Report: climate change impacts on risks in the oil and gas industries

Over three quarters of the world's oil and gas companies surveyed believe inevitable climate change could impact their business: increasing downtime, system failures and safety; but only 19 percent are taking action, says a new Acclimatise report backed by IBM.

"The Oil and Gas industry is an important contributor to our society and economy, so if anything impacts the industry it could well impact people at home, at work, on the move, or even their personal finances," said Allan Roberts, IBM's Industrial Strategy & Change Leader, IBM Global Business Services, UK & Ireland. "While oil and gas companies are typically well run and have systems for monitoring risks, they have been exposed to problems with their major projects and operations in the past. Evidence in the report shows companies may not be fully appreciating the risks posed by climate change or have in place responses which are robust."

The report titled ‘Global Oil & Gas - The Adaptation Challenge’ is based on the Carbon Disclosure Project's annual request for investor information that was sent to the world's largest 128 oil and gas companies globally (based on market capitalisation). Analysed using the Acclimatisation Index Methodology, the report identified the top five impacts of climate change and the industry implications.

Top five industry impacts of climate change

Increased pressure on water resources: Concerns over changing rainfall patterns, water shortages, poor water quality, drought and flooding is significantly increasing the demand for water. Growing competition for available resources could create operational problems for companies which rely heavily on water for oil and gas production. The demand may also create conflicts with local communities and other water users throughout the world changing the risk landscape for oil and gas companies. Nearly all companies surveyed did not appear to recognise the risk landscape is changing - only 6 percent reported knowledge of potential civil and geo-political risks and 3 percent identified adverse risks for local communities.

Physical asset failure: The report revealed that many existing plants and equipment have been designed on the basis of historic climatic conditions and may not withstand changing environmental conditions. Fluctuating temperatures can affect efficiency and performance of physical assets leading to transport disruption, damaged buildings and increased operational delays and costs. Only 6 percent of respondents indicated they were taking actions to manage disruptions to off-site utilities (energy, communications, water and waste treatment).

Employee health and safety risks: Volatile working conditions in extreme environments and physical assets which are potentially not suitable for the changing climatic conditions have the potential to impact the health and safety of employees. However only 1.5 percent of respondents reported to incorporate climate change considerations into their health and safety risk assessments. Employer and public liability insurance cover may be compromised if companies fail to take climate change into account during health and safety risk assessments.

Drop in value of financial assets: To meet the growing demand for energy, oil and gas companies need to continue securing investment for new exploration, production and manufacturing. Potential investors and stakeholders are placing greater importance on the business impacts of climate change as the risks impact cost and revenue drivers. Insurance costs could potentially rise because of greater chances of physical plant damage due to weather events, an issue only recognised by 10 percent of respondents. The current reported value of proved reserves may also be affected by companies failing to take into account the full impact of climate change. This could result in changes to the disclosed value of reserves which has major financial implications.

Damage to corporate reputation: As knowledge and awareness of climate change grows, any failure to monitor and report the impacts of climate change on social and ecological resources is increasingly likely to harm a company's reputation. Contractual relationships that do not adequately foresee and manage risks driven by climate change, may damage the company's reputation with stakeholders as the risk of parties turning to litigation increases.

"It is difficult to justify the position taken by any company that fails to assess the vulnerability of existing and future assets to acute and chronic changing climatic risks, given the information we now have," said John Firth, chief executive officer and co-founder, climate change adaptation specialists Acclimatise. "Companies that develop an integrated approach, recognising that we no longer have a stable climate, will be the winners. This is not merely an environmental issue, it is about bottom line consequences and the future viability of oil and gas companies."

Read a full copy of the report.

•Date: 6th Nov 2009• Region: World •Type: Article •Topic: Operational risk
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