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Executive Summary
Today’s national oil companies (NOCs) control nearly 90 percent of the
world’s known oil reserves, but they face a myriad of risks arising from the
occurrence of both man-made and natural events in their exploration,
production, refining, and shipping/distribution chains. Given their
dominance in supplying most of the world’s energy needs, Marsh believes
that it is vital that these companies—both for their own benefit as well as
for global economic stability—enhance their understanding and mitigation
of risk.
Marsh convened this forum in order to help NOCs more fully understand
their protection needs, as well as to bring into focus the need for
companies in this space to strengthen their risk mitigation with insight
and initiatives that extend beyond merely obtaining appropriate insurance
coverage.
Recognizing the need to continue convening the top risk managers of the
world’s NOCs and to share best practices in both the use of insurance and
other risk-mitigation techniques, Marsh is also announcing its intention to
sponsor and lead a second annual risk advisory conference for NOCs in
early 2008.
The Impact of Risk on National Oil Companies
Introduction
There is no denying the fast-growing importance to today’s global energy
market of the national oil companies. As leaders at the forefront of an
evolving industry, NOCs have more ability than ever before to shape the
global market in ways that have worldwide impact. Likewise, global market
trends will undoubtedly change and influence the business of NOCs in
major ways. NOCs control the majority of the world’s carbon resources; and
in looking at oil and gas reserve holdings, one finds that 14 of the world’s
top 20 upstream oil and gas companies are NOCs.i Clearly, some of the risks
that these companies face are risks that energy consumers ultimately face
as well.
And those risks are significant. They range from the controllable, such as
safety procedures at a refinery, to the uncontrollable, such as the threat of
hurricanes, to the vastly broad and geopolitical, such as the desire for
environmentally friendly energy sources. In this kind of environment, it is
vital that NOCs not just understand the types of risks they face and the
associated potential financial impacts, but also think about and address
these risks strategically. With so much of the world’s resources in their
hands, NOCs have a significant opportunity: to limit the world’s energy
risks by mitigating their own business risks.
To look at one example of a major risk, we can examine climate change and
the accompanying growing demand for environmentally friendly energy
sources. We need look no further than today’s front pages to see how much
this issue has become a part of the zeitgeist. And it presents a multifaceted
risk:
Operational: Companies with oil and gas production resources in the Arctic
are facing new challenges due to loss of permafrost; rigs and platforms are
at risk due to increasingly severe weather patterns that result in hurricanes
like Katrina.
Political: Regulatory standards are becoming tougher and tougher around
the world.
Reputational: The public is demanding greater social responsibility on this
issue, and companies that cannot pass the test are feeling the effects.
The Impact of Risk on National Oil Companies
The Impact of Risk on National Oil Companies
NOC-Specific Risks
With these global imperatives in mind, NOCs need to understand the risks
that they face specifically as members of a critically important industry. To
that end, Marsh convened the first ever NOC-specific global risk advisory
conference in Dubai in February 2007. The Dubai conference allowed for
discussion of topics like knowledge transfer among NOCs, governance,
measurement of enterprise-wide risk, and operational challenges tied to
cross-border investments. Marsh also polled attendees, which included
NOC leaders and advisors from across the world, to get a better sense of
how risks are viewed and understood by the audience.
The Impact of Risk on National Oil Companies
In addition to finding out what the specific risks are, we also wanted to
determine the level of understand that NOC leaders had about these risks.
An independent break-
Here are our major findings: out session following
1. Risk is poorly understood by many NOCs. When attendees were asked if
Marsh’s 2007 global
they fully understand their companies’ risk tolerance and how it can be risk conference
used to manage risk, just 7 percent said they had a full understanding.iii
for NOCs also strongly
This lack of understanding among industry members that control nearly 90
percent of the world’s oil reserves indicates the need for a risk supported the desire
management forum within the growing NOC community, as well as further for sharing best
debate and sharing of best practices.
practices:
Do you
Do you fully
fully understand
understand your
yourCompany's
company’s risk tolerance /risk appetite
risk tolerance/rick appetite and
and
how it can
how it can be
be used
used to
to manage
managerisk?
risk? When asked to respond to the
statement, “I believe I have
sufficient ways to exchange
60%
51% views,” only 38 percent agreed,
50% and no one strongly agreed.
37%
40% When asked whether NOCs
30% wanted to involve service
providers such as brokers and
20% risk management consultants
4% 7%
10% in a leadership, facilitation, and
participative capacity, 96
0%
percent agreed to advisor
Strongly Disagree Disagree Agree Strongly Agree involvement.
Three-quarters believed the
2. NOC leaders have a desire to understand risk better. Not only is there a proposed risk management
need for a forum focused on risk management, there is a desire for one. forum should be global rather
Ninety-two percent of respondents agreed that there is a need to share best than regional, and the majority
practices within the industry.iv .Ninety-nine percent of those located in the agreed that it should be held on
Middle East agreed. an annual basis. It is in
response to this expressed
Do
Do you
you agree
agreethat
thatthere
thereisisvalue
valueinindeveloping
developinganan NOC
NOCrisk
riskmanagement
management
desire of our clients and
forum
forumfor
fordebate
debateand andsharing
sharingofofbest
bestpractice?
practice?
prospects that Marsh is once
again hosting a global risk
54%
60% conference for NOCs in 2008.
50%
38%
40%
30%
20%
5% 3%
10%
0%
Strongly Disagree Disagree Agree Strongly Agree
The Impact of Risk on National Oil Companies
But finding the right way to transfer and finance risks increasingly requires
innovation and strategy. It’s important that NOCs look for the kind of
insurance brokerage services that can provide them with the best total
coverage. And they should look for a provider whose services are constantly
being improved to increase protection, limit cost, and streamline process.
For example, Marsh pioneered the integration of multiple protection
policies, as well as financial exposures, in unique packages designed to
protect a company in the long term.
The Impact of Risk on National Oil Companies
The Impact of Risk on National Oil Companies
In looking at these two major areas, NOCs need to answer the following
questions:
A local shipping
company discovered
Resource availability: Do we have the resources necessary for
implementing strategies to mitigate risk and control costs?
that one point in
its supply chain
Ability to meet demand: What is the risk of not being able to fulfill a spike
in consumer demand for our products? What contingency plans can we
involved transporting
put in place in case of a spike? all of its goods across a
Brand reputation: What is the risk to our brand if an incident occurs along single bridge. There
our supply chain? Will there be consequences beyond the financial, was no contingency
insurable ones?
plan set in the event
Industry regulation: Do we understand the regulatory challenges facing that something
our industry, and are we analyzing the impact those challenges will have
on our business. happened along that
route or if the bridge
Political changes: Are we actively analyzing political trends and thinking
about long-term political changes that may affect the regulatory were destroyed or
environment for our industry? blocked due to forces
The bottom line: Insurance is great first aid in the event that something beyond the company’s
goes wrong, but a strategic approach to risk management can allow you to control. Once this risk
stay healthy in the first place.
was realized, the
company was able to
map out an alternative
route as well as a crisis-
management plan.
The Impact of Risk on National Oil Companies
The Impact of Risk on National Oil Companies
10
The Impact of Risk on National Oil Companies
Similar to this year’s event, the conference will look at vital industry
issues, including knowledge transfer among NOCs, governance,
measurement of enterprise-wide risk, and operational challenges tied to
cross-border investments. The aim of the 2008 conference is to continue
the dialogue among NOCs about the risk challenges they face and their
strategic capabilities in dealing with those risks.
i
http://www.rice.edu/energy/research/nationaloil/index.html
ii
Polling reference
iii
Polling reference
11
iv
Polling reference
The information contained herein is based on sources we believe reliable, but we do not guarantee its
accuracy. It should be understood to be general risk management and insurance information only. Marsh
makes no representations or warranties, expressed or implied, concerning the financial condition, solvency,
or application of policy wordings of insurers or reinsurers. The information contained in this publication
provides only a general overview of subjects covered, is not intended to be taken as advice regarding any
individual situation, and should not be relied upon as such. Statements concerning tax and/or legal matters
should be understood to be general observations based solely on our experience as risk consultants and
insurance brokers and should not be relied upon as tax and/or legal advice, which we are not authorized to
provide. Insureds should consult their own qualified insurance, tax and/or legal advisors regarding specific
risk management and insurance coverage issues.
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The Impact of Risk on National Oil Companies
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