Sound enterprise-wide risk management (ERM) programmes comprise various tools for top executives of companies to deploy in ensuring that they anticipate impending threats and the potential impact of such threats on shareholder value and market capitalisation, a report by H. Pierson Associates Limited, has revealed.
This, the report noted, involves actively ensuring that risks are properly identified, assessed, monitored, and mitigated.
Overall, the report added that ERM involves creating a risk-intelligent culture that keeps the firm’s decision makers effectively engaged in the risk management process.
“Companies in the Nigerian oil and gas sector have experienced significant challenges within the last several months. These challenges have brought to the fore, the imperative for heightened levels of ERM practices by operators within the sector. Some of the risks that have plagued the oil sector include sharp declines to date in crude oil prices in the upstream sector and uncertainty in the future direction of these prices. These pose great Market risks to sector players.
“Under this setting, several oil companies that had made expansion and growth plans, are now dogged by Strategic Risks at this time. Some of such plans were backed by funding arrangements that in themselves had embedded exchange rate and interest rate risks. With the uncertainty that has long plagued the passing of the Petroleum Industry Bill (PIB), business and investment decisions have also remained fuzzy for many. This has further heightened significant Strategic risk for many sector players,” the report stated.
It further stated that, “Overseas, in order to grow their revenues, several E&P companies embarked on acquiring or finding new reserves. An interesting and popular new way of doing that has been through shale formations (“fracking”), to the extent that the output of rigs in shale formations accounted for most of the oil production growth in America. Unfortunately, the break-even point here is about $70 per barrel as against current prices of below $40 per barrel. This throws up interplay of Strategic and Market risk.
“Beyond market and strategic risks, compliance risk has dealt its own blows on the sector, such as with a company like Afren, while reputation risk finally sealed its faith. On a day-to-day basis, the industry also faces significant Project risks as well as operational risks – attributable to people, processes, systems and external events. The above provide a small glimpse of the risk issues that face oil firms.”
The report noted that while an embedded risk management framework does not necessarily immunise an institution from these risks, “it enables the institution more effectively forecast and evaluate the risks it faces, as well as identify procedures to seek to avoid or minimise their impact. For our Nigerian oil companies, the benefit derived is in institutionalising the practice of identifying these and other potential risks in advance, analysing them and taking precautionary steps to mitigate the risks and the adverse impact on the firm’s earnings and capital.
“For our chief executives and their teams therefore, a sound risk management framework and embedded practices, become a primary tool for minimising the adverse effect of uncertainty on pre-defined business goals and objectives. This function must quickly evolve to become very close to the ear and heart of the board of directors.”