Risk Advisor Optimistic on Sector’s Ability to Face New Challenges

THE CONFERENCE CALLER: BDO risk advisory partner Andrew Hillbeck told the opening day audience at the RIU Good Oil Conference in Perth that we are seeing a new generation of complex risks come to the forefront for oil and gas companies. By Jack Baker

Hillbeck, who has 20 years’ experience in risk management and expertise in the natural resource sector, outlined what he believed are the fresh challenges facing the industry.
 
Hillbeck spoke of the recent geopolitical trends companies had to take to take into account.
 
“The oil and gas sector crosses borders … we are entering a new era of geopolitical risk,” he said.

“The risk of populist and nationalistic agenda, have taken many business leaders by surprise, adapting to the new era will require balancing business models and supply chains with opportunities to mitigate risks.
 
“Demographic and cultural factors behind Brexit, Trump and even at a local level, the thought of a WAxit (Western Australia exit) will influence macroeconomic trends.

“Events in one geography will ripple through to impact other geography in the sector.

“Traditional business-flows around the world are likely to be impacted by stronger levels of nationalism.”
 
Hillbeck referenced Aon Risk Solutions executive director Sarah Taylor’s comments on political risk in the sector, saying the changing global landscape, driven by trade protectionism, populist policies and sanctions, is likely to have a significant impact on emerging and frontier markets.

According to BDO’s 2017 global risk report, cost management has been the biggest challenge facing the natural resource sectors globally.

Hillbeck said after spending the last 10 years looking for cost recoveries and cost savings in companies’ contracts and joint ventures in the sector, that this is a consistent theme for Australian-based organisations.
 
“Whilst oil prices in 2017 have improved marginally from 2016, cost management activities and initiatives since late 2014 seem to be taking effect,” he said.

“So, I expect the risk to reduce, however, it will never go away.”

With the exception of Karoons’ sale to Origin in the September quarter of 2014 the average company cash balance has been steadily declining since June 2013 to just over ten million at march 2017.
 
“All the cash flow indicators do not represent a recovery but I look forward and I have seen the preliminary data to the next ASX quarterly cash update that is released in the coming weeks,” Hillbeck said.

Consumers are far more concerned today with environmental impact of organisations and their behaviour.

Speaking on bribery and corruption in the natural resources sector, Hillbeck noted recent overseas legislation, largely centred on payment to government officials that extends beyond US and UK-based entities.
 
“Non-compliance can result in substantial penalties including jail sentences and fines,” he said.

“Also, organisations implicated may face compromised reputations, damaged public confidence and subsequent loss to important markets and contracts.”

Hillbeck provided the example of a recent announcement from an American mutual fund that it had sold all its shares in Petrofac due to ongoing investigations into the company by the UK Serious Fraud Office.
 
Oil and gas companies consistently feature in organisations being investigated for bribery and corruption.
 
“While once considered the cost of doing business when looking for inroads into new and emerging markets, the legislation has shown it can put you out of business,” Hillbeck said.
 
Hillbeck touched lastly on cyber-risk in the sector, explaining that cyber attacks are increasing, expected to increase further and continually catch businesses unaware, particularly those who believe it will not happen to them.
 
“To mitigate against cyber-risk, it’s critical that your organisation become more cyber-resilient, there’s some simple things to consider,” he insisted.

“Needing to know the value of your assets and your data, where they are, who has access to them, who is responsible for protecting them, how well protected they are and is the level of protection within your risk appetite, when you have been breached and most critically, what to do when you have been breached.”

While elaborating on these new challenges in the sector, Hillbeck noted that corporate culture was vitally important to risk management.

In his experience coming into the sector, he said he was astonished at the security culture of natural resource companies and this is reflected on their risk culture.

The responsibility from risk management, he said, starts at the top, and businesses have to be sure that their management aligns with their culture.