Oil and Gas Consolidation: Hidden Risk in the Pipeline

Posted by The ALS Group on Oct 5, 2016 3:20:59 PM


Nine out of the 10 largest bankruptcies in the first half of 2016 were energy companies, according to investment insights publication The Turnaround Letter. Eight of those were oil and gas companies, specifically. Such widespread failures throw not just assets but whole segments of operations up for  grabs.  As the buyers assimilate these operations, it is no surprise that the acquisitions change the risk profiles of the new owners.

The Usual Suspects

  • New countries introduce additional or new exposures to:
    • Political risks (nationalization, delays and costs due to unrest)
    • Environment, health and safety risks (air quality, isolation and indigenous diseases)
    • Contractual risk or legal and regulatory risks (slow or unfavorable legal structures; additional third parties to vet)
  • Newly acquired operations may bring with them new types of equipment or supply chain items that are unfamiliar to the acquiring organization.
    • Are you acquiring the technically proficient people you need?
    • Do you have the right type of refineries with the capacity to handle the types of oil you will be dealing in?
  • Having adequate experts for the growing entity is also a concern.
    • Do you have access to the geology, geophysics, petroleum engineering and high-performance computing experts that you will need?
  • Cyber security is always an issue with acquisitions.
    • Will you be acquiring and operating legacy IT and OT (operational technology) systems that come with security gaps? Can the gaps create vulnerabilities across your network of systems?
  • What is your confidence in the reserve estimates of your acquisition? Has reserve estimation been outsourced?

The Hidden Risk

Certainly, oil and gas companies routinely perform risk management. The above examples of risk issues are not new for the players in this industry. What might be overlooked is that, as the degree of complexity increases for the acquirer, so does the amount of risk for the entire enterprise.

The key question for a growing oil and gas company is, “Has risk management been fragmented among various departments and segments of operations?” If so, it is unlikely that the company can make any assertions to shareholders, lenders or regulators about risk and mitigation for the enterprise as a whole.

The Information Pipeline

The safest investments in this phase of oil and gas consolidation will be those protected by centralized risk management.  Not necessarily centralized in the old-fashioned sense of command and control.  No, this is centralized reporting with a helpful methodology. Two standard tools of Enterprise Risk Management (ERM) illustrate the concept:

  • A strong, common Risk Management Framework (RMF) in use throughout the company ensures that risks can be compared and quantified across the company.
  • Having a single Risk Register gives management and the board the collective “portfolio view” of risk they need to provide assurance to stakeholders about the company’s Risk Appetite and adherence to it.

Being able to conform newly acquired operations to a mature risk management strategy is one of the keys to protecting the investment in the acquisition.

Contact us if your risk information pipeline needs help.

Topics: Due Diligence, Energy Company Mergers & Acquisitions, Energy Risk, Energy Risk Management, Enterprise Risk Management (ERM), Enterprise Risk Management, Enterprise Risk Management, ERM, Mergers & Acquisitions, Oil and Gas Risk Management, Oil & Gas Risk Management, Risk Appetite, Risk Management Blog, Risk Register

The ALS Group

Risk Management Blog

We manage more than a quarter billion dollars of premiums for a diverse range of clients around the globe. 

Our areas of expertise include:

  • Enterprise Risk Management (ERM)
  • Cyber Security & Cyber Liability Insurance
  • Construction Management
  • Customized Risk Management Assessments (RMAs)

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