The latest market situation is leading to difficulties for some energy companies, while creating great opportunities for others. To understand how the major UK operators are dealing with these risks on an enterprise level, DNV has conducted a survey among their executives.
The survey revealed not only common issues facing the UK operators but also different approaches to managing the risks, suggesting improvement areas and opportunities for industry-wide solutions.
“We wanted to learn how operators are applying Enterprise Risk Management (ERM) in this new and changing business environment. ERM is a cross-disciplinary approach for identifying and managing the overall opportunities and threats in a company. Hence, it takes all dimensions into account, rather than a narrow risk approach,” explains Hari Vamadevan, DNV’s Director of Energy Operations in Europe.
The UK ERM Survey findings are based on interviews with senior executives at MD, CFO and COO level in many of the top 20 UKCS operators. These executives raised two issues above all others: firstly a general shortage of qualified personnel and secondly the asset integrity of the ageing UKCS infrastructure, though both are being actively addressed. The operators accept the benefits of an ERM approach, but state frustrations with the practicalities of its implementation, leading to incomplete realisation of its full ability to improve business performance.
“Despite the constant shifts in the business environment, DNV believes it is possible to enhance business performance through proper management of the business risks. Risk can be good if you can manage it,” says Robert O’Keeffe, a Principal Consultant from DNV’s UK ERM practice who led the survey.
“We hope that these observations can help the energy industry on the UKCS and elsewhere to improve its approach to managing its enterprise risks during 2009 and beyond,” he concludes.
Summary of the UK ERM survey
A brief summary of the survey is given below. Please send an e-mail to Robert O'Keeffe to receive a printed or .pdf copy of the survey.
Industry issues
The survey respondents identified a number of issues affecting their organisations and the wider industry:
Ageing infrastructure and asset integrity
Rather than occupational safety risks, the focus has moved to Process Safety and Asset Integrity due to the UKCS’ ageing infrastructure. The challenge is to safely preserve this infrastructure in order to exploit the new exploration finds.
Supply chain costs and lifting costs
The current high cost base is critical, driven by resource shortages of all types (people, equipment, etc.).
Project risk management (PRM)
Quoted by one company as its weakest area, PRM is vital in a low oil price/high cost world to deliver projects on time, on budget and in line with performance expectations.
Resources (quality; availability; ageing workforce)
The resource issue was most commonly stated by all participants, suggesting a broad shortage in the near and long term. The challenge is to secure access to the right resources and to retain the resource base, avoiding the inefficient ebb and flow of experienced personnel from and to the workforce.
Oil price
Although clearly an issue, this ‘risk’ is outside a company’s control and is often considered in a different ‘uncertainty’ category. The challenge in a fluctuating market is how to evaluate the opportunities effectively, given the long project lead times.
ERM adoption
The concept of ERM as a useful contribution to the management of the business is generally accepted. All the UKCS operators interviewed are applying an ERM approach to identify and manage the risks associated with the issues affecting their business, though their approach focuses on threats, not opportunities.ERM drivers
Companies state three main drivers for implementing ERM, the first being ‘to meet stakeholder requirements’. This demonstrates the perceived benefit of ERM in meeting the demands of corporate HQs to identify and manage risks. The second driver is ‘to help meet strategic goals’ and finally ‘to improve decision making’.ERM application
Although ERM is adopted by all companies to some extent, there are variations in its maturity and extent of application throughout the levels of the organisations. Significant identification and analysis of risks occurs, but the methods used to implement ERM vary significantly, with no common approach (no common standards etc). This is possibly contributing to frustrations with the process and incomplete implementation or realisation of its full benefits.
ERM is considered to be a valuable system, providing input to strategic thinking and decision-making. However, ERM is not the only mechanism that drives strategic thinking. Proponents of ERM need to recognise this and design the systems, processes and tools accordingly to ensure they are fit-for-purpose and lean in terms of inputs and time involved. Complex software is not the desired solution, though the omnipresent spreadsheets are perhaps hitting their limits, becoming unwieldy and restricting multi-user input and output.
Finally, with limited auditing and no benchmarking of ERM taking place, it is uncertain whether there is sufficient governance of the ERM process. This is an example that suggests that an ERM culture is not yet fully ingrained, and training programmes are probably required to maximise the recognised benefits of ERM.