Introduction:

The energy industry is a sector that provides directly or indirectly services and products to the world and people. The industry itself is a key player who dominates the upstream energy sector to a considerable degree. The industry itself is a key player who dominates the upstream energy sector to a considerable degree. The energy companies play an important role in this modern day because society has developed a dependency to gas and oil services. We can see that this sector is a key in this 21st century because that gives us a lot of services and products that we need for our life.

Energy sector companies are at an operational disadvantage when we compare them to firm in other industry. The volatility of the market and the prices of commodities like oil and gas are greater than the volatility of other markets. Financial institutions and organisations of other industries are susceptible to financial risk factors like currency fluctuations, interest rates, borrowing rates… volatility related to this kind of markets is overshadowed by the commodity market. In the perspective of energy companies also if we add the complexity of their operations we can see that they are active in both markets.

The volatility of the commodity markets and the effect that it has on oil, gas, supply and demand, exposes energy firms to commodity risks, which in turn bring about price risks. These risks change when there is a threat of market risk and that also present a significant challenge to the energy companies in terms of profitability, income, investment, operating cost, stakeholder return… energy companies operate in a number of countries and markets that bring firm to trade in a number of currencies.

This increase the risks faced by companies. Fluctuation in currency rates expose firm to currency risks that are an additional part of market risk. The situation is more complicated by global factors like recession and economic crises. The recent global crisis that affects the world between 2007 and 2009 increase the vulnerability of firms to credit risks and other market risks. The question we can ask is what can we do to limit or reduce this kind of operational hazards?

The answer to this question presents itself in the form of financial risk management, with the purpose to provide to organisations the mechanism that can help them to manage credit risks or other market risks. The role of financial risk management is to determine when and in what way we have to use hedging and other financial instruments (Crouhy 2006). Research conducted by Froot et al (1994) suggest that the employment of risk management can be helpful to organisations in a number of ways, from reductions in operating costs to the increase of shareholder value.

However, Froot et al (1994) research is based to industries and organisations outside the energy sectors and does not take in account operating conditions like those present within the industry. Companies in this industry (energy sector) can take in account financial risk management to allow or reduce liquidity issues and also capital issues. That can be an important advantage due to fact of their nature of operations. That can be an urges benefit for companies or organisations if they are implement in financial risks or transactions.

This dissertations will examined the issues of financial risk management in energy sector, also how they impact in the performance of companies in that sector. The next section will clarify the exact intentions and objectives that we gone follow in this paper. Also we have to provide a set of dissertation research question that we have to answer in this dissertation.

1.1 Aims and objectives:

The aim of the dissertation is to examine financial risk management in energy and oil sector and evaluate his impact on organisations performance. In order to develop the understanding of financial risk management in that sector, we will examine the major companies in energy sector in the UK: BP, Shell, Total and Exxon. First we have to identify what exactly financial risk management is and the role he plays in an organisation. Also the tools use by financial risk management will be examine and evaluate to determine if an organisation can benefit of the use of financial risk management. The primary research question of the dissertation is: can a company operating in the energy sector improve his performance with the application of financial risk management?

With this research question, the following objectives have been identified:

• Analysis of financial risk management.
• Identification of credit and market risk and his impact on organisation in energy sector.
• Identification of performance indicators in oil and energy sector.

The first objective provides the base for the research and establishes theoretical foundations for the topic. He also investigates what is financial risk management and how it helps organisation to deal with risks. The second objective will firstly differentiate risks in the energy sector with other industries, and after will identify and discuss the different type of financial risks and his impact or effect on companies operating in energy and oil sector. The aim of the research is to determine if financial risk management has any impact on organisational performance and if yes what is the extent?

1.2 Justification for research:

We conduct this research because it applies an important component of corporate finance in the sector of oil and energy. It will identify if there is a correlation between successful financial risk management and the performance of companies in that sector. The research will also determine if there is a causal link and make some recommendations to how companies can benefit of financial risk management. Risk management in any form is a costly business; the research will be benefit to the academic plan and also to the industrial plan because it will provide evidence of link between performance of an organisation and financial risk management.

Moreover, it seeks to cast light upon how financial risk management is used in this particular sector and also identify possible performance gain as a result of financial risk management. Financial risk management in the energy sector has to be explored because it will contribute to our knowledge and help for further future research.

1.3 Dissertation structure:

Chapter two: literature review.

This chapter will be dividing in two parts. The first part will investigate financial risk and financial risk management. The second part will be the application of financial risk management in the energy sector.

Chapter three: research method.

This chapter will provides the research process that we will used to achieve the objectives and research question of this dissertation. It will explore the different methods that we can approach and also give justification about the method and the data we have choose.

Chapter five: Case study.

The dissertation case study will examine financial risk factors and his impact on organisations in the energy sector. We will focus on the recent global crisis of 2007 to 2009 also see what happen in the year after the crisis. We will analysed the financial performance of organisations over this period in order to determine financial risk implemented in the balance sheet