Oil and Gas Companies’ Risk Management

In connection with the increased relevance of business social responsibility, as well as the increasing importance of economic factors and control by regulators, it is becoming increasingly evident that it is necessary to move to the management of these risks, both to ensure short-term profitability and for the long-term sustainable development of oil and gas companies. An Ernst & Young chart is a simple tool that visualizes the major business risks for an oil company or industry.

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There are four main segments: financial risks, non-compliance with legal requirements, strategic and operational risks. Compliance risks are associated with policy, legal, regulatory, and corporate governance issues. Financial risks arise from the instability of markets and the economy. Strategic risks stem from the nature of interactions with customers, competitors, and investors. Finally, operational risks affect the processes, systems, people, and value chain of the company. Accordingly, the main risks that need to be covered by insurance are the risk associated with violation or change of legislation, climate variability, and uncertainty about payments for carbon dioxide emissions into the atmosphere.

Irving Oil is a Canadian private oil and gas company. One of the few in its sector that openly supports the Kyoto Protocol. As you know, in 2018, there was a powerful explosion at one of the branches of an oil refinery, sending flames and black smoke into the sky. Based on this incident, it can be concluded that Irving Oil’s insurance, as mentioned earlier, should cover the issue of payments for emissions into the atmosphere. In addition, since Irving Oil is a privately held company, insurance must include avoiding the risk of access to reserves, political constraints, and competition for resources.

Against the background of current trends in the global economy, many developing countries are experiencing a sharp decline in budget revenues from the implementation of public investment programs and tax revenues. In this regard, oil and gas companies are expected to face higher tax rates and other fiscal measures. In this regard, it is necessary to take steps to prevent the risks associated with the deterioration of the financial conditions of companies’ activities.

Organizations that want to retain a significant share of their losses in exchange for greater flexibility often form their insurance coverage to meet their risk financing needs. This once innovative approach to risk management, called captive insurance, is now a relatively common way of reducing the overall cost of risk for organizations, especially private ones. There are many captive insurance plans, each designed to meet the specific needs of its parent. A company considering a captive insurance plan must first determine whether it is possible to create or join a captive insurance company (Elliott, 2012). Many considerations that are critical to the operation of a captive can be addressed through a feasibility study.

The feasibility study should include an analysis of the parent’s current risk financing structure, including the type of insurance coverage used, the amount of coverage purchased, retention rates, premiums paid, ancillary collateral, and the kind of rating plans applied. The goal is to understand the costs and benefits of a current risk financing plan (Elliott, 2012). Each type of captive insurance plan has unique features that consider the situations faced by the owner, the insured. A captive insurance plan can reduce the cost of risk for an organization over the long term compared to value-guaranteed insurance.

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Reference

Elliott, W. M. (2012). ARM 56: Risk financing [eBook edition]. The Institutes.

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