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Research Report

Key Risks Companies Face in Petroleum Investment and Operations

Bud Coote
Karl V. Hopkins
Copyright Date: Jan. 1, 2017
Published by: Atlantic Council
Pages: 29
OPEN ACCESS
https://www.jstor.org/stable/resrep03695
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Table of Contents

  1. (pp. 2-2)

    This report will examine key risk factors that influence energy investment and operations worldwide and identify possible ways to mitigate risks and reduce uncertainty. Their impact has risen in importance in recent years as energy companies have invested in more developing countries, violence has grown more widespread, environmental and human rights issues have generated political criticism of companies, and oil prices have fallen.

    The report will look at eight categories of risk: rule of law, sanctity of contract, infrastructure risk, personnel security, political criticism and reputational risks, financial risks, corruption, and cyberattacks. Climate change-related risk is addressed primarily as a...

  2. (pp. 2-3)

    Adherence to rule of law is critical to support confidence and investments in long-term, high capital-cost projects in the petroleum industry, but it is undermined by poor governance. Risks are often most significant in developing countries with a high dependence on oil and gas revenues, weak public institutions, and a poor record in enforcing the rule of law. A country’s high dependence on oil and gas revenues provides a stronger incentive for governments to try to improve its share of revenues through changes in the law or by means of fines. This effort can also include government insistence on a...

  3. (pp. 4-5)

    Along with rule of law, sanctity of contract is a key concern and risk for petroleum investments involving long-term contracts with high capital costs. While “rule of law” applies to a government’s adherence to and enforcement of all the laws within a country and the consistency and fairness of such laws, “sanctity of contract” applies more specifically to a company’s contract with a host government or its representative, which may be a national oil company, as well as all of the contracts a company makes with other participants in a project, such as equipment and service companies and labor groups....

  4. (pp. 5-11)

    Risks to critical energy infrastructure are a large concern to investors, governments, suppliers, operators, consumers, workers, and security and military personnel among others. Damages can have widespread consequences for the economy as well as the health, safety, security, and psychological wellbeing of large portions of a population. Past attacks such as the February 2006 terrorist attack on Abqaiq in Saudi Arabia, the January 2013 terrorist attack on In Amenas in Algeria, pipeline disruptions in Nigeria, the Iran-Iraq war from September 1980 to August 1988, the Iraqi invasion of Kuwait in August 1990, and the conflict in Iraq beginning in March...

  5. (pp. 12-12)

    Security of personnel trumps all other considerations. After the taking of hostages at In Amenas, Statoil made it clear to the Algerian government and its Algerian partner Sonatrach that saving lives was the priority and, by 0930 the first day, transferred authority to a hostage incident response team.27

    One of the first priorities for personnel security is a rapid evacuation plan and the capability to remove personnel from danger. This is especially important for remote facilities, including offshore facilities. Because evacuations are rare, standby evacuation transport equipment might also be rare. Arrangements might be made in advance with local military...

  6. (pp. 13-15)

    Energy companies increasingly are critiqued by NGOs, the press, and other private groups, especially when operating in areas in which there is real or perceived abuse of the environment or human rights, corruption, inequitable distribution of wealth or other discrimination, lack of transparency, and transgressions that might mar a company’s brand and diminish its credibility and competitiveness. The application of sanctions also exposes companies to still further potential for criticism.

    One of the best illustrations of reputational risk challenges is the public controversy surrounding the decommissioning of Shell and Exxon’s large offshore Brent Spar oil storage and tanker-loading facility in...

  7. (pp. 15-16)

    To a large extent, most of the risks covered in this report ultimately could be boiled down to financial risks, with the notable exception of personnel security risks. Financial risks have always been present, including market risks and the risk of expropriation, in particular, but some risks have grown in use and nature. Sanctions, for example, have been widened to include financial transactions and individuals as well as energy sales and purchases, imposing added burden, risk, and financial exposure for international companies. Local content requirements have grown, imposing additional burdens on companies, adding to expenses, and adding to the risk...

  8. (pp. 17-18)

    From an international perspective, corruption means different things to different governments, but this just increases the risks to energy companies trying to navigate different cultures and laws. Oil is also a particularly corrupting commodity worldwide because of its high value. The widespread government perceptions beyond North America and a few other countries is that energy is a strategic and political good that requires government control. Some governments resemble investment schemes, in which officials gather investments from family, friends, and business partners to buy an important and lucrative position in the government. Those officials are then beholden to pay back their...

  9. (pp. 19-21)

    Energy systems are highly vulnerable to cyberattacks due to the widespread use of electronic controls, including Supervisory Control and Data Acquisition (SCADA) systems used to control pipelines and other facilities.

    The most damaging cyberattack on energy infrastructure to date occurred in December 2015, when an attack brought down the power grid in western Ukraine for six hours. The attack reveals some of the extensive damage that such a cyber raid can inflict, including physical damage to critical equipment and facilities. It targeted SCADA systems in Ukraine, which include controls linked to the Internet, and it highlights the vulnerability of such...

  10. (pp. 21-22)

    Populism is an additional risk that cuts across many of the identified categories of risk that companies face in petroleum investment and development activities. It takes a variety of forms that interact with and magnify financial and political risks as well as expose investors and operators to political criticism and reputational risk.

    Populism can arise quickly when associated with a change in government and frequently accentuates other risks to a wide range of market activities. Populist policies can undermine the rule of law and efficiencies of free market forces, especially in the hands of authoritative governments without checks and balances....

  11. (pp. 23-23)

    The risks on the playing field for international companies investing in and operating petroleum projects have grown with the rise of terrorist threats, armed conflicts, failing and failed states, cyberattacks, and reputational risks. At the same time, financial risks linked to market volatility, sanctions, taxes, emissions restrictions, corruption, rule of law, and contract sanctity still abound, adding to uncertainty and the need for integrated risk management and planning. “The rise in cyber capabilities alone is a game changer that magnifies all other risks as well as introducing new and dangerous risks to the industry. The spread of conflict coupled with...