Considering the increased complexity of energy projects as
companies are entering a new technological era marking the end of
"easy oil", there is a growing concern about the real preparedness
of companies to deal with the new risks they are facing. The
potential severity of those risks due to the important damages
caused to the environment and their possible impact on populations
explain this apprehension. Furthermore, the mis-handling of recent
catastrophes by large energy companies - as well as the largely
unpublicised leaks - have cast serious doubts as to their ability
to prevent severe accidents from occurring and if they do to
control their development .
Though most energy companies have now put in place a risk
management organisation and rigorous risk control systems, mostly
to comply with new laws and regulations, the lessons drawn from the
recent past indicate that it did not result in much improved safety
performance . In fact compliance is not
enough; it does not guarantee that risks are effectively under
control . Most accidents are explained by
transgression of safety rules and procedures, excessive risk taking
or simply risk blindness. It demonstrates that risk management
rules and procedures may exist but are not always taken seriously
enough within organisations. Why is it so? Partly because efforts
made in this domain are not reflected in the value of the company
but rather have a negative impact on usual financial performance
More or less, preventive measures aiming at reducing the risk
exposure of the company have a cost, and therefore contribute to
the deterioration of performance indicators, whereas there is
usually no clear assessment of their positive impact. Hence there
is an incentive to postpone or just ignore safety measures. For
instance postponing an expensive maintenance programme may be the
solution to achieve a targeted return on equity or preserve the
level of operating cash-flows for the current year, yet it may
prove dangerous. Would the resulting increased risk exposure due to
poor maintenance be identified and reported the decision might be
On the exhibit below we indicate the components of the "net risk
exposure" for a company which is made of contingent assets and
liabilities. Prospective losses can be treated as contingent
liabilities for a value equal to the expected losses1; on the other side guarantees
acquired from insurers or resulting from contractual agreements
with other parties should be seen as "contingent assets"
compensating for a part of expected losses. The difference is the
net risk exposure.
Developing an efficient risk management programme would indeed
reduce expected losses and/or increase guarantees and hence
increase the equity value2. If
investors are well informed on a perfect market, this risk
reduction would be reflected in a "marked to market" value of the
firm. But indeed rather than perfect information ambiguity
dominates. Moreover financial analysts who are expected to provide
investors with relevant information do not seem to pay much
attention to the issue as anyone can observe when reading their
notes. Yet, when potential losses can represent billions of euros -
as it is the case for energy companies exposed to the risk of
fatalities and severe environmental damages - it might be a good
way forward. In particular, any attempt to value the quality of
risk management, would be a good move. Arisk management performance
indicator would inform stakeholders about the probability and
severity of potential accidents, have an influence on conditions
negotiated with business partners, on the cost of debt and
eventually on the share price. Undoubtedly companies would regard
such an indicator seriously.
In this domain, insurers can have a major role since they are
normally familiar with risk assessment and pricing. Considering the
increasing cost of claims in the energy industry - particularly if
liability caps are increased or even removed  - they may well think of it.
 Oil and gas spills in North Sea
every week, papers reveal,Richard
Cookson Tuesday 5 July 2011.
risk management lessons from the BP Deepwater Horizon
catastrophe, June 2010.
 Patrick Gougeon,
Ignore risk management at your peril, Financial Times, March
Raise BP liability cap to $10 billion?
1. For well diversified
shareholders this would be the appropriate measure assuming
accidental risk are not correlated with the market portfolio.
2. Only if the additional
cost incurred is lower than the decrease in expected loss.