Oil challenges, risks and opportunities

“As a business risk advisor, we consult companies of all shapes and forms, in all business arenas, and bring in a suite of services to them. This helps to help them run their business more efficiently and strategise for present and the future,” said James Pierce, managing director and chairman of Marsh Global and Marine Energy Practice.

“In the insurance space in particular, we help them design ways and means to protect their income statement and balance sheet, and where necessary transfer risk of loss to third parties – the insurance market place,” he added.

Finance is key when running any business; and having the ability to control it is crucial to a company’s success. In order to protect assets, it is inevitable that companies working within any industry, particularly in oil and gas that the right insurance is purchased.

“We view the purchasing of insurance as the end of the journey, where once we have finally analysed what it is that makes a particular company tick we can determine, working in conjunction with that company, which risks are better transferred to another,” said Pierce.

“When you look at the insurance market, in particular the energy insurance market, it is a pool of contingent capital, waiting to be aligned with a price – insurance at the end of the day is the promise to pay. This is what we are doing when we go off to insure refineries or offshore drilling operations…where third party insurance companies to offer tens of thousands of millions of dollars to commit to oil companies in an event of a catastrophe,” he added.

This contingent capital would then be unleashed and paid over to the company if and when they suffered the/a loss.

Risks

Whether it be related to finance, the government (political) or dealing with an increase in demand, for oil and gas companies today, identifying a risk, or a number of risks that could potentially jeapordise the future running of their business can be problematic.

Also speaking at the NOC conference, according to Sheikh Faisal Al Thani, director and head of business development – Middle East, Maersk Oil (Qatar) “Good risk management allows an organisation to increase their confidence…and is as much about looking to make sure that you’re not missing opportunities, as it is ensuring you are not taking inappropriate risks”.

As companies continue to globalise their businesses, they are now beginning to address some of the risks and challenges they face in recognition of the fact that they are sitting on a vast majority of the world’s hydrocarbons.

According to Pierce, “In this high commodity price environment there are a lot of exposures on the supply side which cause them (NOC’s) angst. As they try to manage there growing businesses we work with them to maximise the efficiencies in running their business internally, and figure out where they can get help from third parties, transferring that risk to a third party.”

A challenge

As well as the risks encountered, running an oil and gas business efficiently, and cost-effectively poses an array of challenges. In Pierce’s view the biggest risk or challenge that NOC’s face today is the lack of supply itself.

“The ability to maintain production at historic levels is going to increasingly become a challenge to all National Oil Companies. So, we will see them embracing new technology to enhance production from existing reserves, as well as an increased effort to explore for and find new sources for oil within their domains – that to us is the absolute biggest challenge for them – to look to the future and maintain the supply,” said Pierce.

Moving to cross-border trade also presents a challenge for organisations. This is a trade where the investor borrows money in a country that has low interest rates and lends or invests the funds in a country that has high interest rates, for example. This trade relies predominantly on currency, and interest-rate stability in order to succeed. If the spot currency rate changes too much to keep the interest rate advantage, even though the trade is profitable, money can be lost on the change in the currency’s value.

Moving to cross-border trade, for oil and gas companies therefore, involves not only a risk for a loss of capital, but political risks in dealing with other nation states and private sector transactions, which historically they haven’t had to focus on, but are now.

The more traditional challenge is in the sheer size of a lot of the infrastructure projects. As companies drive them more and more, the potential for loss should something go wrong, has the NOC’s relying on the conventional energy insurance market considerably to help them protect their balance sheets in the event of loss.

In addition, when considering such new projects “they (NOC’s) find themselves challenged by a lack of availability of raw materials and labour supplies – labour has not historically been an issue for NOC’s but it is becoming one as they globalise their businesses,” said Pierce.

“Historically, a lot of the infrastructure projects were managed by the IOC’s, and that is no longer the case as National Oil Companies are controlling there own destiny making the capital commitments and taking the risk that comes along with the commitments, a new arena of risk for a lot for the NOC’s,” he added.

A strategic challenge

In addition to maintaining supply by investing in various infrastructure projects, according to Pierce, the biggest strategic challenge business’ in Middle East face, is how they are going to balance the growing need for internal consumption. As their populations grow, and demand more themselves, which at this price level of oil, they will do – they will be increasing indigenous demand for energy.

The NOC’s will therefore, “need to balance the need to satisfy the needs of their own populations and are going to find themselves struggling to keep up with the diminishing amount of external, export capability because of internal demand.”

“This will then create more demand and a higher price of oil, becoming a self-fulfilling prophecy – but will be a big challenge for the NOC’s and huge responsibility for them to find a way to distribute hydrocarbons for global economic stability,” Pierce continued.

Solutions

So, although there are many risks and challenges to be identified and addressed – companies are helping to minimise them by prudently purchasing insurance by physical loss, or damage to their assets, and the protection of cash flow through the purchase of business interruption following the loss of one of their assets.

Protecting against pollution, accidents and catastrophes – those are all traditional energy insurance market products that are available to the NOC’s. However, as Pierce states, the more assertoric supply risk is not transferable to another party, and there is no contingent capital lined up willing to step in and pay the NOC’s if they are not producing enough oil as they used to.

“This is where the more exacting recovery efforts in use of technology comes in and you are seeing the NOC’s rely more on technology which is great for some of the service companies, but managing supply risk at the end of the day is not a risk that you can transfer. It is going to determine which NOC’s thrive in the future and which ones don’t,” Pierce said.

“The Middle East is the heart and soul of the energy business. As goes the energy business in the Middle East, so goes the energy business globally. We are making a huge commitment to the Middle East as we see it is as our largest growth area for our consultated business, there is tremendous opportunity here and it there will continue to be tremendous growth,” he added.

“I think people such as ourselves are in a position to point out the issues, and encourage National Oil Companies to seize a moment in history where they can actually make a very positive difference on the world,” Pierce concluded.