HomeIndustry SectorsFinance and PolicyRisks associated with new areas of energy exploration

Risks associated with new areas of energy exploration

30 May 2013 –  The demand for energy worldwide is expected to increase by 1.6% a year over the next 20 years. This is being driven by population and income growth. Developing markets are expected to account for the bulk of the energy demand increase.

Although the fuel mix is expected to shift away from oil and coal towards renewables, mimicking the growth of nuclear power in the 1970s, renewables and other alternative sources are expected to account for less than a fifth of world energy use by 2030.

Thus while the global energy sector is playing an increasingly pivotal role in stimulating economic recovery, the industry’s failure to mitigate the risks associated with the new frontiers in exploration and production could potentially jeopardise future growth.

Energy firms therefore need to adopt more sophisticated risk management strategies to counter the odds of low-likelihood, but potentially catastrophic, disasters associated with Arctic exploration, ultra-deep-water drilling and shale gas extraction.

Andrew George, chairman of Marsh’s global energy practice, says, “The global energy sector is driving struggling countries out of the economic mire, while sating surging demand for power in China, the Middle East and north Africa. However, myriad financial, physical and political risks are converging to create a risk landscape that is perhaps the most complex – and challenging – in the sector’s history.

“A single event, such as another deep water incident in the Gulf of Mexico, has the ability to transform the fortunes of the entire sector; political volatility globally has created a fragile operating environment for many organisations and their personnel. The sector also requires significant capital investment due to rapid project inflation costs and the financial outlay associated with pursuing challenging reserves. Stakeholders need to be increasingly focused not only on ensuring the required return on investment is achieved, but that the associated risks are managed appropriately.”

Will Bruce, a principal consultant in Marsh Risk Consulting, adds, “The velocity of risk in these new frontiers of energy exploration and production is exceptional. Improving operational resilience, business continuity planning and firmly embedding strategic decision-making in the boardroom is vital for energy firms, to protect both their investments and global economic recovery as a whole. One misstep could dramatically affect an entire industry.”