Risky business

In an exclusive interview Simon Lazarus, Client Director within the Energy Division of Aon Limited, discusses the importance of risk management in the oil and gas industry.

O&G. In your opinion, how important is construction risk management in regard to major infrastructure developments in the oil and gas industry?
Simon Lazarus. A typical infrastructure project is made up of four phases – concept, development (project planning), implementation and termination (project execution), and risk factors are subject to considerable change during each phase of the project life cycle. Effective risk management is fundamental to each part of the process.

With large infrastructure projects in this sector, opportunity and risk remain relatively high during project planning, but the amount at stake remains low given the relatively low level of investment to this point. During the execution phase, the amount at stake rises as the necessary resources are progressively invested, and this is the period of highest risk – and where risk management and control become critical.

Aon’s risk management process consists essentially of three steps: assessing and analysing key risks, determining and implementing risk strategies and solutions; and monitoring and reporting on risk.

O&G. What are the main challenges of risk management in the oil and gas sector? Are there any challenges specific to Russia? And how are you tackling these challenges?
SL. The sector is experiencing a sharp downturn in energy prices and high costs. The present state of the global economy combined with weak energy prices are hurting investment in future oil production capacity and clouding expectations about future demand levels.

Short-term, given the drop in investment, marginal developments and expansion projects are likely to be shelved, delayed or re-tendered, and securing the necessary project finance will be difficult in territories with major political or financial concerns.

Specific to Russia, it has been reported that the collapse of the Russian stock market caused many large investment funds to sharply curtail their investment in Russian assets, e.g. Emerging Markets Growth Fund and Templeton Russia.

With managing costs being a major risk management consideration, Aon is working closely with its clients to obtain the best results from the insurance markets, providing informed access to markets, programme structure, financial review and economic delivery.

O&G. What lessons can be learnt from the current global economic crisis with regard to risk management in the oil and gas industry?
SL. Although the oil industry is currently suppressed due to the impact of the worldwide downturn, there is still a perceived shortage of oil and gas globally. Higher oil prices are needed as conventional oil reserves are becoming scarce and new oil reserves will require more expensive methods of extraction. If the industry under invests now, supply will be tight when the economy picks up.

Risk management should aim to take a prudent approach to the current issues, but plan ahead for the upturn as the long-term oil and gas industry fundamentals remain positive.

O&G. Where do you see the future of risk management in the oil and gas industry heading?
SL. Short-term risks presented by the global economy need to be managed, but at the same time companies need to position themselves to benefit when the upturn occurs. Risk management must clearly identify their companies, and their customers’ needs.

For the future, risk management has a vital role to play in better managing operational risks, helping reduce overall development costs and ensuring the careful management of project investment. It should also play an increasingly important role in an oil company’s bid to maintain a competitive edge.