ERM is important in E&P
ERM is important in E&P for non-operator co-venturers
Risk management is an integral part of a successful decision-making process
The upstream oil & gas industry is a complex and capital intensive business irrespective of the size of the exploration & production (E&P) company. The industry is inherently very risky, but highly profitable.
So how does an E&P organisation take investment decisions without having a guarantee on successfully discovering economically marketable hydrocarbons?
The answer lies with how effectively the organisation assesses all aspects of that decision. Risk management, including identifying and assessing the risks associated with such investments is an integral part of a successful decision-making process.
Realising this importance, Kuwait Foreign Petroleum Exploration Company (KUFPEC), the international E&P arm of Kuwait Petroleum Corporation (KPC), established the enterprise risk management (ERM) team in 2008.
Some of the small to medium sized E&P companies, prefer being a non-operator co-venturer in a hydrocarbon consortium.
This decision may be based on one or a combination of factors, such as a lack of capability to be an effective operator; for example, a lack of competent resources, lack of experience in managing assets, shortage of cash flows, large debts, etc.
There may also be reasons based around taking a minority share for risk distribution for example, in response to commercial uncertainties, technical prospectivity of complex geological structures, political issues, etc.
Enterprise risk management is one of the proactive approaches to this and should be engaged from the early stages of any project. ERM should start from negotiations and due diligence and continued throughout the project life cycle through to relinquishment/abandonment.
Conducting risk workshops with cross functional teams helps to identify critical risks. Depending on the maturity level and understanding of the importance of enterprise risk management within the entity, the effectiveness of ERM function can be ascertained.
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There are many arguments against conducting a risk assessment for a specific asset by a non-operator.
It is considered by many that such efforts are an unnecessary duplication of work and that the co-venturers should rely on the operator’s risk analysis and mitigation actions.
This is especially prominent as the right of engagement of non-operators in the operator’s risk management process is not very clear or absent in most of the joint operating agreements. We believe that the non-operator co-venturers should identify and assess their own risks rather than being a passive co-venturer.
This principle is applicable for all tasks including development plans, front end engineering design (FEED) study, well programme and geological & geophysical studies. Major incidents such as the Macondo blowout not only expose operators to liabilities and lawsuits, but the non-operators as well.
KUFPEC, in the role of being an operator as well as a non-operator, understands the multitude of risks and ensures using proper risk management methodologies for improving their performance including utilising cash flow at risk modeling to quantify their key risks.
As the saying goes, ‘we cannot improve what we cannot measure’. Based on this analysis, the appropriate mitigation actions to control these risks are developed taking into account the key risk drivers and scenario analysis outputs.
Considering these aspects, the risks of investments can be reduced by having a diverse portfolio of projects taking into consideration different types of projects, the countries to be invested in and choice of co-venturers/operators with the proper regional experience.
With strong senior management support, improving the risk culture covering the head office and the area offices is a key objective at KUFPEC.
Furthermore, Kuwait Petroleum Corporation supports the implementation of ERM 2030 strategic initiatives and aims to maximise the value from the ERM subsidiaries’ functions.