New frontiers of energy exploration pose threat to global economy

As the risk landscape of the global energy sector grows increasingly complex and challenging, the sector’s failure to mitigate risks associated with new frontiers in exploration and production could jeopardize its growth and its pivotal role in stimulating economic recovery, suggests a report released Thursday by Marsh.

“The global energy sector is driving struggling countries out of the economic mire, while sating surging demand for power in China, the Middle East and North Africa,” Andrew George, chairman of Marsh’s Global Energy Practice, notes in a statement. “However, myriad financial, physical and political risks are converging to create a risk landscape that is perhaps the most complex – and challenging – in the sector’s history,” George says.

Global demand for energy is expected to increase by 1.6% per annum over the next 20 years, representing a 39% increase on total 2011 consumption, states the report, Managing Risk on the New Frontiers of Energy Exploration. “As demand pushes energy exploration into increasingly inhospitable geographies, the danger of a low-likelihood-but-catastrophic disaster rises and the requirement for more sophisticated risk management strategies becomes vital.”

The report specifically addresses deepwater drilling, Arctic extraction, shale gas and the Middle East. Associated risks include the following:

• Deepwater drilling: regulatory (moratorium reapplication), supply chain, well blowout (high pressure/temperature wells), resource nationalism, rig sinking, and terrorist attack;
• Arctic: storms, icebergs, cold and mechanical failure, isolated geographically, return on investment and supply chain;
• Shale gas: reputational risk, political risk, environmental (lack of containment, seismic, contamination), activist groups and liability exposure; and
• Middle East: geopolitical volatility, asset expropriation, contractual risk and aging assets and infrastructure.

“A single event, such as another deepwater incident in the Gulf of Mexico, has the ability to transform the fortunes of the entire sector; political volatility globally has created a fragile operating environment for many organizations and their personnel,” George notes in the statement.

“The velocity of risk in these new frontiers of energy exploration and production is exceptional. Improving operational resilience, business continuity planning and firmly embedding strategic decision-making in the boardroom is vital for energy firms, to protect both their investments and global economic recovery as a whole. One misstep could dramatically affect an entire industry,” adds Will Bruce, a principal consultant in Marsh Risk Consulting.

Rapid project inflation costs and the financial outlay associated with pursuing challenging reserves means the energy sector also requires significant capital investment. “Over the past 10 years, worldwide costs of developing production capacity have doubled, largely due to increases in the cost of materials, personnel, equipment and services,” notes the report.

“With costs amplified further in the pursuit of challenging reserves, attention will be increasingly focused on ensuring the required return on investment is achieved while managing risk appropriately,” it adds.

The wide breadth of risk exposures in the new frontiers of energy exploration should do a number of things:

• improve operational standards across the industry;
• lead to the management of risk exposures from an enterprise-wide perspective; and
• help develop measures, such as continuity plans and contingency measures, to improve the resilience of a company.