Board of Directors and Senior Management in Managing Enterprise Risk in an Energy Company - Essay Example

? Risk Management in the Energy & Resources Industry Introduction In today’s ever changing world, energy scar resource depletion and climatic changes have become persistent topics of discussion. Companies associated with energy and resource manufacturing face a whole host of risks including instable scarcity of resources, political environment, inappropriate infrastructure, adverse weather conditions, emissions, and obsolete technology in energy extraction and distribution activities. Traditional measures of managing risk might have served the industry well in the past but with increasing complexity and effect of cumulating risks, energy companies have to adopt a more comprehensive, integrated and balanced approach to manage risk (Lam, 2003). Energy and Resources companies have come increasingly under the regulatory purview. Due to brisk changes in the industry, they face stiffening regulatory requirements, ever-increasing cyber issues and rapidly changing technology. Such compliances and risks have a strong impact on the company’s operations and business strategies that makes it utterly imperative for the management to adopt approaches to manage and mitigate risks and cope up with regulations. Risk Management in the Energy Sector A good progress has been made in the past in developing comprehensive enterprise risk management (ERM) programs. ERM is set to become an industry standard for management of risk because it is probably the most effective way to manage risk internal or external to the organization (Accenture Global Risk Management, 2011). The key risk areas that have been identified for energy and resources sector can be listed as follows: 1. High competition in the industry participants: Energy industry participants have a very unique competitiveness. Each player has a different advantage within the industry. One firm may have a good resource support while the other might be a technologically strong firm and a third would have a huge market. Nowadays, competition is shifting and each firm is trying to develop on every frontier. International firms are thus facing challenges by national players reducing their market size. 2. Limited sources of alternative energy: Despite the fact that there are alternatives to limited source of non renewable energy, energy companies still haven’t been able to progress much on developing much on alternative sources. Alternate sources have an irreplaceable demand, but on the supply side, they face a lot of constraints. There hydrocarbon content on earth is enough to last a century, but the problem lies in lack of knowledge on its development and usage. These sources are limited by limitations in scale, feasibility and fitness (Holmes, 2004). 3. Government Interventions: Most of government regulations in the energy industry are directed towards regulating supply. Operational policies, regulations on carbon emissions and energy security norms affect both the demand as well as the supply side of energy business. Role of Board of Directors and Senior Management Post recession, the scene for energy companies has not only been tough but also challenging in terms of greater project undertakings and complex compliances. Companies have also had to venture in remotest regions simply to manage demand and supply side challenges. Management has to focus on strategy, production, enterprise risk along with operational excellence. With the advent of regulators, management has started to recognise the need for risk management to enhance business performance. With time, a lot of change has come in managing enterprise risk. New tools, better techniques and risk measuring methodologies have come up. One can only predict how enterprise risk management shall evolve in the coming times. As Energy sector risk officers, senior managers and the board of directors need to be have the capability to comprehend what possible risks could potentially arise in the near future and how exactly to take preventive measures that will help in combat. With such approach, all downsides that arise in the post period are avoided (Working Group on Risk Management, 2013). For this, energy sector needs its practical thinkers to look at 3 key areas: 1. The Key Risk Indicators: These indicators are things that are quantifiable. Once the risk indicators are quantified, one can easily set benchmarks and levels of tolerance. One can also track changes in possible risks and whether it affects other untouched areas. Thus setting KRI’s are more critical than simply identifying risk areas. A company can use available data on human resources, safety or progress of their company but what becomes more important is to be able to separate data and derive useful information out of it. Correlating data to bring out useful information that shall be useful in providing early risk intimations is important to prevent catastrophes (Badiru and Osisanya, 2013). 2. Risk Interdependence: This area talks about an approach to find out what might be the possible causes behind each one of the independent risks and thereby try some sort of correlation between these causes. Once these are identified, thoughts can be brought together to bring out any possible relation between the indicators themselves. Positive correlation between multiple indicators would amplify risk while negative correlation shall offset each other. 3. Emerging Risk: This is probably the most critical of the 3 factors. The energy sector is not static by any means. In such a dynamic structure, the risk management activity needs to be constantly at work. One set of risks identified might be mostly the same a quarter or so later. But it won’t remain exactly unchanged. There would necessarily be some factors, however small, that would have changed, minutely or significantly. These risks will become a little different and this is where emerging risks become critical. One has to identify the causes behind the changes that have occurred in the timeframe, the intensity of the risk now and the probable impact it might have later. It might be critical to note that a low intensity risk now might pose the danger of being highly sensitive and cause highly impactful when it would actually occur, if left unattended. Here is where the role of emerging risks becomes important (Deloitte Enterprise Risk Services, 2010). Eventually, in entirety, it is the combination of the above mentioned 3 indicators that management at energy sector companies need to divert focus to. Once these indicators are identified, attended and addressed, much can be said to have been done in the critical task of risk management. Meeting the growing demands for energy in the coming decades The coming decades for energy sector will be primarily marked by the geological findings of sources of energy. The future of energy companies would be dependent on findings of new energy sources and resources. The demand is increasing exponentially and special hike has been observed from the emergent markets. Technological advances need to be made to enhance supply of energy and increase supply of sustainable and inexpensive energy. The second biggest influence that shall be impacting energy sector will be government decisions on supply and demand side challenges. Industry landscape is dynamic and and success of energy companies shall be entire dependent on how performances are managed, enterprise risk management is viewed, operational excellence is achieved, people management is made effective and business model is adapted. The energy industry landscape is being market by huge regulatory and government interventions. Success would be increasingly dependent of developing a strategically productive business model that employs the most effective technology and develops capabilities while complying with the regulatory norms. Also, companies need to enter into strategic partnerships and invest highly in research and development so as to fully exploit the upcoming opportunities (Edwards, Ishaq and Johnsen, 2010). Reference List Accenture Global Risk Management., 2011. 2011 Global Risk Management Study. [online] Available at: http://www.accenture.com/us-en/Pages/insight-key-takeaways-acn-global-risk-management-study.aspx. [Accessed 28 October 2013]. Badiru, A. B. and Osisanya, S. O., 2013. Project Management for the Oil and gas industry. Northwest Washington.CRC Press Deloitte Enterprise Risk Services., 2010. Risk Intelligence in the Energy & Resources Industry. [pdf]. Deloitte Enterprise Risk Services. Available at: [Accessed 28 October 2013]. Edwards, S., Ishaq, O., and Johnsen, O., 2010. Oil and Gas 2030. [pdf]. IBM Institute for Business Value. Available at: http://www-05.ibm.com/no/solutions/chemicalspetroleum/pdf/chemicals_petroleum_summary.pdf [Accessed 28 October 2013]. Holmes, A., 2004. Smart Risk. West Sussex: Capstone Publishing Limited. Lam, J., 2003. Enterprise Risk Management: From Incentives to Controls. New Jersey: John Wiley & Sons. Working Group on Risk Management., 2013. Risk Management in the Electricity Industry. [pdf]. Union of the Electric Industry. Available at: [Accessed 28 October 2013]. Read More