Quality risk management in oil and gas

Our multinational Client asked Xylem Energy to explore the Operational Risks faced by Construction companies in today's business and regulatory environment, and how the right information technology can help mitigate those risks. Operational risk is experienced at the corporate level, but these considerations mainly focuses on what impacts can have every day on Construction Plants activities.

The purpose of this reflection is to encourage and facilitate the development of a more systematic, prioritized, risk-based approach to quality management to support the principles of Good Construction Practice and to complement existing quality practices, requirements and standards.

Quality in this context is commonly defined as fitness for purpose. Construction activities are about generating information to support decision making while protecting the safety and rights of participating subjects. The quality of information generated should therefore be sufficient to support good decision making.

Each step of the business process is setting the stage for decision making by one or more of the parties involved. Quite a number of these decisions are formalized by legislation and by design applicable standards.

The challenge for Oil & Gas industry is to manage the political and other risks that are unavoidable in the industry with effective returns.

DECISION MAKING PROCESS, VALUE OF INFORMATION AND FLEXIBILITY

Many complex decision problems in petroleum exploration and production involve multiple conflicting objectives. Under these circumstances, managers have a growing need to employ improved and systematic decision processes that explicitly embody the firm’s objectives, desired goals, and resource constraints. Over the last two decades, the advances in computer-aided decision making processes have provided a mechanism to improve the quality of decision making in modern petroleum industry. Walls (1996) developed a decision support model that combines the toolbox systems components to provide a comprehensive approach to exploration petroleum planning from geological development through the capital allocation process.

When it comes to information related to assets the issue of data quality hits oil and gas companies. These are typical complaints that I collect:

Unless a company follows a strategy of complete risk avoidance and stays solely within its national boundaries, it will be faced with the need to consider political risk when investing outside its home country. The challenge therefore is to manage the political and other risks that are unavoidable in the industry. How well these risks are analyzed and managed will often be key to a project's success. Classic political risk in the form of expropriation and nationalisation remains a threat, although it is not as prevalent as it once was. Remember, that expropriation or nationalization does not in and of itself violate international law, provided there is prompt, fair and adequate compensation to the investor. Risks of contract repudiation such as was experienced by Enron in India, and so-called "creeping nationalisation" as evidenced by punitive taxation, burdensome labour and environmental regulations, price and monetary controls, pose a greater and probably more likely risk today.

• Supplements