Understanding Above-Ground Risks To Realize Below-Ground Potential
At the 2015 SPE Annual Technical Conference and Exhibition (ATCE), a panel of global experts led a session dedicated to exploring one of the key strategic and operational impacts of sustainable development—managing and mitigating above-ground risks. Entitled Value Preservation: Sustainability and Management of Above-Ground Risk, the session was led by Alex James, global sustainability manager at Halliburton, and introduced by Helge Hove Haldorsen of Statoil, 2015 SPE president. The panelists were RoseAnne Franco of Verisk Maplecroft/Wood Mackenzie, Michael Oxman of Acorn International, Dan Domeracki of Schlumberger, and Alex Hohmann of Anadarko.
The session focused on the ways that sustainability and the management of above-ground risks add value to projects. Sustainable development issues provide an opportunity to innovate, an opportunity to find more efficiencies, and an opportunity to reduce risks. By proactively addressing sustainability across the project life cycle and engaging diverse stakeholder groups, above-ground risks can be incorporated into operational decision-making. This will safeguard and enhance project performance and, ultimately, shareholder value.
HSE Now will feature each of the panelists in a short series to give their perspectives and key lessons learned in an important emerging area for value creation across the project life cycle.
The first article in this series will highlights comments by RoseAnne Franco, who serves as director and head of oil and gas risk at Verisk Maplecroft. She previously spearheaded Wood Mackenzie’s efforts in country and risk assessment and was involved in launching the Asset Risk Index (ARI), which assesses country risk across the asset life cycle. Her country and research experience spans a client base that supports industry (including national oil companies), government, and financial sectors.
RoseAnne’s presentation at ATCE, Understanding Above-Ground Risks To Realize Below-Ground Potential: The Emerging Risk Landscape for Oil and Gas, addressed how gaining an understanding of holistic risks was critical for sound risk management. Historically, above-ground risk has focused on political and economic risk, but Verisk Maplecroft goes deeper and broader, encompassing environmental and social risks. The information discussed here draws from the data analytics and country risk analyses from Verisk Maplecroft and the upstream intelligence from Wood Mackenzie. These data and risk tools can be used by companies to identify risks, which is the first step to successful risk mitigation.
As a case in point, the combined effects of politics and geopolitics are not to be underestimated. For example, the agreement between Iran and the PF+1 in July 2015 will begin to unwind some of the toughest sanctions ever applied against an oil and gas sector. Some of the most onerous sanctions were applied between 2010 and 2012, substantially affecting Iran’s crude oil exports. Sanctions related to the energy sector include:
- Limiting investment in the country
- EU oil embargo which prohibited oil imports from Iran (2012 EU)
- Prohibition on insurance related to transport
- Ban on purchase of Iranian crude oil and products (2012 EU)
- Prohibition on banking, which stopped services to Iranian financial institutions (Iran cannot repatriate its oil export revenues)
The application of these sanctions removed approximately 1.4 million B/D of crude oil out of the market between 2011 and 2015. Nuclear talks between Iran, P5+1 (US, Russia, China, France, and UK + Germany) finally reached an agreement in mid-2015, kicking off the gradual process where sanctions are to be lifted by mid-2016. The question that is now front and center is “how quickly will Iran come back?” Wood Mackenzie is forecasting a moderate increase in output, while Iran’s oil minister is claiming a quicker ramp up in supply (2.7 million B/D in 2015 to 3.4 million B/D in 2020). This gradual rate of growth (260,000 B/D in 2016) is not expected to have a downward effect on prices; however, this could be exceeded with new international oil company investments by 2017. Over a longer period, Iran will have a material effect, given that the country has the third largest remaining hydrocarbon liquids reserves in the world and is poised to become a key source of global oil supply post 2020.
Turning our attention now to economics and the oil markets, Fig. 2 plots West Texas intermediate (WTI) oil prices (annual average) in real terms in 2015 US dollars over the last 4 decades. Note that, when there is an acute risk in oil prices, it tends to trigger 1) fiscal volatility and 2) state intervention as the host government feels that they are not capturing as much of the upside. In addition, there was often no fiscal mechanism in place to account for the steep change in prices. Venezuela is an excellent text book case, where the Chavez government did not begin to apply its more onerous 2001 hydrocarbon law in a piecemeal basis until 2005 (3 years after WTI had begun an upward trend). Governments seek to reach a new equilibrium with operators; however, in this new, lower oil price environment, there is some “stickiness” to improvements in fiscal terms. Many governments have adopted a “wait and see” approach before modifying terms.
As alluded to earlier, human rights and related risks open the door to reputational risks. Verisk Maplecroft has developed 37 social and human rights indices, including:
- Working conditions
- Human trafficking
- Child labor
- Indigenous rights
- Occupational Safety
- Labor rights
This type of data can help operators and service companies address issues relating to responsible sourcing as they assess their supply chain. How might they be exposed, and could they be subject to reputational risk?
Similarly, Verisk Maplecroft maintains 26 environment and climate change indices to help companies better understand the future risk landscape. Three important aspects for oil and gas industry to consider are
- Costs to the industry from regulation to reduce greenhouse-gas emissions
- Risk of stranded assets (more in the longer term, particularly with regard to larger reserves)
- Institutional investors considering divestment in companies that do not have sustainable practices that could contribute to climate change
Continuing the focus on the environment, limited water availability poses a hindrance to shale development. Verisk Maplecroft’s Water Stress Index (WSI), which evaluates the ratio of total water usage to renewable water supply down to 20 km2, is valuable in anticipating local responses to new unconventional projects in the country. China is home to almost 20% of the world’s population but only 7% of the freshwater supplies. Globally, a significant percentage of discovered shale deposits is in areas of high water stress. This, then, contributes to a heightened public awareness of environmental issues. Undertaking stakeholder engagement at the beginning of the asset life cycle can help to facilitate these risks to a certain extent. Ultimately, the initial investment at the beginning can help lower the risk of cost overruns in the future because of local communities slowing down the pace of development. An example of possible local resistance to shale may come from farmers who are concerned about the long-term effect on their agriculture efforts. Areas such as the Sichuan shale development in China are not only subject to concerns about water stress, but the frequency of seismic activity is also a potential source of opposition and reputational risk in light of the 2008 Sichuan earthquake. Therefore, the industry must cross check with other natural hazard indices to assess how any seismic activity may be received by the local community. As companies seek to secure a social license to operate, a thorough understanding of these multiple risk variables is key.
An example of how the ARI can be used is shown in Fig. 3, which compares Brazil and other selected peer countries for the years 2015 and 2020. The framework identifies 21 risk factors across the three stages, and a country is given a score between 0 and 1 for each. The higher the score, the higher the risk.
In 2015, note that most risk lies in the development stage. The longer the bar suggests high risk because of onerous local content requirements as compared with other countries and a domestic supply chain that is not able to meet the industry needs, which is being further compromised by a recent corruption scandal. It is also difficult to secure environmental permits, with delays of up 2 years for seismic in recently awarded equatorial margin blocks. Improvements in each of these areas are expected by 2020, which translates to a better rating. Political and economic considerations are urgent, but a number of the current Brazilian oil and gas measures are unsustainable. The question is the timeline and signposts.
In closing, I wanted to leave you with some key messages to ponder as you consider future global opportunities.
- Resource-rich acreage tends to be located in politically volatile areas of the world.
- Holistic risk analytics can identify major political, social, economic, and environmental risk and gauge relevant stakeholders.
- Risk identification is critical for adequate risk mitigation and reduction in risk to reputation over the life of a project.
- Solid risk analytics coupled with an oil and gas lens and subnational risk intelligence (“basin level”) can take country risk analysis to the next level.
Questions or comments about this article may be emailed to RoseAnne Franco.