Wasted Energy: Why Risk Management Efforts in the Oil and Gas Industry Have Stalled and Why That Needs to Change

Article excerpt

The risk management efforts of oil and gas companies have stagnated and the consequences for the industry have been dire. Reports of lost revenue, lost assets and--worst of all--loss of life are all too common, in order to reverse this trend, the complacent attitude that has led insiders to say, "We're different than other industries," "We don't find value in these programs" and "We'll deal with that if it happens" must change.

[ILLUSTRATION OMITTED]

Traditionally, oil and gas industry risk management has focused on weather and technical issues. But there are many factors to look at when evaluating risk management programs. For one, studies conducted over the past several years show that the cost and risk of industry projects has increased significantly.

For example, according to the IHS CERA Upstream Capital Costs Index, cost inflation in oil and gas projects has seen a 118% increase over the past decade, while the IHS CERA Upstream Operating Costs Index reported a 78% increase in the operating costs of oil field facilities over the same period.

There are many reasons for these upticks. The shift from shallower waters to deep-water exploration, the demand for better return on investment and increasing insurance premiums have all significantly increased risk. These factors need to be included when evaluating risk management.

Another key factor, however, is the mind-set of corporate executives. Risk management has almost become voodoo to some energy companies, and many reference a lack of manpower, or even willingness, to create advanced, modern programs. One main area sticks out: the view that short- and long-term maintenance programs are not a priority.

Failure to take a hard look at this factor can lead to reduced share prices, poor contracts, inadequate joint ventures, failure to meet corporate goals and delayed schedules. In addition, history has shown that maintenance programs--when administered effectively--produce results that are unquestionably successful.

There are several industries, including aviation and nuclear, that have excellent risk management programs that oil and gas could learn from. There are also two U.S. Navy programs that illustrate how a commitment to lower risk can improve operations.

The first program is the U.S. Navy's Preventative Maintenance System. This is a program used to coordinate and plan all short- and long-term maintenance performed on equipment and facilities. The programs are designed to support all of the equipment onboard a certain vessel and allow the tracking of all maintenance performed on equipment, whether it is done on a daily, weekly, monthly or yearly basis. This system is what allows the Navy to build ships that have 30-year life spans. It is a program that is continually improved and upgraded.

The second program is the Navy's Submarine Safety (SUBSAFE) program, which was developed following the loss of the nuclear submarine U.S.S. Thresher in 1963. This program is based on quality and defines systems onboard a submarine into three main categories: "SUBSAFE," "Level I" and "Uncontrolled." If a system falls below SUBSAFE or Level I, there are specific requirements placed on the materials used in the maintenance and repair of the systems. The vessels must also undergo specific testing to assure that the systems are 100% operational.

The Navy's efforts to reduce its risks while operating submarines can serve as an example for an oil and gas industry that has room for improvement when it comes to maintenance. Since the Navy adopted the SUBSAFE program, there have been zero submarines lost at sea due to non-combat-related reasons. Before it was introduced, the Navy lost, on average, one submarine every three years.

Similar models will work for the oil and gas industry, which maintains approximately 2,000 offshore structures in the Gulf of Mexico alone that are at least 20 years old. …