by one may not be considered safe of another. (PM Network: April 2003). An example is a firearm bought by an individual. Many people believe that buying of firearms is safe, others do not believe this. Therefore, statement such as “we can prove that accident will never happen” is not credible.
According to Richardson (1992), risk assessment and quantification of risk result from a specific use or occurrence (or disposal) of a chemical taking into account possible harmful effects on individual people or society of using the chemical in the amount and manner proposed and all possible route of exposure. Quantification ideally requires the establishment of close effects and close-up response in likely individual and population.
Risk assessment is used to conduct a baseline analysis of a site or faculty to determine the need for remedial action and extent of clean up required. It helps to construct “what-if” scenarios – for example, to compare the potential impact of remedial alternatives and to set priorities for corrective action. In addition it assists in evaluation of existing and new technologies for effective prevention, control or mitigation of Risk. In fact, risk assessment in one form or another is inherent in all decision making. Furthermore, it provides a scientific basis for a corporate risk-reduction and management program. (Iyama et al 2000).
Spurred by the tragedies that occur in some processing industry. The Nigerian Oil Industry have intensified their focus on safety and initiated elaborate program to prevent catastrophic events. These programs are designed to address sudden events, such as release of toxic gases and for which much have serious consequences but low probabilities (Henry et al 1987)
Risk identification deals with analysis of the sources of risk, the type of losses, the immediate and late causes of risk. Just like planning, risk is identified throughout the lifecycle of the project. Risk entails both internal and external risk.
Internal risk are risks that the project team or organization can control e.g. cost estimates, staff organization etc. external risks are beyond the organizations’ control e.g. government actions etc. Risk identification begins with identification of sources of risk and this is through:
- Establishment of full detail of activities.
- Identification of dependency of activities on each other.
- Identification of dependency on outside activities.
The organization can achieve this through:
- Organization and process chart. (b) List of equipment owned, rented or used. (c) Analysis of statement of accounts – balance sheets, profit and loss accounts.
The immediate cause of losses is important. The causes of loss could be fire, flood, oil spillage, explosion, and pollution.
The causes and consequences could be lack of maintenance of equipment used in the oil industry, overflowing and burst pipes can cause spillage. Electrical short-circuiting can cause fire, undue fraudulent practices among employees.
This involves the control evaluation of the frequency and impact of the loss. To measure risk, three parts are taken in steps.
- The frequency of the loss, (2) The probability of a loss occurring, (3) The severity – impact of loss on occurrence of the risk.
After identification and measurement, the next step is to develop methods to deal with the risk. The methods are divided into two broad aspects, the physical method and the financial method.
Risk can be prevented or reduced using physical items like fire alarm devices, burglary device, etc., the nature and location of the industry, industry layout and processes, maintenance of equipment, nature of storage, education and safety lessons among employees and the public. The use of protective equipment (PPE e.g. face mask, safety boots, etc).
Sound Risk management is the ability to avoid unnecessary risk. Whenever an organization cannot offer a service while ensuring a high degree of safety, it chooses avoidance of risk as a risk management. Therefore whatever that offers too much risk is avoided. If the risk cannot be totally avoided the manager will always ask, “is there something we can do to deliver this conduct/program of this activity to safety?” If the answer is yes, and then risk modification is the next acceptable method. (Argenti 1984)
Modification means changing activity to make it safer for all involved. Policies and procedure are example of risk modification. An organization that is concerned about the risk of using unsafe driver may add DMV record to check to its screening process. However not that some risks are not avoidable, for instance, the risk of bankruptcy, the risk of liability suit, the risk of premature death (Freeman 1988; 85-89). The basic rule is that when the chance of loss is high and loss severity is also high, avoidance is the best or next to modification.
Financial Risk Control
Risk Sharing or Transfer
Risk sharing involves sharing risk with another organization through a contract. Two common examples are the insurance contracts that require an insurer to pay for claims expenses and losses under certain circumstances and service contract where by a provider (A contractor) agrees to perform a service and assume liability for potential harm that might occur. The idea of transfer is the main feature of the insurance firm. Examples of transferred risk are risk of the fire, death.
Unlike sharing, risk retention is the situation whereby losses are borne by the party exposed to risk. The decision is taken when careful understanding must have been taken by the organization to bear the risk considering the cost of a risk management option.
The ability to retain risk depends on the financial capacity of the firm. Most risk retention is done when chances of loss is low.
Cost Estimation and Risk Management
Cost Estimation and Risk Management
The basic definition of risk is the possibility of an undesirable outcome. From an oil producing prospective such undesirable outcome include, exceeding budget, overrun of schedules, fire accident government policies etc.
Some examples of estimation and risk management alliance:
- Cost estimation is used to evaluate risk and perform risk tradeoffs, (ii) Risk analysis methods are applied to cost models, (iii)
The possibility of meeting cost estimates depends on how well risk management is performed.
Risk management involves both assessments of risk and their control. Cost models can help control them and support both activities. Note that cost estimation techniques are only a subset of those that can be used in risk management (Welson; 1979).
Parametric cost models includes factors describing the project environment and constraints. Hence, cost models can be used as risk identification checklists since they contain a set of project description. Certain tools save time and money by providing an automated technique for identifying project risk in conjunction with estimation using these tools, the managers can identify risk before hand. And also identify risk that can easily be ignored (Campbell, et al 2002)
It is important to analyze uncertainties in cost or schedule estimates, since uncertainty implies risk. Probability of missing target plans can be ascertained because the range of possible results derived from a cost model is a probability outcome. As a result, one can determine the confidence level of meeting plans and target. It is easy to calculate the cost consequence component of risk analysis. For instance, deterministic point along the probability distribution can be used to quantify the cost of potential overruns. Any of these can be used: decision trees, expected earning and sensitivity analysis. These generally involve discrete values of changed factors at extremes, whereas using probability distribution tend to smooth out range between extreme values. (Argenti 1984).
Cost modeling is an important component of risk monitoring and control during project execution (Argenti 1984). It plays a continuous role as well. This cost estimation reassess risk and support re-planning effects. A standard risk management plan must adapt to changing conditions.
Methods of Risk Evaluation
Most industry adequately identifies their project risk, but very few effectively mobilize the correct action needed to resolve the problem. By emloying a risk model to visualize and communicate possible problems, the project terms have to analyze, prioritized and deal with risk to deliver positively (PM Network April 2003).
There are five steps involved in the standard risk model. They are:
Step 1 and 2: Identify And Analyse Risk; Step 3: Prioritize Risk; Step 4: Develop Action Plan; Step 5: Monitor Your Plans.
Cost Estimation and Risk Evaluation
Risk is associated with probability, and can be accommodated or hedged. Uncertainty on the other hand is the lack of knowledge concerning the probability distribution of events. But not that uncertainty is the attribute of virtually all decision process. Cost benefit analysis entails cost estimation and modeling.
Below are three methods of cost estimation in cost- benefit analysis.
- Sensitivity Analysis
- Variable –by – variable analysis
- Scenario Analysis
- Expected Earned Analysis
- Option Analysis
Decision trees are excellent tools that help to choose between several courses of action, they provide highly effective structure within which you can lay out your course of options and investigate, possible outcomes of choosing any of these options. They help form a balanced picture of Risks and rewards associated with each action.
Measures of Profitability
There are several model used in arriving at an acceptable project option. Some models are non-numeric while others are numeric. Example of a non-numeric model is the CEO’s pet project that can be made by the chief executive during a meeting. The numeric models are usually in form of financial Return.
The following numeric models are used for measures of profitability:
- Earning per share (2) Internal rate of return (3) Net present value (4) Accounting rate of return (5) Return on investment
Risks of Vegetable Oil Firms
Not all risk are equal, some are unsafe and the effects are minimal while others are catastrophic. The value of the risk can be estimated by the huge amount of money spent on the exposed property to the risk. The risks include the following:
Fire is very common and can damage a large amount of property instantly. Fire can result due to different condition like:
- Oxygen which is generally supplied by surrounding air
- A source of heat capable of initiating the chemical reaction (combustion).
Heat source can be planned or unplanned. Most heat source is part of the processes involved in production in the oil sector. Such source include furnaces, electrical facilities, unplanned sources arise from smoking in the premises, misuses of facilities and operation method. The planned source has to be controlled to avoid accident and the unplanned source is restriction of sources and complete removal if possible.
Also effective fire fighting as an important step include:
- Alarm devices and fire detection, well trained fire-men, adequate water supply, installation of a well maintained sprinkles system.
An important aspect of fire control is evacuation of the staff from building before fire becomes large. Most effects are from the chemistry of combustion, a condition of incomplete combustion overcome many people. Anther result of combustion is the combustion of energy. In an enclosed area, suffocation will lead to death.
The basic aspect of fire control is the education and training of staff to response to pre emergency situation, for example by giving specific instruction to staff upon the outbreak of fire.
Explosion occurs when gas or vapour mixed with air or oxygen in the correct proportion is ignited. The initial combustion generates heat in the first layer of the mixture and then gradually spread to all the other level. All sources of ignition must be eradicated to avoid explosion. The basic way to avoid explosion is to avoid flames where there is vapour or gas. (Baotnech 1994;30)
Liability losses are due to contract and tort. Oil companies being extensive employ the help of other firms through contract to foster its activities. The common tortuous liability in the industry are negligence, nuisance, occupier’s liability, usually most liability risk are taken to court because of its legal condition. This lead to communities using or threatening to sue oil companies in respect of oil spillage or pollution.
The issue of pecuniary losses in the oil industry includes fraud, loss of money in the toil or while transit, all contingency covering all interruption in the business e.g. of an interruption can be a fire outbreak in the refinery and this can lead to a break in refining process. This is an acute shortage. This type of loss is taken care of through insurance policies.
The personnel employed by the oil industry vary because of the number of activities. They can be skilled, semiskilled, and casual. In order to reduce human waste and increase safety in the oil sector, various safety measures are adopted. They include wearing of protective helmets, goggles, gloves boots at work site.. establishment of clinics near sites. Also, the 1987 Workman’s compensation decree stipulated that the employers of labour must pay a stated amount to any employee of his legal responsibility following bodily injury, sickness or death. Insurance is taken by employer to cover such loss.