Global crisis creating ‘new risks for oil and gas sector’

MANAMA: The oil and gas sector has been unevenly impacted by the global economic downturn which has created new risks for the industry that threaten the near-term survival and prospects of a number of oil and gas companies, according to the 2009 Ernst & Young business risk report.

The report is based on interviews with some of the sectors’ leading CEOs, analysts, commentators and academics. It shows that there has been a near reversal in the top six of the ten major business risks identified for the sector, compared to last year. Access to reserves was identified as the number one business risk for the oil and gas sector, up from fourth place in 2008; while uncertainty around energy policy moved up from sixth to second position, followed by a new entrant in third place — price volatility. Languishing in sixth were human capital deficits, identified as the number one business risk for the sector in 2008, reflecting the easing of hiring pressures in a downturn.

“Events of the last six months have shown how quickly and dramatically market conditions can change,” said Wendy Fenwick, Ernst & Young’s Global Oil and Gas Leader. “These events have resulted in the need to fundamentally change how businesses act in a new environment. Oil and gas companies need to ensure that their risk management policies and procedures allow them to react and respond quickly to unexpected events,” Fenwick said.

“Commenting on access to reserves being the number one challenge for leading oil and gas companies — a near consensus view among the industry participants interviewed for the report — Fenwick says, “Political issues, including resource nationalism, the growth of land areas designated as environmentally sensitive, and concerns about energy security have made it increasingly difficult for companies to secure their future.”

“Operating in politically uncertain regions can expose companies to challenges such as unpredictable government interference, changing fiscal regimes, annulment of contracts or civil unrest. Policy uncertainty is likely to be ongoing in 2009, as government finances deteriorate. Fragmented and incoherent energy policies create ambiguity, forcing oil and gas companies to repeatedly make decisions in a vacuum,” the report said.