Oil and Gas Risk Management

oil and gas drilling rig

Oil and Gas Risk Management

Oil and Gas Industry

The oil and gas industry is a volatile one, inundated by a number of risks and regulations which range from worker safety to environmental concern. It is designated as a capital-intensive industry due to the overwhelming amount of capital it needs compared to labor in order to produce results. However, in such a high-cost and profitable industry, all risks carry elevated costs and pricy fines.

We’ll look at industry risks, industry fines, and management.

Areas of Risk

The oil and gas industry has a wide array of risks that spread across all areas of business.  These can be economic risks such as oil price collapse, loss of demand, or high operating costs. Political risks can vary depending on the country the organization is doing business in. Environmental  risks, which can include pollution or damage to the surrounding environment, or perhaps damage the environment causes to equipment or personnel. A large area is also operational risk, which could include a major oil spill or expired license to operate. Reputational risk also carries a lot of weight, as most people today will remember the BP oil spill and boycotts that took place soon after.

These areas also affect each other. For example, when oil prices drop, companies often face substantial pressure to slash spending. This reduction can lead to production slowdowns, decommissioned facilities, and unsafe working conditions as processes and responsibilities change. Several parts of the oil and gas industry are very labor-intensive, such as oilfield services equipment manufacturing. This puts companies at high risk of worker injuries.

Areas of concern are exploration development projects, production processes, refineries, processing facilities, midstream gas plants, transportation processes, and pipelines, to name a few.

Regulations and Standards

With so many risks in the oil and gas industry, it’s understandable why there are so many regulations and standards. It’s not only in the best interest of an organization to follow these to avoid fines, but also to protect itself and employees from harm (financial, health, or otherwise). Governing bodies include the Environmental Protection Agency (EPA), the Department of Transportation (DOT), the Federal Energy Regulatory Commission (FERC), The Bureau of Land Management (BLM), and more. Each organization has jurisdiction over various components of oil and gas business practices, such as offshore drilling and transporting oil.

Many U.S. regulations can be found here for transportation, storage, production, etc. You can also see many in a more segmented view, here.

Regulations are required and often set an interval in which you need to complete your assessments to have a record of compliance. A good risk management platform, such as with RiskWatch, will allow you to load these regulations into a platform that guides you through the assessment. You will then have a record of compliance or non-compliance and be able to track and keep a record of improvements and corrections. An example of a regulation you would need to keep a record of is OSHA, which ensures safe working conditions for employees.

Standards are up to the discretion of the business, but often provide very valuable insight to the risks of a particular industry or business practice. These may have overlap with regulations, but are still beneficial. In oil and gas, valuable standards would include FEMA 426, which helps with anti-terrorism measures, and ISO 45001, which helps improve employee safety.

Oil and Gas Fines

Within the oil and gas industry, fines are not just a scare tactic or a talking point, but a learning opportunity. Just as industry best practices and standards provide insight as to how to prepare for risks you may encounter, you can see what other companies failed to prepare for. Below are two recent examples of the financial risk companies face for violations.

In 2018, Noble Energy was fined $1.6 million for failing to maintain and pressure test several hut-in wells.  As Colorado’s second-largest driller by volume of oil, this shows that even large organizations must focus on risk management. The regulation is in place because pressure testing helps verify the integrity of the well and check for leaks, which helps protect both workers and the environment. The size of the fine came from a combination of the number of wells, and the duration of violations. In some instances, maintenance was overdue by more than a year, and Noble incurred a penalty of up to $5,000 for each day. More here.

In 2019, The Railroad Commission of Texas issued $864,689 in fines for 270 enforcement dockets against operators and businesses. They were fined for oil and gas, LP-Gas or pipeline safety rule violations, as well as violations of the Commission’s Pipeline Damage Prevention rules. More here.

Planning

To help prevent many risks or mitigate the impact of some of the more uncontrollable circumstances, risk management and planning takes a big role within an organization. Dedicating the time and resources required to address all requirements and industry best practices is investing in the future success of the company.

A crucial aspect of planning and decision making within today’s oil and gas climate is accounting for varying levels of risk. Generally speaking, the higher the risk, the more resources you’ve devoted and the potential return is higher as well. For example, a pipeline is lower risk and lower return compared to a drilling rig. Having efficient and effective processes in place that take account of risks will allow businesses to focus their full attention on production and profits. Having a process in place that assigns a risk score helps you allocate resources and prioritize mitigation.

RiskWatch provides software solutions that enable oil and gas companies to meet their risk, security, and compliance management goals. Our platforms are used worldwide to ensure regulatory compliance is met and policies are shaped and implemented. Our software effectively ensures consistent compliance with regulations and standards, identifies hazards, and offers mitigation tasks. Going off-site? Conduct inspections right from your mobile device.

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