Easy to underestimate risk and liability

Oct. 1, 2011
Robb Knock poses a good question in his article, "Risk assessments become risky," in this month's OGFJ.

Robb Knock poses a good question in his article, "Risk assessments become risky," in this month's OGFJ (page 28). The regional director of Calgary-based SimuTech Group asks if the oil and gas industry has learned anything from recent disasters and world events. His answer is – not enough.

Knock thinks the petroleum industry is "grossly underestimating" its potential liabilities. He indicates that some risk is incalculable, but that a thorough analysis of the various risks needs to be a bigger part of both engineering and business practices. This brings to mind a new report on risks in the oil and gas sector that Ernst & Young just sent me. The comprehensive annual risk report includes items that should be on the radar screen for everyone in our industry.

Not surprisingly, "access to reserves" is the No. 1 risk for the oil and gas sector, particularly with respect to political constraints and competition for proven reserves. "Uncertain energy policy" is the No. 2 concern, obviously more in some countries than others. Another big risk factor (No. 5) is "health, safety, and environmental issues."

On the flip side of risk is reward. "Frontier acreage" was ranked No. 1 in this category. Areas that many companies previously considered too difficult, too expensive, or too politically unstable to justify investment and operations have become more economically viable due to high energy demand and advancements in technology. However, there are plenty of risks for companies operating in this arena as well.

No. 2 on the opportunity side is "unconventional resources." Technological improvements have made the development of shale, oil sands, and coalbed methane commercially viable for many companies, especially those that have the size and resources to survive the current low-price environment for natural gas.

Here, in a nutshell, are Ernst & Young's top 10 risks for oil and gas companies:

  1. Access to reserve – political constraints and competition for proven reserves – Oil and gas respondents were more likely than those in any other sector to report difficulties in managing the risks associated with the expansion of government's role.
  2. Uncertain energy policy – Energy policy is in a continued state of flux in many key geographies. Meanwhile, the consequences of last year's oil spill in the Gulf of Mexico continue to be felt in the debate over deepwater regulations.
  3. Cost containment – At present, rising costs are being driven both by cyclical factors and the end of "easy oil."
  4. Worsening fiscal terms – "The use by governments of tax claims, real or not, as a pressure point to coerce oil companies appears to be increasing," said one survey respondent.
  5. Health, safety, and environmental risks – These risks have risen, which reflects both increased public pressure and more complex operational challenges.
  6. Human capital deficit – Ernst & Young says that 22% of the oil and gas industry respondents indicated a lack of qualified personnel was impacting their operations.
  7. New operational challenges, including unfamiliar environments – Three years ago, says E&Y, this was a "below the radar" risk. The threat has now moved onto the radar, and is still rising.
  8. Climate change concerns – Though the Copenhagen summit of 2009 failed to achieve a breakthrough, pressure on companies can arise from stakeholders. Risks related to climate concerns cannot be fully managed solely as a regulatory compliance issue.
  9. Price volatility – The unrest in the Middle East and North Africa region in the first half of 2011 resulted in an oil price surge. Of course, given the increase in exploration and production costs, volatility on the downside poses an equal or greater challenge.
  10. Competition from new technologies – In addition to new technologies for exploration and production, the petroleum sector is impacted by broader technological advancements, such as alternative power generation and the electrification of energy delivery.

SimuTech Group's Knock says there is no "one-size-fits-all" solution to mitigate risk. However, he urges us to be aware that conventional, tried-and-true risk metrics in oil and gas cannot reliably assess the scale, scope, and magnitude of foreseeable impacts. And he reminds us that, "At the leading edge in any industry, accidents happen more frequently than across the entire industry."

When it comes to managing risk in an inherently risky environment like oil and gas, it behooves us to use the best tools at our disposal and never, never become complacent.

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