When managing energy sector risk, what are the most important areas to prioritize? Featuring the views of 250 senior professionals, our special report considers how to turn supply chain risks into opportunities for improvement.
- Survey of 250 energy sector professionals highlights key areas to prioritize when managing risk.
- Labor disruption is #1 risk, but price risks overall, offer the biggest opportunity to improve business.
- Identifying and managing supply chain risks collectively brings substantial benefits.
The energy sector has always been exposed to a wide variety of risk, due to the nature of the places where oil and gas are found.
In particular, the capital-intensive nature and supply and demand dynamics expose the sector to risks around regulation, geopolitics, technology, price volatility and operational cost.
It is therefore crucial that corporations identify the risks that pose the biggest threat to their operations, and where effective management will create the biggest opportunities to improve the business.
Biggest energy sector risks
Our new report has found that senior professionals in the energy sector see labor disruption as their biggest risk, and the one that is the most operational and commercially prudent to effectively manage.
However, price risks overall represent the biggest group of opportunities to improve business, according to the survey.
Operational cost is also an area that not only offers opportunities to improve efficiency, but can be severely impacted by unexpected events.
A recent example is Hurricane Harvey, which dumped trillions of gallons of water on the Houston region, the hub of the US energy industry, paralyzing businesses and resulting in large losses.
Managing price risk
Two of the main sources of supply chain risk are around price and supplier risk. However, it’s important to look at these holistically.
Price risk is one of the most fundamental issues that energy companies face.
It costs a lot of money to get oil and gas out of the ground or to build generation facilities and with energy prices being inherently unstable, companies need to know what price they are going to be able to sell what they produce.
This is reflected in our survey, as three of the top five opportunities to more effectively manage risk are price related:
- Raw material price fluctuations
- Regulatory and trade agreement changes affecting taxes and tariffs
- FX volatility
This is why it’s crucial for companies to have accurate data, market news and analytics so they can understand their exposure to fluctuating supply chain costs and take action if necessary, for example to hedge for raw material or FX prices.
A tangled web of suppliers
The third biggest opportunity to better manage risk is around reputational damage caused by exposure to bribery and corruption or financial crime, according to the energy sector survey.
As supply chains become longer, more global and more complex, it has led to them becoming less transparent and more vulnerable to supplier risks.
In particular the global nature and scale of the oil and gas sector, and the complexity of the working and contractual relationships with governments, venture partners, suppliers and other contractors, make compliance with anti-bribery and anti-corruption regulation something that requires significant management focus.
Yet according to the our research, 57 percent of those working in the energy sector felt that third-party relationship decisions often overlook key risks.
This is a mistake, as firms operating in the oil and gas sector are among those that have incurred the most significant penalties.
For example, Brazil’s state-owned Petrobras recently agreed to pay US$2.95 billion to settle a corruption-related class-action lawsuit in the United States.
The role of technology
Shifts in the industry tend to emanate from technology breakthroughs, such as increased productivity in tight shale extraction or rapid growth of the markets for renewable energy and electric vehicles.
But new technologies can help multinational companies succeed in today’s energy environment by getting the basics of running their businesses right — identifying the right markets, investing in the infrastructure required to grow, and accurately forecasting supply and demand.
Yet when surveyed energy professionals said the biggest obstacle for effective risk management is funding, indicating that holistic risk management is not a mature area for the sector.
However, companies such as ourselves are bringing together their expertise in areas such as finance and risk to provide a broader oversight of risks.
With analysis and insight from financial, risk, tax and legal content alongside market leading technology, and deep domain expertise, we provide the trusted answers so companies can take confident action to advance their business and gain competitive advantage.