The risk management efforts of oil and gas companies have stagnated and the consequences for the industry have been dire. Reports of lost revenue, lost assets and--worst of all--loss of life are all too common. In order to reverse this trend, the complacent attitude that has led insiders to say, "We're different than other industries," "We don't find value in these programs" and "We'll deal with that if it happens" must change.
Traditionally, oil and gas industry risk management has focused on weather and technical issues. But there are many factors to look at when evaluating risk management programs. For one, studies conducted over the past several years show that the cost and risk of industry projects has increased significantly.
For example, according to the IHS CERA Upstream Capital Costs Index, cost inflation in oil and gas projects has seen a 118% increase over the past decade, while the IHS CERA Upstream Operating Costs Index reported a 78% increase in the operating costs of oil field facilities over the same period.
There are many reasons for these upticks. The shift from shallower waters to deep-water exploration, the demand for better return on investment and increasing insurance premiums have all significantly increased risk. These factors need to be included when evaluating risk management.
Another key factor, however, is the mind-set of corporate executives. Risk management has almost become voodoo to some energy companies, and many reference a lack of manpower, or even willingness, to create advanced, modern programs. One main area sticks out: the view that short- and long-term maintenance programs are not a priority.
Failure to take a hard look at this factor can lead to reduced share prices, poor contracts, inadequate joint ventures, failure to meet corporate goals and delayed schedules. In addition, history has shown that maintenance programs -- when administered effectively -- produce results that are unquestionably successful.
There are several industries, including aviation and nuclear, that have excellent risk management programs that oil and gas could learn from. There are also two U.S. Navy programs that illustrate how a commitment to lower risk can improve operations.
The first program is the U.S. Navy's Preventative Maintenance System. This is a program used to coordinate and plan all short- and long-term maintenance performed on equipment and facilities. The programs are designed to support all of the equipment on-board a certain vessel and allow the tracking of all maintenance performed on equipment, whether it is done on a daily, weekly, monthly or yearly basis. This system is what allows the Navy to build ships that have 30-year life spans. It is a program that is continually improved and upgraded.
The second program is the Navy's Submarine Safety (SUBSAFE) program, which was developed following the loss of the nuclear submarine U.S.S. Thresher in 1963. This program is based on quality and defines systems onboard a submarine into three main categories: "SUBSAFE," "Level I" and "Uncontrolled." If a system falls below SUBSAFE or Level I, there are specific requirements placed on the materials used in the maintenance and repair of the systems. The vessels must also undergo specific testing to assure that the systems are 100% operational.
The Navy's efforts to reduce its risks while operating submarines can serve as an example for an oil and gas industry that has room for improvement when it comes to maintenance. Since the Navy adopted the SUBSAFE program, there have been zero submarines lost at sea due to non-combat-related reasons. Before it was introduced, the Navy lost, on average, one submarine every three years.
Similar models will work for the oil and gas industry, which maintains approximately 2,000 offshore structures in the Gulf of Mexico alone that are at least 20 years old. Instituting these programs can lengthen the expected life of these and other assets by years and help realize their maximum return.
There are thousands of miles of pipeline and cables, for example, that can be better protected and supported to reduce long-term maintenance. And the vast fleets of watercraft in use, from small work boats to large self-propelled pipelay vessels, will last beyond their design life with proper maintenance programs.
In order to reap these benefits, however, the industry must undergo a major mind-set shift regarding risk management. There needs to be a focus on operational as well as technical risks and the programs need to incorporate inspection, repair and maintenance.
Having a program in place that mitigates the potential risks of equipment failure, asset damage and major project over-runs can result in lower insurance premiums, lower overall capital investments and a higher return on investment. Without these changes, there is the potential for more lost revenue, lost assets and lost lives.
There is good news, however. With the vast pool of talent that exists in the sector, there is no reason it cannot improve its risk management efforts. But the process must begin immediately and include the following five components.
1. Time
Unfortunately, time is a factor in any effort to improve risk management. It can take anywhere from six months to two years to build and implement a complete system. Starting now is the best way to ensure that time line is as short as possible.
Moreover, following implementation, there must also be continuous review and upgrading to the system to keep up with technology and equipment changes. The time commitment never actually ends.
2. Capital Investment
There must be a financial commitment to the success of the program from the top down. This includes investing in the right personnel and utilizing the right technology to design and build the system.
There must be an understanding by senior management that the return on the investment is going to be seen in fewer breakdowns in equipment and longer life cycles of both equipment and facilities. This, in turn, is going to be seen in more revenue-producing uptime, less downtime and greater efficiency.
3. Training Programs
Prior to implementation, there must be a program to train employees on how the system works, expectations of the personnel and the best way to maintain an accurate picture of the status of equipment and facilities. There must also be a training program for newly hired employees as well as continuous training to maintain worker proficiency.
4. Learning from Others
As with the SUBSAFE example, there are many sectors to borrow from. In some cases, this can be taken literally: hire personnel who have extensive experience in risk management in other, similar industries. This knowledge can be extremely valuable to the oil and gas industry. Sometimes, the best way to break the cycle of "this is the way we have always done it" is by bringing someone aboard who has never done it that way.
5. Alternative Solutions
There must be an attitude from the top down that looks for better methods and technologies for inspections, maintenance and repairs. Management cannot simply accept the norm. Complacency must be examined and fought. The bottom line is that the best, most efficient way to solve a problem may not be to use a system or technology that has been around for decades.
There are many alternative approaches to solving problems that may arise on a project. Take, for example, a pipeline project that requires supports, stabilization or protection; concrete mats and mechanical supports are not the only option. There are other proven technologies that exist and do not need to be replaced upon subsequent inspections.
As with everything in risk management, sometimes the key is just a mind-set shift. Fortunately, this requires no investment--just a willingness.