The oil industry is the behemoth that powers the modern world. It provides energy to the worlds 7 billion people, amounting to more than 60% of the worlds total daily energy needs with the rest of the worlds energy needs powered from a variety of different sources including hydroelectric power, wind, coal and nuclear power. Without oil, the world as we know it would look vastly different than it does today.
Most are unaware of the huge number of industries that oil is at the heart of. In fact, oil is likely responsible for many of the items in your household right now. It is used in the creation of items like plastics, paints, rubber, fabrics, carpets, adhesives, cosmetics and fertilizers. It is used in the production of many heavy-duty industrial goods as well.
Business Pulse of Oil and Gas
According to a recent report by Ey shows that a number of risks within the oil industry present large obstacles to businesses including HSE, price volatility, regulatory compliance and increasing challenges in accessing reserves.
Interaction with governments and ensuring regulatory compliance has always been a large obstacle for companies within the industry, as it can be for businesses and organizations in any industry. Because of the worldwide presence of the oil industry, companies are forced to deal with a variety of regulatory environments. As technology rapidly changes and new methods of extraction (like hydraulic fracturing) become more prevalent, the regulatory situations could rapidly change. These situations create new challenges for companies that must continually adapt to a rapidly changing landscape. New regulations exist today that would have been completely unpredictable just ten years ago.
In an industry that requires partnerships and collaborations between multiple service providers, it can be difficult to find the perfect balance of risk and opportunity. As these collaborations have become more prominent in recent years, the processes involved in managing and assessing these agreements have certainly become a higher priority for most organizations.
Acu-“Punctured” Points of an Oil and Gas Body
The very nature of the oil and gas industry ensures a level of complexity that can make mitigating risk a difficult issue to broach. When working with collaborators, governments, suppliers and contractors can make reducing bribery and corruption in compliance with regulatory bodies a difficult proposition. The ‘compliance pressure points’ that companies deal with provide a high-pressure environment, but with large potential payoffs.
Locally Sourced Supplies
Companies often need to award contracts to local service providers. Many of these providers are located in remote locations around the world. This can mean very specific regulatory requirements. These contracts can be extremely lucrative, but do come with a high risk of bribery, fraud and corruption.
Although many companies attempt to ‘spread the wealth’ so to speak, a propensity does exist within the industry to source through a sole supplier. This could be because of a limited selection, or large gaps in experience and quality in specific regions. Using a single sole supplier is not a solid option for mitigating risk.
Splitting orders refers to splitting orders within the procurement process. This is typically conducted from the bottom up, with a complex approval process. This conduct does conceal some fraudulent actions at times, but is not always conducted with malicious intent, as it can help to bypass some of the bureaucratic processes.
It is important that oil industry companies keep in mind that when working with third party companies (like engineering or procurement firms) that they keep an eye on those that conduct procurement operations on their behalf. Monitoring procurement is important for mitigating risk.
Bid and Tender
Many service providers within the oil and gas sector have to exercise caution when receiving bids and contracts from state-owned service providers. There are many risks associated with providing gifts, entertainment and other benefits to officials for state-owned organization that could present a very serious risk during the bidding process.
Not implementing proper customs controls can have a terrible impact on the ability of an oil or gas extraction site. Delays in the process can be extremely draining, in terms of funds and mobility. There may be times when equipment is on-site and ready to go, but cannot be used for one reason or another. These challenges often require that companies employ third party companies with a knowledge of the local area.
Licenses and Permits
Many regions require very specific licenses and permits for certain procedures. Additionally, political unrest in some of these areas can add another barrier to moving forward.
Most companies in the oil and gas sector work in joint ventures with other companies, or state-owned entities around the world. These ventures will often involve government officials who sit on boards in order to protect the interests of the state. The increased risk that comes with government scrutiny can be a huge risk that needs to be considered during joint ventures.
Misappropriation of Assets
Oil and gas companies have large asset holdings. These assets could potentially be of value to others, and could potentially be the target of theft. These assets have also been known to be used as bribes during the bidding and tendering process. A misappropriation of assets can be very detrimental.
Many emerging markets rely heavily on quick cash-based payments when paying local salaries. These transactions can be difficult to confirm and validate, and could lead to fraud. Companies should be well-versed on these risk and attempt to use existing financial systems where possible.
People and Culture
The worldwide nature of the business means that companies will be working with a large number of people across many cultures. The social dynamic in different regions can expose companies to increased compliance issues, and the company must cater to these individuals.
Expatriate staff can create a conflict of interest on site. There are few things that can be done to distinguish between salaried staff and employees and contractor staff, which could leave a company being held liable for infractions and other issues.
Local Staff and Contractors
When using local staff and contractors, it is important to remember that these individuals could have a well-developed network of relationships that could create conflicts of interest. This increases the risk of fraud or bribery.
In this day and age, all companies must prepare against the risk of cyber attacks. The stakes are undeniably higher in the gas and oil sector, and for that reason a company must ensure that they have the proper infrastructure to mitigate and minimize the risk of these attacks. Many companies have already dealt with debilitating cyber attacks. For instance, Saudi Aramco was struck by a self-replicating computer virus in August of 2012 that would go on to infect as many as 30,000 of their Windows-based machines, arbitrarily deleting important data from hard drivers. This caused a huge disruption for Saudi Aramco.
Creating a proper infrastructure can help to reduce these attacks and also help companies to respond effectively when an attack begins. Cyber attacks present a serious and very real risk for any company in the oil and gas industry – which relies heavily upon its technology to deliver its services. Even small interruptions could have lasting ramifications, as was seen in the example of Saudi Aramco.