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March 07, 2010
How safe is oil and gas industry in an uncertain environment
The Oil and Gas industry is by its very nature of business, exposed to signifiant business and operational risks,. Talking of some examples, consider the scenarios that are given under:
1. Even with modern oil-exploration methods which are better than previous ones,the success rate for finding new oil fields may still be only a 10-percent.
2. A 7-10% error in reservoir modelling could easily lead to loss of 50 Million Barrels of oil (for medium size reservoirs)
3. International crude oil prices have fluctuated from the peak of nearly 150 US $/Barrel to a low of 30 US $ /Barrel in recent times
4. A wrong production strategy may mean light oil (high quality crude) exhausting sooner than expected
Now if we talk of the recent example, the year 2009 will have a recall value for Executives in Oil industry for more than one reason. The global economic turmoil during this period that shook the foundations of the economic order, created a profound impact on almost all the sectors of industries, large and small. The Oil and Gas industry was no exception to this and during this period we saw perhaps the biggest swings in the prices of crude oil within a short duration. The previously unimaginable high of nearly USD 150 per barrel suddenly became a reality, and thereby brought some of biggest windfall profits for many oil firms. But during the same period, and with an unexpected speed, prices plunged to below USD 30 per barrel and threw all planning and business expansion targets out of gear.
The highly uncertain environment that exists today undoubtedly forces our attention to the high level of risks that this industry is now exposed to. And commodity price fluctuation, of which the above scenario was an extreme example, is just one of the many risks that exist for this industry. Some of the other risks which we will discuss shortly are in fact bigger in terms of their longer term impact and the level of preparation that the industry would need to make to effectively mitigate them, and potentially benefit from some of them.
Given below are "seven key risks" that loom around the Oil and Gas industry at present. These risks differ in their nature,some of these are more strategic and others are more operational, some are more acute in the short term while others will show a larger impact in the coming decades; but all of these are very real and tangible issues. Senior Executives from the industry should started planning around them and perhaps the need of the hour is an enhanced focus on risk management considering all these issues and not a lesser one.
Here is my opinion of the major risks for this industry:
1. Talent pool shortages (short and long term)
2. Ongoing economic turmoil
3. Depleting reserves of light oil (light oil is the high quality, easy to produce, low sulphur content oil)
4. Increase in competition for reserves( this is applicable even for NOCs looking to expand their footprint outside their country)
5. Commodity/ crude price instability (apart from possibility of low returns, it badly affects right planning)
6. Going green voices (i.e. increasing emphasis on environment friendly energy options)
7. Emerging Alternative energy options (thermal, nuclear,wind-power etc. )
At the end, it is worthwhile to remember that Risks are not just threats; they can create many opportunities also.
Please let me know your insightful comments and suggestions...
The End-Note:
According to some estimates, Saudi Arabia has close to 25% of Worlds proven oil reserves. However when Standard Oil (now Chevron) started searching for Oil in Saudi Arabia, it took them four long years before they could make their first discovery at Dammam in 1937.
Some more interesting facts on Oil and Gas industry are available at http://www.gravmag.com/oil.html.
Posted by apandey at March 7, 2010 11:10 AM
Hi Ashu!
It seems that we share some concerns about the oil and gas industry and their lack of interest on serioulsy assessing strategic and process risks.
I believe the main result is the huge fluctuation in prices, as you mention above.
I am sure that O&G risk managers could learn much from their financial institutions peers in terms of systems to improve their capital allocation models.
Posted by: Gustavo at May 3, 2010 04:47 PM
I believe that Hubberts peak is true and that we are now past the point of peak oil. I think many of the current events have to do with this downturn and it won't be long before the main stream media and population wake up and understand what is going on. For me and my family, we are preparing for the next era.
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