As a result of the increase in prominence of oilfield services companies and the dependence of national and international oil companies upon them, the risks which oilfield services companies face have become risks to the whole sector, according to a report.
Deloitte which released a white paper on Energy and Resources in the Middle East titled ‘Ghost in the Machine’, the third in a series of ‘Managing Scarcity for the Future’ monthly white papers, touched upon those oilfield services risks and the potential ways of mitigating them.
The Deloitte white paper states lists 11 risks that could hinder the ability of oilfield services companies to perform successfully at a sustained level. For each of these risks the Deloitte, the white paper suggests mitigating actions.
“The competitive position of an oilfield services company reflects its management strategy, as well as its attitude towards risk. The risks we have identified in the Deloitte whitepaper, together with customer base, growth strategy and financial durability determines the degree of its vulnerability to demand fluctuations which greatly affects performance,” said Kenneth McKellar, partner and Energy and Resources leader at Deloitte in the Middle East.
The risks include Industry risk; the systemic exposure to fluctuations in core commodity prices and demand for services. Country risk; the exposure to external country factors inherent in the environments in which oilfield services companies operate, including security, political risk, legal risk and transparency, bribery and corruption, exchange rate and local infrastructure.
Project specific risk include the risks pertaining to the execution of projects to customer specification, including technical risk, budget and schedule risk, performance guarantee levels, safety risk and environmental risk.
Level of demand for services; such demand is linked to the level of capital and operational expenditure by the oil and gas industry.
Oil and gas commodity prices; long-term expectations of the price of oil and gas may have an impact on the level of new investment in the industry and may therefore affect demand for services. Financial performance may be more leveraged to the price of oil and gas if there is co-investment in upstream oil and gas assets, and financial results may be impacted.
Availability of essential manpower; the availability of skilled personnel remains perhaps the most significant challenge facing the oil and gas industry.
Security; even in a single location, security risk remains heightened, given the strategic importance of activities conducted by oilfield services companies.
Business continuity; oilfield services are potentially exposed to natural hazards, acts of terrorism, war and civil unrest that could impact infrastructure, through the unavailability of physical assets or access to systems and data.
Exchange rates; significant movements in exchange rates could impact financial performance.
Challenges in sovereign laws and contract enforcements; although this risk can be less pronounced because the oilfield services company is a subsidiary of a national oil company, oilfield services companies operate in a number of countries where their ability to rely upon contracts for protection is potentially reduced by the opaqueness of the local legal system.
Breach of legal and regulatory code; there is potential financial and reputational risk resulting from a breach of local or international laws, particularly in respect of behavior relating to bribery and corruption.
“Only those oilfield services companies with sophisticated product lines right across the Exploration and Production value chain, together with geographically diverse operations that enable them to support customers’ full drilling programs, have the strength of cash flow to weather the many plausible risks,” McKellar added.