Project Risk Management in Oil and Gas Industry - Coursework Example

PROJECT RISK MANAGEMENT IN OIL AND GAS INDUSTRY By Student’s Name Code + Course Name Professor’s Name University/College Name City, State Date Abstract The oil and gas project management is faced with a series of risks both within the internal and external environment of involved organizations, which may include economic, social, political, environmental, public, logistical, and legal risks. In addition, in projects that involve international partnering between oil and gas organizations, as much as the projects are supplied with advanced technologies and capital, they are exposed to other risks such as practice differences between the local and foreign partners, legal risks, political and policy risks, and financial risks. These risks have a negative impact on the success of oil and gas projects in terms of increased cost, prolonged schedules, and reduced quality. As such, there is need to adopt various strategies that would deal with the risks within the oil and gas projects and facilitate project success. Some of the risks include prolonged processes for project approval and bureaucratic systems of government, poor project design, project team incompetence, and contract law risks. Through proper management of these risks, the coordination of activities within the projects would be facilitated enabling optimum performance of all the involved parties and increased performance of the project teams. This would in turn have a positive effect on the general outcomes of the project. Introduction Oil and gas industry projects are exposed to both external risks including social, economic, political, public, legal, environmental, and logistical risks; and internal risks including design, financial, contractual, personal, construction, and operational risks (Badiru & Osisanya 2013, p. 444). Such risks may have significant negative influences on the project’s schedule, cost or quality. Most of the oil production organizations are within developing countries, which do not have well established effective and systematic systems of risk management. In the contemporary society, oil and gas projects are exposed to more uncertainties and risks due to various factors including: complexity in design and planning; availability of different interest groups such as contractors, owners, and consultants among others; availability of resources such as equipment, materials and funds, among others; social concerns; climatic environment; among political and economic statutory regulations (Inkpen & Moffett 2011). Most oil and gas projects involve joint ventures partnerships that involve multinational organizations. Such partnerships offer high technologies and capital required for the project’s success which may not be available for local partners. However, these foreign partnerships expose oil and gas organizations to risks including practice differences between the local and foreign partners, political and policy risks, legal risks, and financial risks (Inkpen & Moffett 2011, p. 173). Therefore, it is important to manage risks appropriately in project management within the oil and gas industry. This paper identifies various risks within the oil and gas projects and reviews various strategies that could be employed in managing such risks. Major Risks and Management Strategies Long project approval process and bureaucratic systems of government The bureaucratic government system and prolonged procedures for approval of projects is one of the major risks in projects within the oil and gas industry. This is especially eminent in countries with incompetent staff within the regulatory agencies of the government, unclear power and responsibility, ineffective law implementation procedures, and complex procedures of approval (Thuyet et al. 2007, p. 186). As a result of such imperfections in handling of the projects, there is a long delay in reception of approval for most projects. This problem is common among developing countries and thus has an astounding effect on the image of such countries in relation to attraction of foreign investors. This risk has a considerable impact on the expansion of business within an organization as it slows the process and makes it tedious (EY 2015, p. 5). Management of the mentioned risk is highly complex as the risk occurs within the external environment beyond the organization. One such management measure is the request for administrative reform from the government (Nguyen & Chileshe 2013, p. 930). This involves the merging of organizations within the oil and gas industry in order to extend a collective request to the government concerning the industry, sensitizing them to make reforms within various ministries. Moreover, it is of significance that oil and gas organizations establish and maintain positive relationships with the central and local governments within the jurisdiction in which they operate as this would reduce delayed approval of projects. Project managers ought to adapt to such governments and develop an understanding of their requirements (International Business Publications USA 2003, p. 236). Furtheremore, they should be capbale of demonstrating the benefits of the organization in the region's socioeconomic developments. Poor design Poor design of the project is another common risk that is often associated with quality, time, and cost non-achievement within the project (Leveson 2011). Most project managers incur increased portions of added cost if they are not able to point out any flaws concerning specifications within the project’s early stages. This leads to conflict between the project managers and the owners of the organizations. Poor design may be as a result of the designer’s incompetence, or unclear scope and specifications of the project. In view of such design-related risks within the oil and gas industry, it is important for organizations to consider partnering. Partnering relationships are based on dedication to shared goals, trust, and a proper understanding of the values and expectation of each individual entity. Partnering would improve the cost-effectiveness and efficiency of the projects, increase innovation opportunities, and facilitate quality improvement of the products and services (Jacoby 2012 p. 143). When partnering with design agencies, the project manager within an oil and gas organization would carry his/her commitment through providing enough resources for the design party including clear scopes and specifications, rewards, and on-time payment. On the other hand, the designers would apply their best possible resources including high technology, and experienced and competent designers in meeting the design requirements of the project. Another approach to mitigate this risk would involve consulting highly experienced design organizations. In this case, the selection of the designer should be based on their past performance and experience. Similarly, constructability could be considerably improved through concurrent engineering as this involves simultaneous construction and design, and proper communication between the construction and design teams (Stjepandic et al. 2012, p. 669). In addition to these strategies, it is also important to consider proper translation of the ideas of the organization to designers in order to facilitate the development of good designs. In addition, the project manager should consider hiring of competent consultants that would evaluate the developed designs before and during implementation. Project team incompetence In most organizations, the project team comprises of the project manager, functional members, and project executives. For a project to be completed successfully, it is paramount that all members of the project team understand the critical requirements of the project, which include organizing, planning, directing, motivating, and controlling, and to exhibit positivity towards the project (Jannadi & Almishari 2003 p. 493). Team incompetence can be categorized into two, ineffective teamwork, and individual incompetence. Personal incompetence involves each team member's ability to perform their duty. In most projects within the oil and gas industry, only a few of the project team members carry out their responsibilities with high productivity, efficiency and timely. However, the poor performance among some of the team members may be due to lack of skills, knowledge and competency to perform the available duties effectively. As much as most of the members of the team may have the necessary credentials for their positions on the teams, they are forced to work with foreigners from the international community and thus face problems fitting into the international standards especially if they have local based training. Teamwork is salient in achieving the various project goals. As such, through coordinating efforts, teamwork can beget positive synergy. Individual efforts by team members can lead to increased levels of performance as compared to the sum of the individual inputs (Frick & Laugen 2012, p. 269). The different activities within a project cannot be handled by a single person, and thus they require different members to work as a team in order to coordinate their involvement at different levels towards a single outcome. Various strategies can be upheld in order to mitigate the risk of team incompetence. One of the major strategies that can be implemented is training and education of the members of a project team. It is important for executives to offer professional training and courses bperiodically that would enhance the skills, knowledge, and update the changes in terms of knowledge and technology among the team members in order to facilitate efficiency. Besides training, good staffing is also another strategy that could be used in mitigating the risk of team incompetence. The management team within an organization should allocate the project's human resource appropriately in order to ensure that they function smoothly (Bendiksen & Young 2015). Managers can prevent incompetence within the project team by building effective teams to handle certain projects. The process of building such teams may cover a variety of areas that are inclusive of work design, context, composition, and process (Mubin & Mubin 2008, p. 25). Under the work design, it is important for the management to allow individuals autonomy and freedom in terms of using various talents and skills in completing identifiable tasks within the project, which may affect other team members. The appropriate composition entails an effective blend of the personality and ability of members of the team, role allocation and diversity, the flexibility of the members, the size of the team, and the preference of the individual team members for teamwork. The most important contextual factors in effective team building include effective leadership, adequate resources, and an evaluation system that cross-checks the performance of the members and their contribution to the team and offers rewards. Process involves the commitment of the team members to a single purpose, team efficacy, and development of a specific goal for the team (Mubin & Mubin 2008, p. 26). Contract law risks Unlike the case of developed countries, the energy security for developing countries that produce oil is determined by the concerns for ‘security of demand’ (Barkindo 2006, p. 3). This is because oil and gas organizations in such countries depend on the revenue from sales of these products to finance other dimensions of development. In addition, such organizations rely on the same revenue to facilitate upstream reinvestment and ensure that the rising demand is met. As such, these organizations in developing states have a call to put in place all possible measures in order to support supply security and to promote market stability (Taverne 1999, p. 80). Preservation of the security of demand by these states requires proper investment in the exploitation of mineral resources to enhance local production and to ensure that supply needs are met. Nevertheless, it is evident that most developing states that produce oil do not have the technical and financial capabilities required of them to develop the available resources and they, thus, depend on foreign investors. On the contrary, oil-producing organizations within developing states often experience cases of irresponsible leadership, political turbulence, and unreliable judicial and legal processes, which lead to investment hazards and political risks that are beyond the ordinary business risks faced in oil contracts and other political risks experienced in developed countries (Likosky 2009). For instance, poor definition of the parties bound by a contract can lead to the developing state stepping out of a contract with a multinational oil and gas organization in the case of a political crisis with the claim that they did not recognize the agreement. As such, it is important to establish if the state is standing in for the multinational company or if the company is representing itself in the agreement (Luft et al., 2010, p. 44). This puts the foreign multinationals in a dilemma on whether to invest in this oil producing countries or not, with investors agreeing to invest only in those cases where they are assured of the security of their investments by the host government. In order to guarantee the security of projects, renegotiation and stabilization clauses should be incorporated in the contract data and secured under the secure contract container (Segger et al. 2011, p. 336). This would allow an oil and gas organization to change the terms of the contract in case the host government or company backs out of or acts contrary to the initial agreement. These clauses will also provide immunity to the contract against any political, social, or economic turbulence that may be experienced by the host country. Because of these clauses, the developing countries will be able to attract investors with an assurance of the security of their investment, and thus earn returns from the facilitated production and supply of their products. Such returns would ensure economic growth for these countries and further investment in the security of their energy. Conclusion For many years, risk management has been well recognized and upheld as part of project management within developed countries. However, this remains limited and strange in terms of implementation among developing countries. It is evident that for projects to succeed, the major risks influence the project should be critically examined. To elliminate risks within the oil and gas projects, this paper suggests various strategies that could be upheld by involved organizations including requesting administrative reform by organizations from the government; maintaining positive relationships with the government, NGOs, and environmental authorities; understanding approval procedures, regulations, and local laws; partnering with all the necessary stakeholders; involving design organizations that are well advanced; utilizing concurrent engineering; properly translating the ideas of the organizations to designers; hiring competent evaluation consultants; proper staffing, training, and team building; and inclusion of renegotiation and stabilization clauses in the oil and gas contracts to increase commitment of partners. 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