“The biggest risk is not taking any risk….”

As Mark Zuckerberg continued, “…in a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks”.  The risk of doing nothing is now a regular topic in our conversations with clients about risk management.

Bruised by the battering the industry has taken in the past three years, painfully aware, after Deepwater Horizon, of the potential for disaster, often led by legal advice, and conscious of the rise of alternative energy sources, companies and investors could be forgiven for sitting on the sidelines, minimising their risk with a lack of activity.

But would they be mistaken?

Take the North Sea. Conventional wisdom suggests assets there are close to the end of their productive lives. Some Majors are selling down their interests in the region, while decommissioning is underway in major fields. Shell has submitted a de-com plan for the venerable Brent field to the UK Dept. of Business, Energy and industrial strategy, who will submit an approved version to OSPAR for final sign-off.

More than 5,500 wells, 400 facilities and over 10,000km of pipelines are likely to require decommissioning over the next 35 years in the UK North Sea Continental Shelf. The emphasis will be on environmentally and economically acceptable solutions.  The cost for the next 9 years alone is estimated at £17 Billion.

But think what might be possible. With such huge sums involved there may be opportunities for operators willing to take a well-managed risk.

The NPV cost of decommissioning decreases the longer it’s delayed. There are engineering options – new technologies could extend the life of a field now thought to be approaching the end of its commercial life. Political risk may change – government rules, the burdensome OSPAR Convention, tax reliefs could all be different in the future – particularly in the current, unpredictable political world. Public opinion, a key factor in reputational risk management, may change on using abandoned offshore structures as reefs rather than simply removing them, as evidence of positive impact on marine life becomes available.  Taken together, do these possibilities reduce the risk of E&P in the North Sea? How can these future outcomes be assessed and integrated into a risk based strategy to guide North Sea investment?

Of course, much depends on the different risk profiles for each oil company. One firm’s risk is another’s opportunity – in 1990’s, Perenco was ready to take on ageing assets that other firms were giving up on. But when assessing risk, it’s often too easy to focus on the reason not to do something: some Operators exited the Gulf of Mexico after Deepwater Horizon to avoid any possibility of being associated with similar events in the future, rather than considering risk reduction strategies. Was this a case of risk aversion taken too far, limiting their options for the future, or a well-judged decision on an unacceptable risk?

All firms have (or should have) their own processes for assessing risk – geological, political, financial, operational – but how much emphasis is put on the total avoidance of risk as opposed to the management of risk? How does one balance the downside and upside potentials?  Does risk aversion mean that the industry will miss out on opportunities to innovate and adapt? Please give us your views.

For more on our approach to managing risk, visit our video tutorials here, or ask us about our seminar in London in March

 

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