Our research shows, unsurprisingly, that health, safety and the environment (HSE), regulatory compliance, price volatility and the increasing challenge associated with accessing reserves and markets take the top spots. A new entrant to the top 10 this year is IT security, specifically the threat to companies’ operations — or indeed, country and region-wide energy infrastructure — by cyber attacks or cyber theft of their intellectual property.
With regard to opportunities, rising emerging market demand is this year’s number one, rising three places since our 2011 report. With the continued growth of the world’s emerging economies, energy demand in these countries will also rise rapidly, and the opportunity for oil and gas companies to take advantage of this is immense. The opportunity list saw many new entrants this year, including new infrastructure to gain access to or to connect resources and markets, safety and risk management used as a partnership enabler, and new or expanded markets for natural gas.
To give you a snapshot of the sector’s top 10 risks and opportunities, we have created two “radar” diagrams showing the most significant risks and opportunities at the center of the radar. The sector’s most significant risks and opportunities fall into three key themes:
? Interaction with governments and regulatory bodies
? Core business focus and counterparty risk management
? The pace of technological change
Supply chains in the oil and gas sector are increasingly interconnected. Managing them against a backdrop of multiple governments with different and changing policies and regulations is challenging enough. The industry is also moving quickly into new geographical and technical areas. These create new challenges for governments, and short time frames in which to make critical decisions that have some very profound, long-term implications for oil and gas companies.
Regarding core business focus, companies are thinking hard about their core business focus, and many are recognizing that they cannot be present in all countries in all activities. With opportunities outweighing the capital and skilled resources that most companies are able to invest, they have to be clear about where their organization’s core competencies lie and where they can achieve the greatest returns. This is having a dramatic restructuring effect on the global energy landscape and on how companies manage their own risk and limit their exposure to partners’ risk.
As important for oil & gas companies are the challenges of technological change. At a time when major capital investment decisions need to be made over a 20- to 30-year horizon, the industry faces the difficult task of trying to predict not only how technology will impact and drive our future energy consumption and supply, but how it will change day-to-day operations, drive cost savings and enable new sources of energy to be commercialized.
Ernst & Young risk and opportunity radar
Coming back to the risk and opportunity radar, the risks and opportunities at the center of the radar are those that we feel are the most impactful for major organizations worldwide. Arrows indicate the extent to which the risk or opportunity is likely to increase, decrease or remain the same between now and 2015.
Safety tops agendas
According to our radar, safety matters top agendas. In our view, and that of the survey respondents, HSE is unquestionably the number one hazard for oil and gas companies, and this was confirmed by our experts’ ranking. The need to protect employees, local communities and minimize environmental impact is always paramount, with any perceived negligence in this area penalized heavily by both regulators (who hand out enormous fines) and the wider public (whose perception of the organization responsible can be irreparably damaged).
Of course, such penalties are not the only concerns for oil and gas organizations in this area. Safety and environmental health are of paramount importance in their own right.
Regulators have responded to heightened risk perceptions across HSE, finance and ethical areas by tightening rules and codes considerably over the course of the last decade. The industry has always looked to deliver leading performance in these areas — seen as critical in their own right and as essential components of companies’ “license to operate.” Increasingly, there are regulatory compliance issues in all of these areas, and tangible consequences and penalties for non-compliance.
Access to reserves and markets
This risk has fallen in relative importance since our last report — explained partly by some countries (e.g. Russia, Algeria and Ecuador) revising their terms to entice back foreign investors who had departed following manifestations of resource nationalism. However, our experts expect it to maintain its significance between now and 2015, expanding to encompass new frontiers.
The biggest issue for companies, in terms of access, concerns their relationship with host countries. Companies can mitigate risk in this area by adopting an open approach and maintaining the lines of communication. A lot of governments, particularly in Africa, don’t have as much experience in negotiating oil and gas contracts as some of the major IOCs and NOCs. The most successful companies are the ones that work with governments; the ones that make sure that the governments understand what it is they think they have found, or want to find.
The oil and gas industry continues to push the technical boundaries of exploration and development possibilities, effectively deferring the concept of peak oil. For many organizations, frontier acreage offers the only answer to improving reserve-replacement ratios.
With the continuing search for new sources of oil and gas, there are now plans to explore and extract hydrocarbon reserves in the Arctic. Offshore oil development in Alaska has experienced setbacks, despite its considerable promise. Yet the potential benefits for companies succeeding in this area are immense. From a technological standpoint, IOCs are clearly best placed to develop such reserves; they are already focusing on challenging technical environments such as deepwater and Arctic exploration, gas-to-liquids technology, floating liquefied natural gas (LNG) and unconventionals. The key components of the frontier acreage opportunity are:
? The Arctic — the area north of the Arctic Circle is thought to contain 13% of the world’s undiscovered oil and 30% of its undiscovered natural gas.
? Ultra deepwater — another new area the industry is moving into as it develops new capabilities and solutions to the problems of extreme pressure, temperature and harsh climate. For those that master this challenge, the rewards are considerable and will represent a major competitive advantage.
? Shale oil and gas - another technical frontier. In addition to mastering the technical challenges of interpreting seismic data and hydraulic fracturing, companies will face new challenges in managing onshore operations and interaction with local communities.
Uncertain fiscal outlook for oil and gas
The global economic and geopolitical environments are the primary drivers for this risk, with many countries owing very high levels of sovereign debt, while a stable fiscal regime is a critical factor for oil and gas companies.
For the oil and gas industry, with increasing sophistication and complexity, comes a realization that the advantages and drawbacks to being active across the sector do not always combine favorably. As this new Ernst & Young report highlights, the new model within the industry is that you have more pure upstream, midstream and downstream players. Many NOCs get into downstream because it will gain them access to consumers and technology and market development. NOCs may have very different political and commercial drivers to grow the business. Their core model may be to build on downstream. By contrast, some IOCs have totally or partially divested downstream assets.
Glossary: IOCs – international oil companies, NOCs – national oil companies