Risk Management in Abu Dhabi National Oil Company

Abstract

The primary goal of this research project was to determine how companies in the oil and gas industry could overcome various risks that may affect their operations. The researcher used information gathered from secondary sources to inform the study. It is clear from the report that risk management in the oil and gas market is an undertaking that should not be taken lightly by the players. Any company operating in this industry may be faced with economic, natural, operational, or political risks all of which may be disruptive. These pitfalls should always be anticipated because they can occur at any time. Some of them such as price volatility, natural, and political disasters are out of control of a firm. However, that does not mean a firm should not anticipate their occurrence and effectively plan for their mitigation. Risks emanating from administrative and operational mistakes are directly under the control of an organization. Issues such as negligence, poor coordination, limited training, among others should be avoided at all times. The paper has identified some recommendations that should be considered by ADNOC to help it overcome various risks, especially the ongoing drop in the international oil price.

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Background

The oil and gas industry is one of the most important industries not only in the United Arab Emirates but also in the entire world. It has a direct impact on almost all other sectors because energy is critical. Companies operating in this business enjoy huge profits, especially when oil prices skyrocket due to increasing global demand. However, Yuan (2012) warns that the industry also faces numerous challenges that may affect the normal operations of a company. The oil and gas business is one of the most volatile industries in the world, which exposes it to many risks. One of the most common risks that the industry faces is the volatility of oil and gas price. For the last three years, it has been on a downward trend due to increased supply in the market. Some of the top oil exporters in the world are forced to continue supplying the products in the market even when the price falls, which in turn, affects it further. Major accidents in this sector are also frequent, which may be dangerous to the survival of the affected firms. Products in this market are highly inflammable. Cases of fire outbreak are common, especially when safety standards are not properly observed. Some of these accidents are caused by natural phenomena such as massive earthquakes, cyclones, or floods. Others are caused by administrative and operational mistakes. Sometimes political instability may be a major risk that a firm has to deal with, especially when it results in insecurity and lawlessness that hinders normal operations of a company.

Risks in the oil and gas sector may have varying impacts on the affected companies depending on the magnitude, level of preparedness, size of a firm, and many other factors. Price volatility is one of the worst risks that this market is faced with periodically. Over the last three years, companies in this industry have been trying to grapple with the falling oil worth. The fall of oil price means that a firm’s revenues and profits are decreased. The decreased financial muscle forces the affected entity to avoid some activities as it tries to reduce expenses. It may be forced to cut expenses on marketing, research, and other important activities that could have taken it to the next level in its operations. Accidents, whether caused by natural disasters or operational mistakes can be devastating depending on the magnitude and level of preparedness. Fire outbreak within the premises of a firm can cause serious damage to the product and other assets of an entity. It may disrupt the normal product delivery to the customer. The failures may affect customer loyalty. Such upsets may also result in the injury of the employees. Other than losing a valuable employees, a company may also be taken to court and forced to pay the affected parties in such accidents, especially if it is proven that, the mishaps were caused by administrative negligence. This paper seeks to determine ways in which companies in the oil and gas industry can manage risks that they face during their normal operations with special focus on Abu Dhabi National Oil Company (ADNOC).

Problem Statement

Top companies in the global oil and gas business such as the Abu Dhabi National Oil Company have been hit by a prolonged reduction in oil prices over the last three years. When this problem started, the players in this industry expected that it would not last long, especially given that the business had enjoyed a long period of increase in the global prices. However, it is now clear that this problem may last longer than expected. Other risks such as explosions, fire outbreak, natural disasters, and political instability are also real problems that may strike at any time. Survival of a firm depends on how capable it is to manage these risks. As Lis, Neßler, and Retzmann (2012) warn, when price war starts, it can be so destructive that even the largest companies can be forced out of the market. Currently, this is the main problem that oil and gas companies in the global market are facing. Some of them have opted to cut down their operations by laying-off some of their employees and closing down operations they believe are less beneficial to them. Others are reducing allowances to their employees as a way of reducing operational expenses.

Yuan (2012) warns that the strategy that a firm uses should be in line with its strategic goals. When a wrong move is used, such as eliminating some of the most talented employees or demoralizing them through reduction of their salaries and allowances, then the problem can be compounded instead of being solved. These problems should be addressed carefully to find ways of remaining sustainable without creating other problems for the company. The affected companies need to make a smart move, always knowing that for every action they take, the reaction should lead to the desired outcome. That is why this study is important. It will offer solutions to these firms in the oil and gas industry on how to overcome the challenges they face in their normal operations. The following is the research question that this project seeks to address:

What are the most appropriate strategies that local firms, especially ADNOC, can use to overcome various challenges such as accidents and reduction of oil prices?

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Scope of the Study

Risk management in the oil and gas business is a very sensitive topic that may attract the interest of many stakeholders. The government may be interested in such a report to help it know how it can help to protect the industry during such challenging times when oil and gas prices remain low. Companies in this business would want to know how they could be sustainable in their operations despite the increasingly challenging environment in which they operate. Other scholars may also be interested in the findings of this study. As such, it is necessary to define its scope. This study was primarily a desktop research. It means that data used was collected from secondary sources. The researcher collected information from books, journal articles, and reliable online sources. The study was not based on primary data collected from respondents. Although the researcher considered primary data important for this study, the time available made it a less desirable approach of collecting data for the study. The researcher used books and articles published locally and internationally. That approach was critical because as we try to solve the local problems in the United Arab Emirates, it is important to look at how the same problems have been solved in other countries. With a global approach, it will be easier to solve the local problem.

Goals of the Study

The oil and gas business is the most critical industry in the United Arab Emirates. The public-private partnership has helped in diversifying the economy, especially the massive investment in the infrastructure by the government. However, the industry is still the single most vital foreign exchange earner in the country. As such, it is important to find ways that this market can be cushioned effectively against some of the forces such as the fluctuating international oil prices. The primary goal of this study is to come up with practical solutions for the affected companies that can help them overcome various risks in this business. The following are the specific objectives that the study should achieve:

  • To identify specific risks that companies in the oil and gas industry face in their operations.
  • To identify strategies that various companies are currently using and the effectiveness of these strategies
  • To come up with the most appropriate strategies that local firms, especially ADNOC, can use to overcome these challenges.

Literature Review

In this section, the researcher will focus on the published sources to investigate what other scholars have found out about this issue. Risk management in the oil and gas business is a sensitive topic that has attracted the attention of many scholars. They have looked at various risks, how they were managed, and their consequences to the affected firms. The section will provide insights on how ADNOC- and many other oil and gas companies in MENA region and at the global level- can overcome various challenges.

The 1988 Occidental Petroleum Piper Alpha

Piper Alpha was an oil production platform owned and operated by Occidental Petroleum in the North Sea, about 120 miles northeast of Aberdeen in Scotland (Pitta, (2015). The platform was initially designed for oil production. It was one of the largest oil production platforms in the region at that time. However, the management introduced add-gas production after a short while. Piper Alpha accident is one that arose directly from operational mistakes and lack of coordination and training among the employees trusted with its operations (Mannan & Lees, 2005). During routine maintenance, some valves controlling pressure in the gas section were removed. It was supposed to be replaced by the employees in the next shift, but that did not happen. It led to massive leakage of gas at a very high pressure. The entire safety system was designed to deal with fire outbreak because it was originally meant to produce oil. However, the leakage of gas led to a huge explosion, an eventuality that was not expected when designing the safety measures. The accident led to the destruction of the entire rig, which was consumed by the fire. The accident had a massive impact on Occidental Petroleum, which owned the rig at the time of the explosion. It is reported that 167 people died from the accident (Flin, O’Connor, & Crichton, 2008). Thirty bodies of those who were on the rig at the time of the explosion were never found. It was insured at the cost of $ 3.4 billion, which made it one of the costliest accidents in the oil and gas industry.

How the company managed the crisis: It is critical to note that although the Piper Alpha accident remains the deadliest and one of the costliest offshore accidents in the oil and gas industry, the company has not suffered a lot from it regarding suits (Priest, 2007). It was also cushioned from the direct financial loss when the accident occurred because it was insured. Indeed, it lost one of its most important rigs, a number of its trusted employees, and had to deal with the massive reduction of products delivered to the customers. However, the fact that the facility was fully insured helped the company to overcome the crisis without experiencing major financial challenges.

The 1989 Exxon Valdez Oil Spill

According to Leacock (2005), Exxon Valdez is one of the worst maritime accidents in the oil and gas industry. It was in March 1989, when an oil tanker known as Exxon Valdez- owned and operated by Exxon Shipping Company- that was bound for Long Beach in California struck a Bligh Reef at Price William Sounds in Alaska (Larabee, 2000). At the time of the accident, the ship was carrying 53.09451 million gallons of oil, out of which 10.8 million gallons were spilled in the high sea. Although no one died from the accident, it led to massive environmental pollution. It disrupted the aquatic ecosystem in an estimated 11,000 square miles of the ocean. It also affected 1,300 miles of the coastline, making it impossible for people to use the beaches for recreational and economic activities. Many aquatic animals such as fish, seals, and birds among others died due to the oil spillage. Although the company was able to clean up the oil from the sea, it took long to do so, and many people were directly affected by it. It is estimated that Exxon spent over $ 2 billion to clean up the spilled oil in the affected areas (Wiens, 2013). It spent another $ 1 billion to pay damages to people who were affected by the oil spillage and to the environmental bodies.

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The company was also faced with a punitive suit for its act of negligence that caused the accident. It was established that the ship had issues with maintenance. The management had failed to address some issues that led to the mistake, which occurred at sea. It was also established that the captain in charge of the ship was drunk at the time of the accident. That was partially the cause of the poor judgment at the time when it occurred. The court held that the management failed to supervise its employees, resulting in lack of proper coordination that was also blamed for the accident. When the case was taken to court, Exxon was instructed to pay $ 5 billion in punitive damages, besides the $ 287 million in actual damages (Lee & Bridgen, 2002). However, the company appealed against the amount set as punitive damages. After a series of appeals lasting over 13 years, the entity was finally instructed to pay $ 507.5 million for punitive damages and all the legal costs associated with the case.

How the company managed the crisis: The management of Exxon responded very promptly to the accident as soon as it took place. It took a personal initiative to clean up the sea, knowing that it was fully responsible for the environmental pollution. Although several aquatic animals were lost due to the accident, the quick action taken by the company reduced the magnitude of the calamity. The firm also appreciated that a number of people were affected by such a mishap either directly or indirectly. It arranged with J.P Morgan to ensure that funds were made available to compensate the affected parties as fast as possible (Hamilton, 2008). The third strategy was to prepare for the court battle against the punitive damages. Knowing that it has settled individuals and corporate affected by such an accident, it set forth to fight high punitive damages that were set by the lower courts. After years of court battles, it succeeded in paying about 10% of the initial sum set by the lower courts. When factoring in inflation over the past 13 years, the firm indeed paid less than 10% of the initial fine that had been set by the lower courts.

The 2002 MV Prestige Accident

The oil spillage by MV Prestige is considered one of the worst cases of maritime pollution in the oil and gas industry. The single-hulled ship had a deadweight tonnage of about 81,000 tones. At the time of the accident, the ship was carrying a cargo of 7,000 metric tons (McNally 2017). When the ship was at Galicia, northwest of Spain, it encountered a serious storm that caused one of its twelve tanks to burst on November 13, 2002. It started leaking petroleum products to the sea. Knowing that the ship would sink if urgent measures were not taken to save it, the captain requested help from Spanish rescue workers. However, instead of receiving the much-needed help, the Spanish authorities ordered the captain to steer the ship off the Spanish harbor and coastline. The local authorities feared that the ship would pollute their coastline, given that one of the tanks was already leaking. The captain headed northwest as instructed, only to be intercepted by the French authorities keen on protecting their coastline from major pollution. The captain was instructed to head south. However, the vessel was once again intercepted by the Portuguese authorities and stopped from moving further south. The captain and the crewmembers were stranded at sea, with no signs of any help coming from the three countries.

On November 19, 2002, approximately one week after the captain asked for help from the three governments and received none, the ship finally sank. It is estimated that the ship released 20 million gallons of oil into the sea. The Spanish, French, and Portuguese coastlines were heavily affected by the spillage. Fish, birds, and many other aquatic animals died. Fishing in the region and other economic activities were disrupted for over six months as the authorities tried to clean up the sea. The three governments tried to sue the regulatory authorities that had given the ship a clean bill of health, but their suit did not achieve much. Although it was established that the single-hulled ship was not equipped with modern technologies to overcome natural challenges such as major storms, the accident was blamed on the storm. The three governments, especially the Spanish government, were also blamed for failing to act with speed to rescue the ship before that major spillage. The investigators found that over 95% of the spillage could have been avoided if the Spanish authorities acted promptly to save the vessel instead of sending it back to the sea. Their reluctance to salvage the ship made it impossible for the three governments to sue for punitive damages.

How the company managed the crisis: At the time of its sinking, MV Prestige was owned by Mare Shipping Inc of Liberia and was carrying cargo for Crown Resources of Switzerland. The two companies were able to overcome the crisis because both the ship and the cargo were insured at the time of the accident. They were insured against the risk of a natural disaster, which occurred. However, Crown Resources was affected regarding the failure to deliver its products to its customers as scheduled. Although it received the compensation for the lost cargo, it was unable to ensure that its products reached the market in time. It had to find alternatives of transporting a new set of products to the market once again using a different vessel.

The 2010 Deepwater Horizon Oil Spill

The Deepwater Horizon oil spill of 2010 remains one of the worst accidents in the oil and gas industry in the recent times. According to Eargle and Esmail (2012), Deepwater Horizon was a semi-submersible, floating, and mobile drilling rig, which could operate in water up to 3,000 meters deep. At the time of the explosion in April 2010, it had been in operation for ten years. The rig was designed and built by Hyundai Heavy Industries of South Korea but fully owned by Transocean. At that time, it was chartered by British oil giant, BP (Freudenburg & Gramling, 2011). The well was located in Mississippi Canyon of the Gulf of Mexico, approximately 66 km off the coast of Louisiana (Ramseur, 2011). On the fateful day of April 20, 2010, at about 9:45 in the evening, it is reported that a high-pressure methane gas from the well rose to the drilling rig, which then caused ignition and subsequent explosion that engulfed the platform (Hagerty & Ramseur, 2010). When the accident occurred, about 126 employees were on board the rig. Eleven people were presumed dead, and their bodies were never found while 94 others were rescued from the accident scene. The accident led to a spillage of 4.9 million barrels of oil into the sea, making it one of the worst oil spillage in the petroleum history. It resulted in massive environmental consequences. The figure below shows the impact it had on the coastal line in the Gulf of Mexico:

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Environmental impact of Deepwater Horizon oil spill 
Figure 1: Environmental impact of Deepwater Horizon oil spill 

As shown in the figure above, the accident had a devastating impact on the environment. It largely destroyed the ecosystem in the Gulf of Mexico. The company faced numerous suits after the accident and in November 2012, it pleaded guilty to two counts of misdemeanors, 11 counts of manslaughter, and felony charges. The company agreed to make a settlement of $ 4.525 billion in fine. The company also faced numerous other suits and in February 2013, it reported that the accident had cost the company more than 42.2 billion in fine, lost revenues, and other payments. It was mostly because the courts ruled that the accident was primarily caused by BP’s gross negligence in its management of the rig.

How the company managed the crisis: The Deepwater Horizon oil spillage had a devastating impact on BP (King, 2010). The company was blamed for the accident that occurred and had to bear its full cost. It is reported that the company had to pay tens of billions of dollars to individuals, corporate bodies, and the American government for the deaths, injuries, closed businesses at the beaches and in the high seas, and the massive environmental pollution. The company’s image in the global market was also affected, especially in North America where a section of the civil societies called on the Americans to boycott its products because of the effect it had on the environment. To recover from the crisis, BP had to sell many of its assets, especially the upstream factories, to settle the bill. In November 2010, a few months after the accident, BP was forced to sell 60% of its stake in the Pan American Energy at the cost of $ 7 billion to Bridas Corporation. It was meant to help the company meet its urgent financial needs as it was under pressure to act on the piling suits.

In August 2012, it sold Carson Refinery, which was considered non-strategic based on the challenges the firm was facing at that time, to Tesoro at the cost of $ 2.5 billion. In February 2013, the company was once again compelled to sell its Texas City refinery to Marathon Petroleum Corporation at an estimated cost of $ 2.4 billion (Clinard, 2016). In May 2016, the company announced that it was selling 11% of its stake in Castrol India to local and international investors at a fee estimated to be $ 328 million (Clinard, 2016). The company has sold many upstream factories since the accident occurred in an attempt to recover from its impact. It is currently considering a suit against Transocean Ltd, which was partly responsible for the accident but never suffered as much as the company did. It is seeking compensation for the damages caused by lost revenues, massive negative impact on its image and brand in the global market, and lost finances arising from the numerous suits in the United States.

Volatile International Oil Prices

According to Yuan (2012), the volatility of international oil prices is currently the biggest challenge that oil and gas businesses have to deal with in the market. Just like any other product, the price of oil and gas in the international market is defined by the forces of demand and supply. When the demand for the product increases, the price is also likely to rise. It means that many people will be willing to pay higher prices for the product as it becomes scarce. On the other hand, when the demand goes down, the prices automatically fall. The traders are compelled to sell their products at low prices because the quantity demanded by the customer has dropped. The problem in the global oil and gas industry is largely blamed partly on technology, other than the fall in demand for the product. Countries around the world are developing rapidly. Many emerging economies in Asia, South America, and Africa are industrializing. The population in these countries is also increasing. It is natural to expect that the demand for energy in the global market would be on the rise. Indeed, a report by Yuan (2012) shows that over the past decade, the demand for energy at the global level has been increasing consistently because of increase in population and the increasing reliance on technological equipment, which run on different types of fuel. Naturally, the increasing energy demand would be expected to boost the international oil and gas prices. However, that has not been the case, especially since 2014. The figure below shows the volatility of the oil prices for the past ten years.

Volatility of the international oil prices 
Figure 2: Volatility of the international oil prices 

As shown above, 2008 saw the oil prices peak at almost $ 140 a barrel. Then there was a sharp drop in the late 2008 and early 2009 when the prices reached about $ 40 a barrel. It was understandable because of the global economic recession that hit many major economies around the world. However, it was a major shock to many individual oil and gas companies around the world. They had to find a way of adjusting, and some had to rely on direct incentives from the government to survive (Krauss, 2017). However, the problem did not last long as major economies around the world started recovering from the recession in 2010. The price of oil started increasing once again, and it peaked in mid-2011 when a barrel of oil was going at about $ 118. Although the price remained volatile, it was a constant small drop and rise from 2011 to mid-2014.

Since then, there has been a consistent drop in the oil prices to date. Over the last three years, international oil prices have barely been above $ 50 a barrel. Given that, the commodity was sold at almost $ 140 a barrel in 2008 and factoring in inflation, firms in the oil and gas business are forced to sell their products at about 30% of what it used to a few years ago. The current trend shows that the price may remain at all-time low for some time and individual companies will have to find a way of dealing with this major problem. However, it is important to look at the cause of this major problem that is threatening the existence of many companies in the oil and gas industry.

According to McNally (2017), technology has played a major role in the sudden drop in the international oil prices. A few decades ago, many countries, especially the United States and Russia, we’re unable to tap into their oil reserves onshore and offshore because of the limited technology. At that time, it was more costly to extract and process oil in many oil reserves than to purchase. However, technology improved in this field, and it became easier to extract oil locally in most of the developed economies. Russia suddenly was able to surpass Saudi Arabia in the production of petroleum products because of the improved technology. The United States also became a dominant player in the supply of oil and gas in the international market. Canada and China also experienced a significant increase in their production of oil as they embraced the use of modern technology.

The United States, China, Japan, and Europe were the top markets for the leading oil and gas companies. However, the introduction of modern extraction and processing technologies meant that these countries were becoming self-reliant (Devarajan & Mottaghi, 2016). The United States could now afford to sell oil in the international market, besides meeting its local needs. It meant that foreign firms had to find a way of remaining relevant in the market. As the supply of the product increased, the only strategy that many companies considered was to slash the price. That was the only edge that leading companies in the world could use to protect their international market share. Although the energy demand is indeed on the rise, the level of supply exceeds it, forcing companies to lower their price.

According to Hughes (2014), technology has also affected the demand for oil and gas as the primary source of energy. Many companies are keen on reducing their reliance on oil and gas because of the volatility of its price in the international market. Some of these companies are moving towards alternative sources of energy. The advanced technology is making this move simpler and less costly than it used to be in the past. Solar energy is becoming an alternative source of energy in many companies. Using advanced technology, it is becoming simple to tap the solar energy and use it instead of using oil and gas. Wind energy is also growing in popularity. In developed countries such as Japan and Germany, solar energy accounts for a significant proportion of energy made available at the national grid. They have made it possible for individuals and corporate to sell their excess energy to the national grid as a way of promoting the production of renewable energy. Families are also embracing bio-fuel instead of gas for cooking and heating. As McNally (2017) says, when substitute products become more readily available and more affordable, the demand for a given product will fall, causing a reduction in its price. It means that although there is an overall increase in the demand for energy in the global market, the availability and affordability of alternative energy sources reduce demand for oil and gas.

Environmental concerns have also partly contributed to the fall of international oil prices. According to Hughes (2014), the oil and gas industry has had a devastating impact on the environment over the past centuries. Major offshore spillages from tankers and rigs have had a serious impact on the aquatic ecosystem. The Deepwater Horizon spill of 2010, the MV Prestige accident of 2002, the Exxon Valdez spill of 1989, and the Piper Alpha of 1988 are some of the significant accidents that led to the release of millions of gallons of oil into the sea. Land and air are also polluted by these products during accidents or when used. Many lives have also been lost in some of these major accidents. In a report by McNally (2017), the use of fossil fuel is blamed for the global warming and climate change. Extreme climatic conditions being witnessed today such as the cyclones in parts of North and South America and Asia and unprecedented drought in Africa are partly blamed on global warming.

Scientists believe that excessive emission of carbon into the atmosphere is causing the global temperatures to rise. As the global society become more literate and knowledgeable in the field of science, they have come to embrace green energy. The use of renewable energy such as sun, wind, and bio-fuel is seen as more trendy in the society today. Many view it as a noble gesture towards protecting the environment. People in cities such as Copenhagen in Denmark, Amsterdam in Netherlands, Portland in Oregon, Montreal in Canada, Tokyo in Japan, and Rio de Janeiro in Brazil now prefer using bicycles to using cars and buses. They are motivated by the desire to protect the environment and to remain physically fit by engaging in physical exercise through riding bicycles. All these factors have contributed to a significant decline in the demand for oil and gas in the international market. The product is increasingly becoming less desirable, compared with green energy, as the global society trying to find ways of making the world less polluted than it currently is based on the scientific records.

How the company managed the crisis: Most of the companies operating in this industry have been forced to find ways of dealing with this problem. According to Dafir and Gajjala (2016), one of the strategies that most of them have embraced is to cut down on their operations. Many companies have embraced layoff as the best way of managing the problem of reduced revenues caused by reduced oil prices. They try to ensure that their profit margin is protected, and the only way of doing that is to cut down the size of their workforce. Other companies have embraced mergers and acquisitions as the most appropriate way of gaining strength in the market and reducing levels of competition (Devarajan & Mottaghi, 2016). A few have opted to sell upstream companies, which they consider less attractive, as discussed in the sections below. Whichever approach a firm embraces, one of the most critical principles is to maintain the revenue stream, protect the company’s profitability, and enhance sustainability in the operations.

Major Themes Classification

In the review of literature, the focus of the researcher was to identify the most appropriate strategies that local firms, especially ADNOC, can use to overcome various challenges such as accidents and reduction of oil prices. It was important to answer the research question posed in the methodology section of this paper. It is now necessary to look at the major themes classification as presented in the review of literature. The review provides three major steps that should be followed by oil and gas companies when faced with major problems in this volatile industry.

Understanding the risk: The first step is to understand the risk. It is not possible to solve a problem that is not clearly understood. A firm should make an effort to understand clearly the risk that it is faced with at each given time. The source of the problem should be stated, and its impact on the firm explained. It makes it easy to understand what the firm should be ready to overcome.

Classifying the risk: After understanding the risk that a firm is facing, the next step should be their classification. As shown in the review of literature, oil and gas industry is often faced with numerous risks. Major accidents cause by operational or administrative lapses, accidents caused by natural calamities such as earthquakes and cyclones, and volatile international oil prices. The classification helps the affected company to know the best approach that should be taken in managing each risk based on its class.

Managing the risk: The last stage is to manage the risk with the view of averting its negative consequences on the firm. Each class of risks has unique approach that must be followed at the management stage. Risk associated with operational and administrative failures requires readjustment of various internal strategies to improve efficiency. Risks caused by external forces must be managed by enhancing organizational preparedness to reduce their impact on the firm. The management must work very closely with the junior employees when addressing these risks to have a holistic approach.

Methodology

When conducting research, Tracy (2013) advises that one needs to come up with an appropriate method of collecting data from various sources, analyzing it and coming up with informed findings that can help make correct conclusion and recommendations. An academic scholar needs to outline the method used in the entire research so that readers can understand the basis upon which the recommendations were made. It is also critical for a researcher to discuss challenges faced when collecting data from various sources and ethical considerations observed.

Secondary Research

According to Vargas-Silva (2012), it is important to define sources of data when conducting research. In this study, the researcher opted to collect secondary data to inform the conclusion and recommendations made at the end of the project. Bernard (2013) advises that it is critical for a research project not to duplicate already existing information. Every study should provide new insights, confirm or reject the existing beliefs, or address controversies in a given field. In many cases, it is always appropriate to do that by collecting data from both primary and secondary sources. In this study, however, the researcher decided to use secondary sources of data because of the practical constraints discussed in the section below. Secondary research, sometimes called desktop research, involves relying on published sources to inform the study (Bryman & Bell, 2015).

The school library was one of the most critical places where the needed materials were obtained. The researcher obtained several books and journal articles that proved relevant to the research. The internet was another valuable platform from which the researcher obtained data. Using key phrases such as risk management, oil and gas industry, price volatility, accident in oil and gas market, oil and gas market, and market competition, the researcher was able to find relevant materials for this study. The biggest advantage that the internet had over the school library is that it contained recently published materials. It was also easy when it comes to accessing the needed material, unlike the library where sometimes one is informed that a given book or article is with another student. The online platform also made it possible for the researcher to access newspapers published on different dates about the changing oil prices over the years and how different companies have been dealing with the problem. The researcher was also able to access videos that explain different risks in the oil and gas market. Information collected from this platform and that which was obtained from the school library was adequate to help make a conclusion and to propose recommendations.

Importance of Secondary Research

Secondary research is important on many fronts. First, it eliminates cases where one makes claims without a supporting justification. It offers a basis upon which one can conclude over a given issue. Secondly, in cases where one is not intending in collecting primary data- like in this particular case, secondary data becomes the only source of information. It acts as the only justification for all the claims and recommendations used in the study. Through a review of the literature, a researcher will be demonstrating to the readers that the document is not a duplication of already existing information. It shows that the researcher appreciates the works done by other scholars and is keen on providing new knowledge on a given topic.

Ethical Considerations

Ethics should always be observed when conducting an academic research (Picardi & Masick, 2013). The researcher was keen on observing the set rules and regulations when undertaking this project. The school has a strict policy when it comes to the issue of plagiarism. As such, the researcher ensured that information obtained from other sources is referenced accordingly using American Psychological Association (APA) referencing format. No information was directly lifted from other sources and directly planted in this document without proper citation. The researcher did not seek any help from other persons in collecting data, analyzing it, writing the report, and proofreading it. The only help was obtained from the library officers regarding obtaining the right materials for the project. Although the researcher has a personal opinion over this issue, given that the researcher currently works at one of the leading oil and gas companies in the country, it did not influence the conclusion and recommendations made in this report. The researcher remained objective throughout the study. The need to remain objective was informed by the fact that this document may be helpful to other scholars who may be interested in conducting further studies in this field. As such, the information had to be not only informative but also very accurate in describing the forces in this industry.

Practical Constraints

When the researcher was conducting this research project, a number of practical constraints existed, which is worth noting at this stage of the research (Wang & Groat, 2013). Time was one of the major constraints in this project. As an academic research, it was necessary to complete this project within a given timeline. Failure to deliver the paper within the set time would have resulted in penalties. That is why the researcher opted for the easiest way of collecting data for the project. Another challenge that the researcher met was access to locally published literature. Most of the books in the school library and the online platform were published by scholars in the United States, United Kingdom, Canada, Australia, and other western countries. It made it difficult in gathering relevant local information. However, the researcher was able to overcome these challenges. For instance, local and international newspapers proved critical in providing the information needed for this study.

Discussion

According to Dafir and Gajjala (2016), the energy sector remains one of the most lucrative industries in the world, with many of its companies appearing in the top 10 largest firms with regard to revenues. However, the industry is also one of the most unpredictable ones. Companies operating in this market are often faced with various risks that they have to understand how they can manage to remain operational. From natural disasters in the high seas to administrative and operational mistakes that cause accidents and volatile oil prices, these companies must find a way of overcoming them all. Managing risks in the oil and gas market is critical for a company’s survival in the market. In this section, the researcher will look at the most appropriate solutions that companies such as ADNOC can use to overcome various risks in this sector.

Managing Accidents

Accidents can broadly be classified into two categories: natural disasters or administrative/operational mistakes. It is difficult for a company to predict when a natural disaster would strike. The nature and magnitude of such disasters often vary. However, Hughes (2014) says that it is always important to plan for such eventualities. Within the company, there should be systems and structures that can help employees respond promptly in case of accident to reduce or eliminate loss of lives and damage to property. The employees should also be properly trained. It is also very advisable for an organization to take insurance against risks whose occurrence may have a devastating impact on its operations. A firm often has full capacity to avoid administrative and operational accidents. Regular maintenance, proper coordination among all the concerned stakeholders, and training of the workforce can help avoid accidents. Negligence among employees and administrative staff should be avoided to evade possible accidents within a firm.

Managing Price Volatility

According to Dafir and Gajjala (2016), one of the most common ways that some companies react to the falling oil prices is to reduce their production activities. Since 1974, the volatility of oil prices has been witnessed in the global market, where a sharp fall is often followed by consistent recovery over a short while (Devarajan & Mottaghi, 2016). For companies that have been in the industry for a while, they often know that their survival depends on their ability to withstand the price drop for a certain period. As such, many often consider reducing their production as a way of cutting down their costs. They take a short break during such times to re-evaluate their operations, upgrade their systems, and come up with superior operational strategies. However, McNally (2017) warns that such strategies only work when the problem is short-lived. It is only effective when the drop in price lasts just for a short time because a firm cannot afford to stay out of the market for a long time, especially when it has loyal clientele base. This approach of managing price volatility could not be applied to address the recent problem of dropping oil prices that have persisted over the last three years.

Some organizations often consider increasing their production rate instead of cutting down operations when the international oil prices fall (Devarajan & Mottaghi, 2016). Saudi Aramco, a Saudi Arabian gas company, has often used this strategy whenever the oil prices drop. Instead of slowing production, the strategy seeks to maintain the revenues of the company. The only way of achieving the same revenue when the oil price drops is when a firm can increase the amount of products availed in the market. When international oil price started falling in 2014, many companies believed that the problem would not last long. However, when it persisted, it became obvious that players in this industry had to find a way out of this problem. Many companies started increasing their production to help them protect their revenue stream. This survival tactic is very dangerous when a company’s oil reserves are dwindling.

According to McNally (2017), the recent problem has lasted long, and many companies are now looking for long-term solutions. Some have considered layoffs as the only alternative to solving the current problem. Indeed, it is true that the reduced oil prices have significantly reduced revenues of many oil and gas companies. Their profit margins have subsequently reduced. To ensure that they remain operational, they have to develop ways of lowering their expenses in line with the reducing revenues. Many companies in the MENA region and other oil-producing countries have slashed the size of their employees. Cases of redundancies must be eliminated at such difficult moments. Non-strategic employees such as brand ambassadors have also been eliminated by many of these companies. Their primary goal is to operate with a lean workforce and as efficiently as possible. Every employee must justify his presence at the firm. The management must be convinced that everyone in the payroll is bringing in significant amount of revenue or helping the company avoid being driven out of the market. Abu Dhabi National Oil Company is one of the entities, which have opted to have lean personnel as a way of cutting down its expenses. The company has been forced to retire a number of employees whose work can be done by their colleagues or who can wait until such a time when the market forces are favorable.

During boom seasons, many oil and gas companies often engage in research and extension activities (Devarajan & Mottaghi, 2016). They try to find ways in which they can remain dynamic in the industry and impact positively on the environment and lives of people in the areas where they operate. However, the approach changes when the problem of reduced profitability sets in. Many companies have restricted their research to specific areas considered very fundamental to their survival. These firms are keen on eliminating any unnecessary expenses. Their increased focus on protecting the environment through creative but expensive actions is no longer given priority. Most of their research is currently focused on understanding market forces, how to deal with the stiff competition, and strategies that can help them penetrate new markets as they try to improve sales in response to the reduced profitability.

The strategic alliance is sometimes considered the best approach to managing price reduction in the market. As Hughes (2014) says, reduction in the price of a commodity is often caused by excess supply in the market and stiff market rivalry. As two or more entities struggle to increase their market share, they are forced to reduce their prices. Many companies have often considered strategic alliance as the best ways of overcoming such problems. Mergers and takeovers are often common during such period. ExxonMobil is currently one of the largest and most stable oil companies in the global market. At one time, Exxon and Mobil were fierce market rivals in the North American market. Their competition was hurting their profitability and making it difficult to achieve their strategic goals. They spent most of their time and resources thinking of ways of outsmarting each other in the market.

The two organizations finally came to appreciate that they had to learn to how to work as a team, or be forced out of the market as individual entities. They decided to form a merger in 1999, which resulted in the current ExxonMobil. Currently, it is one of the most dominant players in the industry, controlling a significant market share in North America. It is a strategy, which has been tried by many companies. Some of these organizations often enter into a short-term partnership such as Shell and BP once did, to help them overcome common problems they face in the market. Others consider acquiring smaller companies to help them expand their operations. Irrespective of the approach that an entity takes, it is always beneficial when two competing firms come together to operate as a single unit. They not only strengthen their ability to overcome the challenge but also gain the power of negotiation. The customers’ ability to make choices in the market is reduced. As such, it becomes possible for a company to have the capacity to define the price of its products in the market.

According to Álvarez, Sánchez, and Urtasun (2017), when the market forces increasingly become unfavorable because of risks such as reduced oil prices, some companies opt to sell upstream or downstream branches to remain with those that they believe are strategic and able to overcome the challenges they face in the market. Some companies control the entire supply chain, from extraction, processing, transportation, and distribution of oil and gas to the customers in the global market. Enjoying such a monopoly in the supply chain helps a firm to avoid cases of over-relying on other companies to obtain the product or deliver the same to the customers. It is fully in control of all the activities. However, that remains beneficial only if all the stages of the production bring in desirable income. When the market becomes volatile, it may force a company to sell some of the upstream or upstream companies. Yuan (2012) notes that some firms are now venturing into green energy sector to increase their revenues.

Adoption of Concepts and Ideologies

It is important to adopt some of the conventional models when managing risks faced by oil and gas companies. Some of these models and ideologies have proven effective in managing change and dealing with disruptive market forces. It is necessary to look at those, which are relevant in the context of this research.

KPMG model risk management approach: Also known as, Enterprise Risk Management, this model proposes a systematic approach to managing various risks that oil and gas companies may face in their normal operational processes. As shown in the figure 3 below, the whole process starts with the assessment of risks before it can be quantified and aggregated. Then the risk management team must monitor the problem and report to the relevant authorities. The next step is to control the risk to minimize its impact on the firm.

Volatility of the international oil prices
Figure 3: Volatility of the international oil prices

McKinsey 7s model: The model focuses on how internal elements of a firm should be aligned effectively to enable a firm manage various risks it faces in the market. In this model, the emphasis is placed on the need to ensure that the strictures, systems, style, staff, skills, and strategies (7s) are aligned to achieve the desired organizational goal (Hughes, 2014). Whenever a risk has been identified and properly classified, these seven elements must be aligned and focused on the problem. The figure 4 below shows the elements of the model.

McKinsey 7s model 
Figure 4: McKinsey 7s model 

Boston consulting group: When using BCG to manage risks, Dafir and Gajjala (2016) say that a firm must understand product life cycle. Sometimes the problem may be caused by the lifecycle of a product hence it makes it necessary to reconsider its relevance. This model has four classes of a product. Products, which have high market share and high growth rate, are stars and deserve maximum level of investment. Products with high market share but low growth rate are cows and should be considered the main source of income for a firm. Products with low market share but high growth rates need to be reevaluated to determine their relevant to a firm. Products with low growth rate and low market share are dogs that must be eliminated. By classifying a product into any of the four classes, it is possible to know the best approach that should be taken in addressing it. Figure 5 below identify the four classes.

Boston consulting group
Figure 5: Boston consulting group

Ernst & Young model risk management: The model is very instrumental in managing uncertainties such as the unexpected fall in the price of a product in the market. In this model, the responsibility of addressing the risk is assigned to the line managers. These managers should start by reviewing strategic objectives of the company, and through that process identify major risks and uncertainties. After identifying the risks and uncertainties, these managers are required to determine the duration that it can take to address the problem. The line managers should then prioritize the goals of their department, knowing which risks must be addressed first based on the prevailing internal and external forces. The last stage is to focus on the risks with limited impact on an organization. Figure 6 below identifies the process.

Ernst & Young model risk management
Figure 6: Ernst & Young model risk management

PwC’s model of risk management: This model proposes six stages that a firm can use to manage various risks that it may encounter in its operations. The first stage is to set objectives. Even in the midst of a crisis such as the price volatility that is affecting oil and gas companies, the first step is to set objectives. The objectives will help identify the path that a firm should follow in achieving its objectives. The second step is to identify risks that may hinder a firm from achieving the set objective (Clinard, 2016). The third step is to assess the risks to identify its magnitude and the likelihood of occurrence. The fourth stage is to respond to the risk using appropriate structures, systems, and skills. The fifth stage involves control activities conducted during the time of responding to the risk. The last stage is to monitor the outcome of the entire process to determine whether the desired objective is achieved.

PwC’s model of risk management
Figure 6: PwC’s model of risk management

Conceptual Model

Managing risks in the oil and gas industry are becoming a critical role that managers need to understand to ensure that they protect their companies from the related consequences. According to Dafir and Gajjala (2016), time has come when every company will need its model of managing risks that it faces in its operations. The models discussed above were developed by industry experts and global consulting groups based on various forces of the market that they monitored. They are effective in various ways and can be applied under different settings. However, unique problems may require unique solutions other than following a universal pattern of addressing similar problems. It is also important to note that every organization is unique in its ways, making it undesirable to use common solution to all problems. Successful companies are now coming up with their models of managing various risks.

According to Hughes (2014), coming up with a unique model of risk management involves understanding both the internal and external forces of the environment. The management unit must understand how the internal capabilities can be used to manage the known and the unknown risks. ADNOC is facing similar problems as most of the leading oil and gas companies in the global market. It is heavily affected by the fluctuating international oil prices, and is prone to various accidents and other risks discussed above, just like its competitors in the market. However, the firm’s internal capabilities are not similar to that of its competitors. That is why it needs its unique model of managing risks. Figure 7 below shows the proposed ADNOC’s 4-stage risk management model:

4-staged risk management model 
Figure 7: 4-staged risk management model 

As shown in the proposed model above, the first step in risk management is to have regular environmental scan. The management of ADNOC should ensure that enough funds are set aside specifically for regular environmental scan. During the scan, it is important to appreciate that the risk may be from either the internal or the external environment. The second stage is the identification of the risks. This process involves proper definition of risks, the magnitude of its consequences, possible causes, and areas that will be affected. It will be critical for the risk management team to assign monetary value to the possible consequences of such risks to help in the planning process. The report should be forwarded to the relevant management unit within the company.

After getting the report about the identified risk, the relevant management unit and a team of employees will develop risk management plan. The stage is very critical because it involves managing the risks using the least possible resources. When developing plan, the team will identify strategies that need to be employed based on the nature of the risk. A team of employees who will be involved in the execution of the strategy should be identified. The role of each employee should be clearly stated so that they understand what needs to be done. In the plan, it should be clear how much should be spent to address the problem. The final stage is the implementation. At this stage, the selected employees will undertake the specified activities using assigned resources within the set time, and under close coordination of the relevant managers.

Conclusion and Recommendations

An organization must understand how it can overcome various risks when operating in the oil and gas industry. As shown in the discussion above, accidents can be prevented through proper planning, coordination among the operational and administrative staff, commitment, intolerance to mediocrity and negligence, and proper maintenance. A company can opt to manage price volatility through layoffs or elimination of less strategic operations. Some firms consider selling upstream companies during difficult moments in the market. The strategy helps them to receive more revenues and to shelve off less profitable activities. BP is one such company that has embraced the strategy to help them overcome problems they face in the market. The company has been identifying and selling off some of its less-strategic upstream companies. The entity has sold off various processing plants in the United States and other North American countries. It has also sold some of the gas retailers in various parts of the world. The move has helped the company to focus on activities that bring in more money other than spreading out its operations. It has also avoided operation in areas that can significantly be affected by various market forces. Despite the many challenges that BP has faced since the 2010 Deepwater Horizon oil spill, the company has managed to remain one of the dominant players in this business. ADNOC should consider the following recommendations to overcome risks in the oil and gas industry:

  • It is advisable to establish strategic partnerships with other firms, especially during times when oil prices are low. Such strategic partnerships reduce market rivalry and empower a company to define market price of its products.
  • The management of this company should consider eliminating activities, which are costly but less profitable in its overall operations. All stakeholders should be involved when making such important decisions.
  • ADNOC should consider exploring into the renewable energy sector as a way of increasing revenue streams and profitability in the market. Solar and wind energy sectors are very promising.
  • The management should have proper systems and structures, including properly trained employees, to help it overcome any possible cases of accident in its operations.

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