Oil & gas companies today face a more complex and challenging risk environment than at perhaps any time in the industry’s history. And energy risks for both IOCs and NOCs will grow in size and inter-relatedness over the next several decades, creating difficult to manage ‘constellations’ of risk, according to a recent report from insurance broker and risk advisor Marsh.
The report, The Energy Industry: An Evolving Risk Landscape, says risks for many firms have ‘proliferated and are larger and more inextricably linked than ever before’, requiring managers to take a more holistic view of threats rather than a more traditional ‘silo’ approach that tends to place risk in singular, and thus less threatening categories. ‘Never before has the function of energy risk management been more challenging, nor offer those that do it well such significant competitive advantage over those that are merely adequate,’ Marsh says.
Marsh points to several converging trends that have increased the challenges, including an increasingly complicated relationship between IOCs and NOCs. The traditional model – NOC provides access to oil, IOCs provide the technical skills and access to markets – is gradually being supplanted by dollar-per-barrel tariffs and the transfer of a greater share of risk to the IOC. Moreover, ‘host nations may seek to exercise control over projects through a requirement for IOCs to partner with NOCs, and through their NOCs may become shareholders in companies that participate in the oil and gas value chain,’ Marsh says. The result can be additional risks for both parties, including what the brokerage calls ‘increased risk to national/strategic/ operational objectives due to complexity of operating with non-aligned partners.’
As NOCs venture abroad to shore up reserves, the report says they increasingly are exposed to the same political and country risks that historically have faced IOCs. For both IOCs and ‘international’ NOCs, the company says, ‘political risk, in all its guises, should be the subject of robust analysis and pre and post-loss mitigation’.
Increased costs and regs
Among other challenges facing the industry is the increasing cost of exploration and production and the risks of operating in harsh and environmentally sensitive areas such as deepwater and the Arctic. Regulations add another layer of uncertainty to costs for international operators: changes in contractual agreements implemented by a host country almost always benefit the host country, and can substantially increase project costs.
Operators are also subject to sudden increases in taxes or tougher than anticipated regulations, as seen in two very recent examples: the UK’s increase last year in the supplemental tax rate for North Sea oil producers, from 20% to 32%; and ongoing retooling of US drilling regulations in response to Macondo.
Natural disasters can have more profound affects on oil & gas operations as companies increasingly rely on a complex network of suppliers to support projects. The Japan earthquake and tsunami last year and the ash cloud from the eruption of a volcano in Iceland in 2010, for example, severely interrupted global logistics.
‘Under the umbrella of enterprise risk management, proactive supply chain risk management can help prepare an organisation for anticipating consequences to supplier interruptions,’ the report says.
‘Nonetheless there are many risks outside the control of an organisation (for example natural catastrophe) and embedded contingency plans for crisis management, disaster recovery and business continuity are prudent measures. Organisations are far more resilient to major shocks if they have clear lines of communication and if employees across the organisation are empowered to take decisions. Organisations should also seek assurance over suppliers’ risk management processes and contingency plans.’
Many companies regard enterprise risk management as best practice, but the strategy ‘has in some respects struggled for necessary recognition and adoption,’ the Marsh report says. ‘We believe that the future of enlightened risk management lies in an increasingly holistic approach, so that above the silo level, risks are assessed for wider, more company-wide impacts.’ RM
Subscribe
