According to the World Economic Forum’s Global Risks 2012 report, macro risks will become increasingly complex and interrelated over the next 50 years, as "constellations" of risk overtake singular risk silos in representing serious threats to global prosperity and security.
The purpose of this paper is to consider the evolution of energy risks in the context of the global macro-risk picture; to anticipate evolving high-level energy risk trends that should perhaps ‘loom large’ on the radar screens of industry risk managers; and, to offer insights on potential risk mitigation and treatment techniques.
Never before has the function of energy risk management been more challenging, nor offer those that do it well such significant competitive advantage over those that are merely adequate. Energy sector risk managers need to ensure they have addressed key issues in this new "reality of risk":
- Risk magnitude has grown such that traditional risk transfer capacity may be found wanting unless complemented by new or evolved solutions. The size of an insurance recovery is only half the story: experience has demonstrated that when losses threaten balance sheets, the rapidity of cash injections via insurance indemnities is of critical importance.
- Risks have an increasing habit of ‘compounding’– the ability of a singular incident to ignite innumerable and perhaps unforeseen consequences which, in turn, may emit their own shockwaves. These ‘after-shocks’ may have far greater impacts than the original occurrence. Risk compounding presents myriad challenges to risk managers: it is both difficult to model the consequences and easy to lose control of event management, stabilization and recovery.
- Regulatory and organizational insularity undermines the pursuit of insightful risk management. Effective risk management should recognize the merits of competition but also the value of collaboration. Our own research has shown that energy companies are good at internally cascading the lessons of their own experience but poor at learning from the mistakes or insights of others.
- The ‘Black Swan’ moment. Risk managers should assume that their company will suffer a major loss regardless of the preventative measures in place, and that it may bear little similarity to those appearing on the corporate ‘Risk Register’. This insight drives a very much more expansive risk perspective and one that is an essential guarantor of corporate survival.
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