Energy and Utilities Risk for 2016

Energy and Utilities Industry Sample Hero
Energy and Utilities Risk for 2016

Research Conducted by Protiviti and North Carolina State University’s ERM Initiative

Volatility in equity markets. Falling oil prices. Global terrorism. Escalating healthcare costs. Uncertainties in political regimes in certain parts of the world. Disruptive technological innovation. Expanding regulation and oversight. Shifts in expectations about China’s economy. Strong U.S. dollar. These and a host of other significant risk drivers are contributing to the risk dialogue in boardrooms and executive suites.

Entities in virtually every industry and country are reminded, all too frequently, that they operate in a risky world. Recent terrorism events, perceived adjustments in expectations about economic conditions in China, the rapidly increasing costs of healthcare, and continued concerns about cyberdata breaches vividly illustrate the realities that organizations of all types face risks that can suddenly propel them into global headlines, creating complex enterprisewide risk events that threaten reputation and brand. The rapid and steep decline in oil prices was not anticipated by many players in the energy industry, reminding everyone that they need to expect the unexpected. Boards of directors and executive management teams cannot afford to manage risks casually on a reactive basis, especially in light of the rapid pace of disruptive innovation and technological developments.

In their fourth annual survey, Protiviti and North Carolina State University’s ERM Initiative report on the top risks on the minds of global boards of directors and executives. Our respondent group, which includes 535 board members and C-suite executives from around the world, provided their perspectives about the potential impact over the next 12 months of 27 specific risks across these three dimensions:

  • Macroeconomic risks likely to affect the organization’s growth opportunities
  • Strategic risks the organization faces that may affect the validity of its strategy for the pursuit of growth opportunities 
  • Operational risks that might affect key operations of the organization in executing its strategy 

Energy and Utilities Industry Group – Top Risks for 2016

Commentary

Despite widespread upheaval produced by extreme declines in oil prices globally, this year’s top risks for the Energy and Utilities industry group are consistent with those from 2015, which may be a measure of the experience, competence and steadiness of boards and executive management to address these concerns.

Although many oil and gas companies basically understand the risk environment they face, until recently, they also may have remained in denial about the potential extent of extraordinary declines in oil prices. Across the entire Energy and Utilities industry group, some risk scores in the survey actually declined this year compared to the 2015 results. This likely occurred for two reasons: The full extent of oil’s price drop had not yet occurred when this survey was conducted in the fourth quarter of 2015, and a decline in oil prices does not generally have a net negative effect on most utilities. However, with the subsequent fall of an additional 25 percent in oil prices following the survey period, many companies now find their operational, liquidity and survival options significantly constrained.

If this survey had been conducted in the first quarter of 2016, economic conditions almost certainly would have been rated as the top risk confronting Energy and Utility companies. Oil prices in the $30 per barrel range, combined with a consensus outlook that no significant price rebound is anticipated for an extended period, have forced many companies to replace growth with survival as their top objective. Risk response steps being implemented virtually across the board include large-scale layoffs, major reductions in capital spending, asset sales, restructurings, and bankruptcy filings. For very large energy companies with strong balance sheets, along with risk-tolerant private equity investors and funds, these circumstances produce a wide range of opportunities, as they are well-positioned to endure the current uncertainty in the industry. But there is no clear indicator yet as to when a point of price-risk advantage will be seen.

Regulatory change and scrutiny remains the top risk identified by Energy and Utility companies for the fourth consecutive year. While concerns about regulatory actions to restrict hydraulic fracturing, expand health and safety requirements, and increase environmental enforcement directed at oil, gas and utility operations continue, banking regulations also have begun affecting many oil and gas companies. For example, as oil prices remain low and the value of assets collateralizing bank loans sinks below outstanding loan principals, regulators frequently require lending institutions to withdraw credit, forcing companies to take extreme financial measures to stay afloat.

After a significant rise on the risk scale in 2015, cybersecurity remains a critical risk this year, albeit at a slightly reduced level. Energy and Utility companies are fully aware of the cyber risk environment, as well as the imperative to marshal management and board attention, top technological solutions, and increased investment to protect against criminal, competitive and nation-state threats. In comparison with oil and gas companies, utilities have relatively high public visibility, expansive – and often aged – infrastructure and data networks, and the need to be responsive to regulatory oversight. This continues to drive high levels of cybersecurity protection activities in their organizations. 

For further results and a copy of the overall survey report, visit www.protiviti.com/TopRisks. 

 

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