Risk management involves identifying, evaluating and prioritizing risks. This process is then accompanied by coordinated resource application to minimize and control the impact of hazardous event arising from those risks. Moreover, the process intends to maximize opportunities to improve processes while assuring the organization that the hazard does not negatively reflect on the business goals and objectives (Van Thuyet, Ogunlana, & Dey, 2007). The oil and gas industry is riddled with complex processes that are high-cost, lengthy in their execution and involve high risks. Risk management is thus a critical application in this industry, as it assures business actors that their interests within the business are secured with minimal possibility of hazardous events (Aven, Vinnem, & Wiencke, 2007). In this paper, a discussion of the 4Ts of risk management are discussed, with specific focus on the oil and gas industry.
There are four main ways in which risk is dealt with within the discourse of risk management. Risk avoidance is the first such method. This involves directly avoiding an activity that could increase or carry risk. For instance, an industry player in the oil and gas industry could avoid buying property where it conducts its activities, thereby removing the legal liability that comes with the ownership of property (Van Thuyet, Ogunlana, & Dey, 2007). Avoidance, although seemingly a good answer to risk, is not adequate, as it could result in the loss of opportunities for the organization. These opportunities may hold real opportunity for gain if the risk was accepted. For instance, failing to engage in business so as to avoid the risk of loss also locks out the business from gaining profits. While risk avoidance is favorable for low-risk companies, it also locks players within the oil/gas industry from accessing potentially profitable business.
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Risk reduction is an alternative risk management mechanism, where hazardous processes are optimized to reduce the severity of losses in cases of an adverse occurrence. By optimizing the risks, the organization is able to balance between the positive and negative aspects of the risk, thereby enjoying the full benefits of the activity. It is well-known that oil/gas industry players have accepted some level of risk so as to successfully operate in various scenarios (Aven & Vinnem, 2005). For instance, BP endured a level of risk to operate in the Gulf region to successfully produce petroleum.
An organization can also choose to transfer risk to a third party, such as an insurance company. In this mechanism, the pure risk involved in a hazardous activity is contractually transferred to a third party, thus reducing the liability of the owner in a hazardous situation (Kryukov & Moe, 2007). In such a situation, the insurance company (or any other contracted third party) is responsible to pay a commensurable amount to the policy holder for the damage that has occurred against their interest. This is also applicable in the case of oil/gas industry players, where expensive equipment is often insured against damage or destruction.
Lastly, there is risk retention which involves accepting a particular risk simply because the cost of insuring is higher than the cost of retaining the risk (Baker, Ponniah, & Smith, 1999). For instance, war is an example of risk that has to be retained, as it is not possible to determine the extent of the risk. Moreover, it is also not possible to charge premiums for the effects of war, as they are often too large to quantify. As a result, this is a risk that the organization has to retain. In case of the occurrence of the hazardous event, then the organization has to meet its own costs with regards to the losses incurred.
In conclusion, the application of risk management mechanisms within the oil and gas industry is widespread. It is meant to address current market requirements, including risk planning, evaluation and minimization. As seen above, four main mechanisms are presently available for industry players, including examples of their daily practice.
References
Aven, T., & Vinnem, J. E. (2005). On the use of risk acceptance criteria in the offshore oil and gas industry. Reliability Engineering & System Safety, 90(1) , 15-24.
Aven, T., Vinnem, J. E., & Wiencke, H. S. (2007). A decision framework for risk management, with application to the offshore oil and gas industry. Reliability Engineering & System Safety, 92(4) , 433-448.
Baker, S., Ponniah, D., & Smith, S. (1999). Risk response techniques employed currently for major projects. Construction Management & Economics, 17(2) , 205-213.
Kryukov, V., & Moe, A. (2007). Russia's oil industry: Risk aversion in a risk-prone environment. Eurasian Geography and Economics, 48(3) , 341-357.
Van Thuyet, N., Ogunlana, S. O., & Dey, P. K. (2007). Risk management in oil and gas construction projects in Vietnam. International journal of energy sector management, 1(2) , 175-194.
