Understanding the risks faced by oil, gas and energy firms 

CHUKWUMA ONONIWU

Chukwuma Ononiwu is a doctoral fellow ICRMP-UK, DR.ICRMP-UK, FCILRM-NG, ACILRM-NG, an alumnus of Abia State University and Pan Atlantic University Lagos Business School, a certified professional insurance broker, and a certified risk management professional. He can be reached through riskswisepro@gmail.com and  +234-903-596-8732 (WhatsApp only).

Before delving into the topic, it is critical to first examine risk intelligence. Risk intelligence is the ability of an organisation to gather needed  information that will successfully identify uncertainties in the workplace. The chief objective of risk intelligence is to propel the organisation to a competitive advantage and a comparative advantage. Thus, organisations with high risk intelligence, certainly, make much more informed business decisions generally. 

The risks faced by oil, gas and energy firms, include but are not limited to: political risks, geological risks, price risks, supply and demand risks and cost risks. This week,we shall dissect the political risks. 

POLITICAL RISKS: The chief way that politics will affect an oil, gas and energy firm, is in the regulatory template. Generally, an oil, gas and energy firm is governed by a broad spectrum of regulations that limit the where, when, scope, and how extraction is to be done, the sharing formula from the proceeds of extraction, tax, environmental impact assessment, e.t.c. The interpretation and the  implementation of these laws and regulations can also differ from state to state, from province to province and from region to region, even in the same country. 

Thus, political risks, generally upscales when oil/gas/energy firms are working on extractive deposits abroad. As a result, firms are favourably disposed to countries with stable political systems and an indelible legal history of granting and enforcing long term leases. In some exceptions,  firms go to where oil/gas/energy is found, even if a particular country falls out of their risk intelligence assessment template. Here, issues usually arise, inclusive but not limited to sudden nationalisation and other political headwinds that propel change in the regulatory ecosphere. In all, depending on the country, the agreement the firm starts with may not be the agreement it ends up with, as the government may change its mind after the firm’s investment of capital, in order to take much more profit from the drilling or mining or prospecting of its huge abundant extractive industry. 

Political risk is prone in countries with dictatorship, unstable dictatorship, military rule, military coup, authoritarian regime, irrational monarchy, supreme leader, e.t.c. It is also prone in countries that adjust foreign ownership rules to ensure and to guarantee that  domestic corporations and domestic upstarts gain a foothold and an interest in its extractive industry. A critical approach that a firm should take is inclusive but not limited to: risk management, risk intelligence, adopting a risk based approach, investing in corporate social responsibility, building mutual sustainable relationships, critical community stakeholder engagements, local content technology development, e.t.c.