Risk management

Managing Risk, Uncertainty, and Complexity

Regarding the long-term risks to our industry and a decreasing role of oil and gas in the energy transition in the future, I see an opportunity for companies to expand into new business segments and our members into new career opportunities.

Risk management plan compass
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I was invited to chair an executive panel related to best practices in oil megaprojects at the 2021 World Petroleum Congress in Houston in December. There were outstanding presentations by Petrobras, Equinor, and Chevron related to developing very complex projects in challenging surface and subsurface environments with the required quality and in line with initial cost estimates. Technological evolutions in our industry have allowed such an achievement, which makes me proud to belong to this industry.

If I were to characterize the skills that differentiate our oil and gas professionals from most other industries, I would highlight our knowledge of subsurface sciences and the ability to manage large-scale projects that are complex and have significant risks associated with them. The latter refers to a significant deviation from the planned/expected performance of the project due to various factors.

I have learned that nothing is certain except for the need to have strong risk management, a lot of cash, the willingness to invest even when the future is unclear, and great people.
Jeff Immelt, Former CEO of General Electric

SPE has developed over the years several initiatives related to risk management. They span most of the technical disciplines, in particular the Health, Safety, Environment, and Sustainability, and the Management disciplines. Among the latest resources is the Human Factors Technical Section, which has done an outstanding job to deliver valuable information on how to mitigate risks associated with human factors, especially in the case of complex decisions with short-time response required. With the expanding use of artificial intelligence in our operations, there will be more involvement of the Data Science and Engineering Analytics discipline. Other resources include publications about decision analysis, and in particular, the books Making Good Decisions, Introduction to Petroleum Economics, and the still very useful Decision Analysis in E&P.

A particular type of risk that our industry faces is the challenging economic environment that has resulted in shorter industry cycles associated with an increased impact on activity (hence employment) in the oil and gas sectors. The activity drop in 2014–2016 led to a decrease of more than 25% in upstream investments, followed by another even larger (30%) decline in 2020. In fewer than 5 years, the upstream sector has seen investments nearly halved.

I highlighted in a previous column that the 2022 recovery would depend on the emergence of new variants of COVID-19. The emergence of the Omicron variant and the speed at which it is spreading around the world, with limitations imposed on international travel, has led to new daily cases reaching a (conservative) figure of 3 million daily worldwide. Thankfully, it seems that the severity of the cases is lower than with previous variants such as Delta.

The oil demand forecasts by the three main agencies (EIA, IEA, and OPEC) vary widely with an estimated increase of consumption between 2021 and 2022 going from 3.3 million B/D to 4.2 million B/D. This uncertainty has also impacted the supply side, and companies have been hesitant to increase their development investment, especially given the cost increase in other commodities that has resulted from the steep demand recovery in many sectors. In some countries, such as the US, the recovery is also leading to increased mobility in the workforce, leading to skills shortages in some sectors.

While we cannot accurately predict the course of climate change in the coming decades, the risks we run if we don’t change our course are enormous. Prudent risk management does not equate uncertainty with inaction.
Dr. Steven Chu, Nobel Physics Laureate and former US Secretary of Energy

Regarding the long-term risks to our industry and a decreasing role of oil and gas in the energy transition in the future, I see an opportunity for companies to expand into new business segments and our members into new career opportunities.

The proposal to merge AAPG and SPE into an organization with a wider scope, which will be presented to a member vote later this month, is a positive step toward our members’ future. There is risk associated with the status quo, and we are choosing to stay ahead of the curve and anticipate the trends in the energy world. The team working on the merger has made major progress in defining a mission, vision, and core values for the combined organization. Regular updates have been provided on the joint merger website, and an article related to the merger’s rationale is posted on The Way Ahead website.

Please do not hesitate to contact me at President@spe.org should you have any query, suggestion, or volunteering proposal.