Ernst & Young uses something called “business risk radar” to determine the greatest risks for a particular company or industry. Annually, analysts conduct research in the oil and gas industry to determine what things companies in the sector perceive as the greatest risks. For this year’s list, E&Y analysts interviewed commentators and academicians representing the oil and gas industry, asking them to identify the top business risks for the year and to explain why each risk was important, how it had changed since last year, and which of the company’s value drivers might be impacted by each risk. The top 10 include (with the ranking for 2009 in parentheses where applicable): 1. Uncertain energy policy (2) 2. Access to reserves: political constraints and competition for proven reserves (1) 3. Cost containment (4) 4. Worsening fiscal terms (5) 5. Climate and environmental concerns (7) 6. Price volatility (3) 7. Human capital deficit (6) 8. Supply shocks (9) 9. Overlapping service offerings for IOCs and oilfield service companies (8) 10. New operational challenges, including unfamiliar environment (new). Additional risks identified by industry commentators include aging oil and gas infrastructure, competition from new technologies (including alternative fuels), and access to consumers in new growth markets. The six top concerns for the subsector of IOCs and NOCs include: 1. Uncertain energy policy 2. Access to reserves: political constraints and competition for proven reserves 3. Price volatility 4. Climate and environmental concerns 5. Worsening fiscal terms 6. New operational challenges, including unfamiliar environments According to the E&Y report, “The oil and gas industry can expect a renewed and expanded regulatory focus on safety and environmental risk preparedness and mitigation.” Furthermore, the report says, “In light of corporate social responsibilities and the economic and regulatory pressures the industry is exposed to, It has become increasingly clear that managing these risks is vital, not only to short-term profitability, but also to long-term sustainability for oil and gas companies.” The good news is that the report not only identifies the risks, it explains how they can be mitigated through “improved capital management, investments in technology, financial and operational processes, and other strategies.” For those interested in finding out more, E&Y’s full report is available online.
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