The oil and gas industry is a risky business. Traditionally, E&P companies are comfortable with a certain level of risk - much more so than, say, utility companies, which tend to be risk averse.
That said, banks and investors that lend money to E&P companies are not particularly risk tolerant and are always looking to reduce their exposure as much as possible.
A new study by Deloitte & Touche LLP says that energy companies can comply with regulations more effectively, receive better ratings from credit agencies and insurers, and improve capital investment by moving beyond traditional risk management practices and implementing enterprise risk management (ERM).
Recent history has given us spectacular examples of risk events and consequences. Hurricanes Katrina and Rita severely damaged energy infrastructure in the Gulf of Mexico. Some companies face geopolitical risk in oil-producing countries such as Nigeria and Venezuela, including the risk from expropriation. Agencies such as FERC and the SEC as well as the US Congress present us with regulatory and legal risk. And, of course, there are numerous examples of risk in the highly volatile world of energy trading.
“Energy companies face increasingly complex and interdependent risks which require a comprehensive and integrated risk management capability,” says John England, leader of Deloitte & Touche’s Global Energy Markets practice.
England noted that while the business case for ERM seems clear, relatively few energy companies have implemented new risk management processes. He believes such companies continue to take unintended or unexpected risks and repeat patterns of behavior, often with the consequence of destroying value. England says that while traditional risk management practices may have served the industry well in the past, the scope and complexity of emerging risks require adopting the comprehensive and integrated approach of ERM.
Deloitte’s white paper, “The Risk Intelligent Enterprise: ERM for the Energy Industry,” makes a strong case for moving forward with ERM. The technology for managing enterprise risk is currently available and can make processes more efficient while adding value.
In 2006, Standard & Poor’s began including a risk management practices evaluation in its annual review of energy companies with large trading and marketing operations as part of its overall rating assessment. Over time, S&P plans to increase the scope of its assessment of risk management practices, so it behooves all energy companies to be prepared.
A valuable resource on enterprise risk management is the Committee of Chief Risk Officers, a coalition of senior risk professionals from more than 30 energy companies committed to developing best practices to strengthen and standardize risk management in the energy industry. The CCRO has developed a series of white papers to help raise awareness and shape ERM practices in the industry. Visit the website [www.ccro.org] for information.
