Mitigating Risk Through Contracting Teams in the Oil and Gas Sector

Jim Bergman

The oil and gas industry is inherently fraught with risks due to its complex operations, volatile markets, and stringent regulatory environments. Contracting teams play a crucial role in mitigating these risks to ensure the safety, profitability, and sustainability of projects.

Here are some key strategies and best practices that contracting teams in the oil and gas sector are employing to effectively manage and mitigate risks:

Comprehensive Risk Assessment

The foundation of effective risk management is a thorough risk assessment. This involves identifying potential risks, evaluating their impact, and prioritizing them based on their likelihood and severity. Contracting teams conduct detailed hazard identification studies (HAZID) to pinpoint potential risks across all project phases, from transportation and refining to exploration and production. They use quantitative and qualitative methods, such as fault tree analysis (FTA) and failure mode and effects analysis (FMEA), to assess the probability and impact of identified risks.

Centralizing Data to Remove Blindspots

Far too often, individual functions and business units make their own agreements with suppliers, obscuring holistic visibility and accountability. By serving as the owner of all supplier relationships, procurement maintains enterprise-wide transparency into agreement expiration timelines, performance levels, and risk profiles. Consolidating contracts into a unified repository allows the development of mature procedures applied consistently rather than one-off fixes each time an issue emerges.

Proactive Risk Mitigation

Rather than reacting to sustainability, continuity, or financial issues, advanced planning to get ahead of risks is mandatory. Contracting teams track agreement expiration timelines and rate supplier criticality to align renewal prioritization to operational risk levels. They assess options and implications of “what-if” scenarios, such as a sole-source provider exiting a region abruptly due to geopolitical tensions. Developing playbooks outlining the cross-functional contingency response makes crisis response more orderly.

Environmental Risk Management

Environmental risks are a significant concern in the oil and gas industry, with potential impacts on ecosystems, public health, and company reputation. Contracting teams conduct Environmental Impact Assessments (EIA) for all projects to evaluate potential environmental impacts and develop mitigation measures. They implement spill prevention programs and maintain emergency response plans for oil spills and other environmental incidents. Regular drills ensure preparedness and compliance with local and international environmental regulations.

Financial Risk Management

Volatile commodity prices, cost overruns, and financial mismanagement can pose substantial risks to oil and gas projects. Successful financial risk management strategies are essential for maintaining project viability. Contracting teams develop detailed budgets and financial forecasts that account for potential cost fluctuations and contingencies. They use financial instruments such as futures, options, and swaps to hedge against price volatility and exchange rate fluctuations.  Rigorous cost control measures are implemented to monitor expenses and prevent budget overruns.

Leveraging Technology

Technology is transforming risk management in the oil and gas sector. Intelligent contract lifecycle management (CLM) platforms provide the systematization to standardize documents, establish clause libraries centering compliance requirements, and route agreements for approvals. Removing manual touchpoints gives procurement teams more bandwidth to devote toward value-add activities like ongoing performance improvement versus administrative upkeep. CLM tools deliver AI-powered analytics on agreement metrics, giving procurement an invaluable vantage point to optimize partnerships.

By implementing these strategies and best practices, contracting teams in the oil and gas industry can effectively mitigate risks, ensuring the safety, profitability, and sustainability of their projects. The proactive approach to risk management not only protects assets and reputation but also enhances operational efficiency and business continuity.

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Published by Jim Bergman

Jim Bergman is a commercial contract professional with global experience spanning the USA, Latin America, UK, Europe, China, South Korea, Japan, India, SE Asia, the Middle East, Africa and Australia. He has worked on a wide range of direct and indirect spend categories in numerous sectors, developing a deep knowledge of services, goods and technology procurement and sales. Across this wide array of commodity and services experience, Jim has found the keys to success in maximizing value for money through customer-supplier relationships founded on innovative category management and strategic sourcing practices, key performance metrics and measures, as well as Total Cost of Ownership principles and collaborative contracting tenets. He has shared his knowledge through advisory engagements, as well as in developing and delivering training programs both on-line and in classrooms, in both open-enrollment and internal environments. Jim has assisted his clients through all phases and steps of contracting, negotiation, strategic sourcing and bidding processes, demonstrating value generation in excess of $250 million. His audiences and clients have included over 7,000 attorneys and commercial professionals students from over 1,000 corporations and public-sector entities.

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