Crude oil price volatility is among the largest business risk that oil and gas companies in India face. This is followed by unstable policy regime, managing costs and risks emerging from technological advancements.
According to the 2009 Ernst & Young business risk report, released on Wednesday, instability in policy regime makes the business scenario uncertain for both national oil companies and international oil firms. ?Fragmented energy policy creates ambiguity, forcing oil and gas companies to repeatedly make decisions in uncertain environment and deters long term planning. The policy requires review in order to balance competing goals of security of supply, affordability, meeting demand growth and climate change considerations.? It said.
The oil and gas sector has been impacted globally by the economic downturn which has created new risks for the industry that threaten the near-term survival and prospects of oil and gas companies, according to the report.
Says Anjani K Agrawal, Partner, Oil & Gas practice, Ernst & Young, ?Volatility around oil prices and exchange rate fluctuations should be built into companies? risk management framework. Strengthening internal risk management processes to protect margins is key concern facing Indian players. Even for the NOCs, this aspect must receive due attention, in the overall national interest as well, despite the loss sharing arrangements worked out by the government. Oil and gas companies need to ensure that their risk management policies and procedures allow them to react and respond quickly to unexpected events.?
Further, the current economic slowdown has brought greater emphasis on managing costs for companies to secure their present. Managing costs poses a big challenge for Indian companies as squeezing costs is critical in the face of fluctuating demand and cyclical pricing (the challenge in 2009 is to mange costs in order to preserve margins). Efficiency enhancements of technical as well as business processes, remain a key opportunity for most Indian players.
The 2009 global report, based on interviews with some of the sectors? leading CEOs, analysts, commentators and academics, identified access to reserves as the number one business risk for the oil and gas sector, up from fourth place in 2008; while uncertainty around energy policy moved up from sixth to second position, followed by a new entrant in third place price volatility. Languishing in sixth was human capital deficits, identified as the number one business risk for the sector in 2008, reflecting the easing of hiring pressures in a downturn.
Increasing impetus on environmental issues and stringent fuel quality norms have accentuated the technological risks refiners face. ?Technological capability of refineries is also required to be addressed in a timely manner.? the report added.