Operational Risk Management During Low Oil Price Scenarios

JATONNA 2016-09-22

What is Operational Risk Management (ORM)

Operational Risk is the potential of loss arising due to failures in systems, people and / or operational processes which can result in an impact on People, Assets / Production, Environment or Reputation. In recent years, Operational Risk, has become one of the most critical risks which is being faced by organisations in the Oil & Gas and allied sectors. This has been due mainly to impacts and losses arising from high profile Industrial Incidents e.g. Offshore Gulf Of Mexico Deep Water Horizon / Texas Refinery Incident, Piper Alpha, UK North Sea, Buncefield,  UK to name but few. In the above cases, the underlying causes have been mainly driven by operational failures or deficiencies in systems, people and / or processes.

Operation Risk Management as defined herein,  is the means and processes through which Operational Risks are managed through an assets operating lifecycle. Traditionally many organisations in the Oil & Gas and allied sectors have developed Operational Risk Management Frameworks to manage operational risk utilising a Hazard & Consequence Type Model associated with an Organisation Specific Risk Assessment Matrix and other tools against a specific Risk Tolerability Criteria pending their risk appetite.

It is clear from an analysis of past major industrial accidents that Operational Risk needs to be managed in a coherent manner given their potential adverse impact, if worst possible outcomes are realised without robust controls and risk reduction strategies in place throughout the assets operational lifecycle. But, is the industry focusing enough attention during an asset’s operating lifecycle which could be between 20 – 25 years, during which time organisations face the major operational risk exposure. Moreover, can operational risk be minimised or completely avoided.

In reality no organisation can eliminate operational risk totally, however, this can be reduced to As Low As Reasonably Practicable (ALARP) by employing additional residual risk measures, protocols and Best Practices to the point at which the incremental benefit of level of risk reduction achieved is outweighed by the cost.

Key Benefits of Operational Risk Management to Oil & Gas and Allied sectors

The benefits of managing Operational Risk effectively during an assets operating lifecycle can be summarized as follows:

  • Reduces the potential for Major Accident Incidents and / or other incident categories;
  • Increases probability of maintaining and sustaining production at maximum / optimum levels required;
  • Enables asset to maintain Safe Operations.

However, the above benefits can only be realized if asset Integrity management and maintenance programs are aligned to asset requirements through their lifecycle. But it can be argued that additional emphasis should also be placed on understanding more precicely the integrity of each asset, given stage in it’s life cycle, life extension  / remnant life assessment , in an environment of ageing infrastructure particularly in the Middle East Region.

Why ORM should not be compromised in a low oil price scenario

The Current Era of a low Oil Price Scenario (from a peak of over 100 USD per Barrel in 2014/2015 to a low of just under 28 USD per Barrel in Q1 2016), has initiated a wave of capital rationing, new project cancellations or deferment, cost reduction measures and streamlining of operations and staffing in the Oil & Gas and allied sectors both in the Middle East Region and Worldwide. This situation could have an impact on increasing operational risks of existing assets if not addressed, pending approach, despite an oil price recovery to approximately 50 USD per Barrel in Q2 2016. This recent shift in focus of sector cost cutting activities, has further exacerbated the potential for major industrial accidents, pending the focus of cost cutting measures. If such cost reduction measures are too deep or not optimised, then this could lead to inefficient operations and increased operational risk along with not meeting the major goal of maximising production in a safe manner.

Despite an oil price recovery to approximately 50 USD per Barrel in Q2 2016, there seems little evidence of this cost cutting trend reversing. This must also be viewed in the context of an ageing infrastructure and uncertainty in asset integrity particularly in the Middle East Region. While the Oil & Gas and allied sectors continue to implement traditional measures of ORM as a basis for reducing operational risk (e.g. carrying out Task / Job Safety Analysis Risk Assessments, updating operation management, Permit To Work and Management of Change (MOC) Procedures as an asset is modified during its life cycle) incidents continue to occur.

This seems to suggest are organisations in the sectors considered missing something here?.

Further, during this current low oil price scenario sector are organisations focusing enough on competency assessments, personnel training and defining clear roles and responsibilities for personnel operating their assets? It is suggested that a new paradigm shift should occur in the oil & Gas and allied sector’s approach and thinking in re-evaluating it’s short, medium and long term operational risk exposures during the whole operating life cycle of its assets and putting mitigation strategies and more effective controls in place which should be continually monitored and challenged with respect to their effectiveness.

People beat Systems, which unfortunately is a fact of life. From evidence provided from several post major incident investigations in the sectors considered, would suggest that a more proactive risk related operating and maintenance culture is required. Such a culture would allow empowerment of personnel to intervene in what can be construed as unsafe acts  through improved communication and accurate information on operational risks  faced without any fear of reprisal.

As such, it is further suggested that if this cultural shift is embedded into an organisations Enterprise Risk Management (ERM) Strategy, processes, policies, procedures and decision making , then efforts made to circumvent untoward events and incidents occurring is drastically reduced.

How can companies not compromise on ORM in a low oil price scenario

Given what we know and understand, it can be concluded that:

  • Operational risk exposures are further exacerbated in a low oil price scenario given current cost reduction measures undertaken in the sectors considered pending investment focus, which should be as a minimum relate to Safety Critical, Maintenance Critical and Asset Integrity aspects;
  • Operational risks need to be managed more proactively with a new paradigm thinking approach, if assets are to be sustainable and organisation goals of maintaining and maximising production safely are to be achieved.

Such a paradigm shift in thinking and approach to operational risk management of an asset during its operation lifecycle should give due consideration to the following:

  1. Adopt a modern ERM approach  to operational  risk management whereupon operational risks are considered and embedded in Strategic planning, ERM processes and Decision making which includes a critical review of current practices , procedures , performance and Gap Analysis;
  2. Identification of all Operational  Risks and their categorisation including range of possible outcomes ;
  3. Being Proactive not  Reactive in Risk Measurement  with an emphasis on  Detection  ( source Historical / Industry Data / Other ) ; expressed in terms of loss frequency and severity and development of Risk and Residual Risk mitigation strategies rather than traditional current models;
  4. Develop robust and systematic processes for making business decisions where the level of risk to be assumed net of controls is aligned with the risk appetite and risk tolerability criteria of the organisation including stress testing;
  5. Build lessons Learned into operation  risk Decision Making and control strategies  and implement Asset Reference Plan,  Asset Integrity planning and  Best in Class Operational and Maintenance Practices;
  6. Develop and implement a  risk based culture and empowerment based on a more comprehensive understanding of risks faced at the operating  & maintenance levels;
  7. Revise / Align current policies , procedures ( e.g. Management of Change ; Job Safety Analysis, Permit to Work etc ) operational management systems and risk / residual risk control measures in line with Best ORM Practices to ensure achievement of operational risk goals;
  8. Establish clear  identification of  roles and responsibilities of all relevant parties;
  9. Set Key Operational Risk  KPI’s to achieve Operation  Excellence , Risk Reporting goals and measure Performance;
  10. Carry out independent audits to determine Operational Risk Performance / deficiencies / areas for improvement/ continuous improvement.



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