Technology & Services

Addressing the New Risk Agenda in the Offshore Oil and Gas Industry
a report by

DNV Consulting

A new risk agenda is emerging, bringing with it new

demands on your business and how it is managed.
Risk management has been an important tool in the
oil and gas industry to control safety-related risks.
Now, we see a shift away from the traditional
compliance
and
insurance-motivated
risk
management to one that is closely linked to business
performance and long-term society commitments. In
the UK, this shift has been expressed through the
Turnbull Report (1999). This report called for directors
of UK stock exchange-listed companies to state
clearly in their published reports and accounts what
they consider to be their key risks and how effective
their internal controls are in managing these risks.
Society expects sustainable business practices. The
winners in this new risk reality are those companies
who can persuade their stakeholders that they are
there for the long term. These are the ones who will
manage to raise capital, attract the best work-force
and create client and brand loyalty and who will
live to see another day.
Challenges and opportunities will arise on several
arenas within the offshore industry. This report puts
focus on a few:
ultra-deepwater development solutions;
LNG the new energy carrier;
entering environmental sensitive areas;

relatively low operational expenditures and high

sustainable production rates hence high costs for
production interruption.
When moving into deeper waters, the economic
penalty for delayed/lost production becomes greater.
The uncertainty related to whether unforeseen
events will occur is also increased as prototype and
novel technology are introduced into an operating
environment not encountered in shallow water
developments. Furthermore, subsea well completion
interventions and repairs also become more
expensive and are associated with longer delays due
to increased availability and mobilisation times for
required repair vessels.
There are many different ways of developing oil
production fields in ultra-deepwater. Dry tree
tieback solutions (Dry) require a platform to
support the permanently attached production/
intervention risers, but provide the efficiency and the
convenience of direct well access for remedial
activities. Subsea tieback solutions (Wet) provide
greater flexibility in utilisation of existing
infrastructure, water depth, well location and
development schedules, but require more
challenging and costly well interventions.
Subsea processing is an emerging field development
solution, which offers several advantages compared
with traditional ways of producing, processing and
transporting well fluids to onshore terminals. By
removing the need for expensive, manned floaters,
initial investments can be reduced significantly.

ageing assets;
cost and schedule risk; and
triple bottom line reporting.
Ultra-deepwater Development
Solutions

The economics of ultra-deepwater developments

are different from shelf developments stakes are
higher and risks are higher. Ultra-deepwater is
characterised by high capital expenditures with

A concept based on subsea processing also offers the

option to provide additional energy to the well
stream to reach treatment facilities (offshore or
onshore). This is particularly important for
exploitation of hydrocarbon reservoir in deep and
ultra-deepwater, where the needs for providing
energy to the well stream are higher. This has the
potential benefit of increasing the ultimate recovery
and/or accelerating the production.
However, as for traditional subsea production
systems, the operating expenditure (OPEX)

BUSINESS BRIEFING: EXPLORATION & PRODUCTION 2003

Technology & Services

associated with subsea processing are subject to

uncertainty due to concerns related to equipment
reliability and cost of interventions.
LNG The New Energy Carrier

Todays liquefied natural gas (LNG) developments

are motivated by a sustained worldwide rise in
natural gas consumption, exceeding the growth of
other fuels. Its current share of total primary energy
consumption is 24% and has risen in all regions over
the last 10 years1. Oil is still the dominant
hydrocarbon energy source, but gas is seen as one of
the fuels of the future. This not only reflects the
ability of natural gas to compete directly on a cost
basis, but also the growing recognition of its
environmentally friendly characteristics.
LNG has up to today played a speculative role in the
development of offshore fields. Now there are two
reasons why LNG technology is gaining the
attention of operators and driving the frontiers of
LNG production into uncharted territories. The first
reason is the economics of environmental constraints.
The Kyoto Protocol is a catalyst in the process to
minimise flaring and to enact pollutant content
restrictions in fuel. The second reason is the potential
to unlock offshore gas reserves without the need to
invest in capital intensive infrastructure.
Floating LNG facilities offer several advantages
compared with fixed or shore-based facilities.
Technological advances have resulted in facility
designs that are readily transported to new
economical fields following depletion of the current
field. Spreading the initial capital expenditure
associated with developing a floating LNG facility
over a number of field developments provides
opportunities to develop fields that may otherwise be
uneconomical to develop. Offshore LNG
production removes the demand for infield platform
and pipeline infrastructures necessary to transport the
produced gas to shore-based liquefaction facilities if
shuttle tankers are applied. It is conceivable that the
removal of these intermediate facilities could reduce
business risks and increase system availability.
Furthermore, the development of offshore-based
LNG facilities mitigates concerns associated with
developing fields in politically unstable areas since the
need to develop onshore infrastructures no longer
exists. Placing LNG production facilities at a
significant distance from shore removes the risk
exposure to the public compared with the onshore
alternative. Similarly, environmental impacts
associated with initial site clearing and future
decommissioning are less of a concern.
2

However, there are still some hurdles to overcome to

make the concept economically viable. Offshore
LNG facilities represent billion-dollar investments in
new unproven technology. The potential business
exposure is considerable and major companies have
expressed a need for a framework to assist their
investment decision processes.
Until recently economic models used to evaluate
new developments have focused on optimising the
balance between potential revenue, capital
expenditures (CAPEX) and OPEX without a
proportional amount of effort to assess the magnitude
of reduced revenue and the cost associated with
development delays, system failures and tarnished
company reputation risk expenditures (RISKEX).
The value of including RISKEX in the early
evaluations of offshore LNG concepts is apparent as
large amounts of money are invested upfront with an
offset revenue stream (production rates) and a long
payback period.
Entering Environmentally Sensitive
Areas

The world summit on sustainable development in

Rio de Janeiro in 1992 really set environment on the
global agenda.
For the oil and gas industry this environmental focus
raises several challenges. The worlds demand for
hydrocarbons is increasing at the same time as
hydrocarbon reserves in developed areas are
diminishing, which by itself is introducing several
environmental issues. The industry is therefore
moving into new areas, often being environmentally
or socially sensitive or politically unstable. Areas
being explored include tropical rainforests, wetlands,
desert, arctic tundra and marine areas spanning from
sensitive mangroves, to deep oceanic waters to the
arctic oceans.
The risk agenda for the industry is thus growing on
environmentally related issues. Major energy
companies have therefore established strategies for
sustainable development and are aiming to develop
their worldwide activities accordingly.
Global warming is recognised as a possible threat to
life on earth and CO2 quota trading is becoming part
of the mechanism for balancing the overall global
emissions in a cost-benefit perspective. The oil and
gas industry has a strong record on reducing
greenhouse gas emission through, for example,
reduced flaring and development of cleaner and
more efficient technologies. The industry is,
however, still contributing significantly to the overall

1. BP Statistical Review of World Energy 2002, http://www.bp.com/centres/energy2002/, June 2002, BP.

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Addressing the New Risk Agenda in the Offshore Oil and Gas Industr y
greenhouse gas emissions, both directly and through
their products.
Another challenge for the global oil and gas industry,
within the framework of sustainability, is to design its
developments and operations to coexist with habitats
important to a variety of biological species.
Examples of processes the industry is initiating to
manage this challenge are:
establishing environmental management systems
committing to continual environmental
improvement; and
the development of priorities relating to
environmental sensitive areas in consultation with
environmental non-governmental organisations
(NGOs).
An oil spill is the common symbol of an industry
without control. Consequences of such an event are
largely on company reputation with significant
economic impacts. Considerable impact may also
occur on natural ecosystems, amenities and peoples
livelihoods. For example, the ghosts of the Valdez
disaster are still haunting Exxon 10 years after the
event. Oil spill prevention and response are
therefore key elements in ensuring responsible
exploration and production.

revisions of operational and maintenance practices.

Safety is challenged by many of these operational
changes. Balancing economical risk related to capital
investments and production on one side, with risk of
accidents and harm to personnel and environment on
the other side, is required to find a sustainable
solution and obtain acceptance from stakeholders.
Cutting staff always causes safety concerns. The
motivation of personnel has to be managed during
these difficult changes. Ownership to the future
solutions and trust in the change process are two key
elements to a successful implementation process.
Ageing assets create a demanding setting for all risk
management functions. However, some operators
have proven that it is possible to reduce cost (OPEX)
significantly and at the same time increase production
volumes and safety performance. Their key to success
has been a consistent approach to all the different
elements of risk and a clear strategy for execution and
implementation of the changes.
Cost and Schedule Risk

Todays oil and gas development prospects are

typically characterised by large investments, tight
time schedules and the introduction of new
technology under unproven conditions. These
challenges typically result in a higher risk exposure
but also in opportunities that should be exploited.

Ageing Assets

Mature oil provinces, such as the North Sea, go

through significant changes. Declining tail-end
production volumes lead to needs for cutting costs. A
successful prolongation of the tail-end production
may financially be very rewarding. Rather than
cutting cost and manning by a few percentages
yearly, ambitions are now to reduce OPEX to a
significantly lower level by applying new technology
and new organisational structures. This opens up for
increased flexibility by minimum permanent
manning and campaign maintenance, supported by
outsourcing of non-core functions.
Mergers of companies and consolidation of
operations across fields and enterprises allow for
restructuring of larger mature assets like the Southern
North Sea assets in the UK and the Ekofisk and
Tampen areas in Norway. The speed of change
becomes more important and the oil companies will
be more radical in finding new solutions to prolong
the life of the mature assets as the pay-back time for
tail-end investments is shorter than for investments
prior to start-up.
From a technical point of view, the facilities may be
subject to deterioration that calls for replacement and

Over the last six to eight years, there has been an

imbalance in the risk-sharing between oil companies
and contractors. This shows up in how the market
forces value the companies. The biggest oil
companies have experienced a substantial increase in
market value while the biggest international
contractors have seen a dramatic decrease in market
value. Recently, there have been multiple examples
where major international contractors have suffered
badly from cost overruns and delays in the execution
of engineering, procurement, construction &
installation (EPCI) contracts, with the result that
some contractors today are declining to participate in
high-risk lump-sum contracts that do not efficiently
balance risk and reward.
This trend is not serving the industry, and we now
see that major oil companies are beginning to enforce
strict procedures for identification and reporting of
critical risk factors that could affect the project
performance and the quality of the project delivery.
The systematic approach and techniques offered by
risk management practices allow for identification
and management of threats and opportunities
associated with a specific project. The process
enhances the understanding of the major risk drivers

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Technology & Services

and the way that these affect the project objectives

typically being cost, schedule and technical
performance. Through this insight, the decisionmakers can develop suitable risk strategies and action
plans to manage and mitigate potential project threats
and exploit potential project opportunities, thereby
increasing the likelihood of attaining project success.
The uncertainties affecting the project objectives
come from a wide range of areas and disciplines, and
may be of a complete different nature;

Companies are becoming increasingly visible and

vulnerable to sway of public opinion. Decisions and
actions traditionally kept from the public eye now
have immediate impact on brand, customer loyalty
and stake holder perception and with this it
impacts profoundly on company value and
competitive advantage. Evident examples are Exxon
Valdez, Brent Spar, Piper Alpha, Enron and the
recent oil tanker pollution incidents off the
European Coast.
Many forward-looking companies now introduce
Triple Bottom Line Reporting as a tool to
transparently account for what value they add and
destroy through their activities. Through it they
create clarity on their economic, social and
environmental impact. Having transparency around
their overall value creation they can persuade their
stakeholders that they stand to create long-term
shareholder value by maximising value (not only
profit) whilst minimising harm.

technical;
financial;
organisational;
contract/procurement;
sub-contractors; and
political/cultural.
Unlike disaster recovery, project risk management is
about anticipating that things are beginning to go
wrong and taking planned and rehearsed steps to
protect project objectives and stakeholders interests.
It is about co-ordinating and integrating all the
planning processes across various disciplines and
contractors, and presenting a confident image to the
outside world.
Triple Bottom Line Reporting

In his 1975 classic account of the history of the oil

industry, The Seven Sisters, Anthony Sampson
predicts that the oil majors would in the future need
to move away from only looking after their own
economic interests and instead define new
management and new objectives to become the
visible representatives of their consumers interests2.
In entering into the 21st century, Sampsons
prophetic vision is becoming reality through a quiet
revolution. The traditional ideas of what is value
creation are redefined from purely maximising
companys shareholders economic returns to the
wider agenda of honoring the interests of society at
large. With globalisation and increased flow of
information, news is broadcast across the world on
CNN and BBC even as events are unfolding.

Being constantly mindful of economical, social and

environmental impacts calls on new and deeper risk
awareness coupled with relevant performance
monitoring. Maximising profit is complex enough
balancing it with social and environmental
responsibilities is an altogether different issue one
where one set of priorities often conflict with another.
Competent communication and genuine imparting
of vision and values become paramount to enable the
organisation to make optimum decisions to maximise
long-term value. The companys ability to identify,
prioritise and mitigate risks in an integrated way will
need to be present up and down as well as across all
organisation levels and locations i.e. where the risks
occur and are managed. Discipline islands and silo
behaviours need to be broken down to integrate
knowledge and facilitate learning and genuine
understanding to meet the needs of the more
complex agenda. The company cannot be satisfied
with setting requirements only for itself; it also needs
to involve its supply and contracting community to
ensure that they contribute to sustainable business
and practices.
The winners in this new world will be society at
large and, in particular, those companies who
manage to communicate and live their values, and
who create and deliver on high expectations.

2. Anthony Sampson; The Great Oil Companies and the world they made THE SEVEN SISTERS; p.323; ISBN
0 340 21323X.

BUSINESS BRIEFING: EXPLORATION & PRODUCTION 2003