'Managing risk is critical to success'

Commodity price risk, political interference and regulatory and legislative changes are keeping risk managers in the energy sector awake at night, according to Peter Vermaak, business unit head: corporate at Aon South Africa. In a recent Global Risk Management Survey the company found that this uncertainty – along with an increased focus from regulators – was the most important external driver to strengthen risk management within energy organisations going forward. “Today’s energy environment is impacted by a wide range of risks, and the ability to manage them effectively is critical to success. Those who have the tools and resources to make more informed risk decisions will produce better results for stakeholders,” said Vermaak. Regulatory focus in the mining industry is forcing the mid-tier mining sector to find innovative ways to economise and deal with operational constraints and project delays. The regulatory focus centres on health, safety and environmental issues, particularly the remediation of environmental damage. “South African law requires mines to make financial provision for ongoing environmental rehabilitation and the environmental costs associated with mine closure – and this is creating one of the biggest challenges facing mining companies today,” he said. Oil multinationals are also facing increased political and economic risks as governments address the balance of power by taking more control over their domestic product. Countries such as Venezuela and Uzbekistan for example pose a high risk for companies, with potential problems such as confiscation, sovereign non-payment and political interference. These political risks could threaten global oil supplies and push oil prices even further. In addition, an increasing number of power crises on a world-wide scale have elevated the principal fuels for power stations, namely coal and to a lesser extent uranium, to the status of strategic assets likely to incur forms of state intervention in private enterprise. This also comes at a time when the main oil-producing and refining region in Nigeria continues to suffer from high levels of political violence, kidnappings and general civil unrest, and tensions between the US and Iran are ongoing, says Vermaak. These factors indicate potential for serious disruption to the operations of key oil producers as well as to established oil transportation routes which could well lead to further spikes in the price of oil, he added. “In South Africa, the government has injected billions of rands into Eskom coffers, partly to maintain the utility credit rating, but also to fund its expansion drive and the increase in coal purchases that will be needed to cope with the increased electricity demand,” said Vermaak. “Governments with stateowned oil companies have benefited and learnt from the technology, expertise and training of the oil multinationals that originally invested in exploration and production. Now these governments have asserted themselves to bring the domestic product in their control through varying degrees of nationalisation.” A number of oil multinationals are facing serious challenges as governments take greater control over their resources. Not only are we seeing an increase in risk across a number of oil producing countries, but the supply situation could potentially worsen in some regions, said Vermaak. “It is crucial for energy companies to understand the nature and extent of these kinds of political threats to their operations and to take appropriate action to mitigate these risks.” CAPTION Peter Vermaak … ‘increased political and economic risks.’