The energy industry, which has always paid special attention to risk management to ensure safe and reliable operations of oil and gas assets, has faced this year new challenges in managing risks after the Russian invasion of Ukraine.
Risk management – all the processes and precautions to ensure continuity and stability of production and all other operations – now has to cope with increased physical threats to infrastructure, higher risks of cyber attacks, and the impacts of highly volatile prices and sudden tax changes on financial performance. In addition, in the extreme market volatility and very high uncertainty regarding both supply and demand of oil and gas in the near term, companies face more work on managing financial and supply and demand risks.
“In my nearly 30 years of looking at oil markets, I can't think of a time when geopolitically there was as much uncertainty over potential high and low points in terms of prices, supply and demand,” Raad Alkadiri, Managing Director, Energy, Climate & Resources, at Eurasia Group, said in a KPMG insight about the top risks facing the oil and gas industry this year.
The Russian invasion of Ukraine has created a lot of uncertainties about supply, while slowing global economic growth and China’s zero-COVID policy continue to weigh on the demand outlook for the end of this year and well into 2023.
So this year and next, the global energy industry has to contend with heightened geopolitical risks on top of uncertain global economic growth and increased oil and gas price volatility. That is certain to create more work at risk management departments.
The war in Ukraine has had a direct impact on the oil and gas markets, as Russia stifled pipeline gas supply to Europe while the EU, the UK, and the US are banning imports of Russian crude oil and products by sea.
Governments are now looking first to ensure security of supply amid the energy crisis. Just a year and a half ago, decarbonization was the top priority of developed nations and energy investors. But the Russian invasion in Ukraine, the first war fought in Europe since World War II, has drastically changed priorities.
“The world needs a Paris-style agreement for the energy trilemma – not just emissions. That’s what I took away from this year’s ADIPEC conference in Abu Dhabi,” bp’s chief executive Bernard Looney said in early November.
“Yes, societies need an energy system that is lower carbon – that’s imperative. But they also need one that is secure and affordable. And unless we focus on all three parts – security, affordability AND lower carbon – we won’t build an energy system that works,” Looney added.
Along with working to meet current oil and gas demand, companies globally have increased vigilance and are monitoring energy assets more than ever as a precaution to increased risks to their physical integrity. This is especially true for oil and gas assets offshore Norway, especially after the explosions at the Russia-to-Germany gas pipelines Nord Stream 1 and Nord Stream 2 in the Baltic Sea, just outside Danish and Swedish waters. The explosions were caused by sabotage, according to the early findings of the ongoing investigation, Sweden said in the middle of November.
After the explosions, which occurred at the end of September, Norway – Western Europe’s largest producer of oil and gas – posted in early October soldiers from its Home Guard to protect energy infrastructure. Soldiers from the Home Guard provide increased security at petroleum facilities in the counties of Rogaland, Vestland, and Møre og Romsdal, the Norwegian Armed Forces said.
The deployment of the soldiers comes after Norwegian police requested assistance from the Army to prevent incidents. The Army is ready to post soldiers at more facilities if the police request it, the Armed Forces said.
Norway started increasing security at its energy facilities after spotting drones flying over oil and gas assets and after the explosions on the lines of the Nord Stream pipeline in the Baltic Sea.
On September 26, the Petroleum Safety Authority Norway (PSA) of Norway urged increased vigilance by all operators and vessel owners on the Norwegian Continental Shelf, after companies operating offshore Norway had recently given warnings or notifications of a number of observations concerning unidentified drones or aircraft close to offshore installations.
Since the end of September, the Norwegian police have investigated several reports of drones of unknown origin flying over oil or gas processing plants and facilities in the country.
Norway has arrested several people in connection with drones spotted over facilities in the country, Prime Minister Jonas Gahr Støre said at the end of October.
Norway’s police and national security are working together to defend the country against cyber threats, he added.
“It is a real and serious threat, including to the oil and gas industry,” the prime minister added.
Half a world away, in Saudi Arabia, the world’s biggest oil firm in terms of both production and market capitalisation, Aramco, says that cyber security risks are now one of the biggest threats.
“Another emerging challenge is cyber-security. Cyber-attacks are one of the top risks we face at Aramco – on a par with natural disasters or physical attacks,” Saudi Aramco’s chief executive officer Amin Nasser said during a speech at the Global AI Summit 2022 in Riyadh in September.
“But while these attacks are growing in scale and severity, AI is helping fend off some of the threat. So our efforts should not only focus on greater efficiency or deeper customer insights, but also on security and resilience,” Nasser added.
“We have deployed machine learning techniques to predict and prevent safety hazards, monitor emissions, avoid breakdowns, optimize energy use, and predict potential cyber-threats,” Aramco’s top executive noted.
In Europe, cyber risk remains a major vulnerability, according to Akshay Joshi, Head of Industry and Partnerships, Centre for Cybersecurity, World Economic Forum.
“Experts warn that should the energy sector come under significant and sustained cyberattacks, the consequences could be rather devastating. The ongoing war has brought new risks, physical and cyberattacks, often combined as a hybrid threat,” Joshi wrote at the end of October.
Lindy Cameron, CEO of the UK’s National Cyber Security Centre, said at the end of September, “we shouldn’t assume that just because the conflict has played out in one way to date, it will continue to go the same way.”
“There is still a real possibility that Russia could change its approach in the cyber domain and take more risks – which could cause more significant impacts in the UK,” Cameron said in a keynote speech at the Chatham House security and defence conference 2022.
The world and the energy industry entered a new era this year after the Russian invasion of Ukraine. Risk management will be paramount to all energy organisations to protect themselves against financial, physical, supply-demand, geopolitical, and cyber security risks.
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