Risk Management Practices in Oil and Gas in Nigeria

Introduction

The Nigerian oil and gas industry usually face numerous risks, which necessitate risk management principles and practices. This research paper seeks to explore the risk management principles that are applied by Nigerian firms in the oil and gas sector. It will also establish the risk management provisions offered to these firms by the onshore and offshore insurance businesses. The country’s economy relies heavily on oil production as it accounts for export earnings of about 95% and government revenue of about 85%. As a result, managing risks in the sector are important in order to improve efficiency.

Background

Numerous risks are associated with investments in the oil and gas industry in Nigeria. The oil and gas sectors are highly risky (Ejembi 2012). Such possible dangers include piracy, fire, sabotage, oil spillage, gas flaring and oil theft/smuggling (diversion of products). These risks make risk management an important aspect of the day-to-day business in the oil and gas sectors (MBendi 2013). These sectors also face risks. Those ones range from volatile commodity prices that are less connected to basic demand and supply but more to the international socioeconomic aspects, to increased safety, health, and environment pressure. The latter results from the past and recent major accidents, which negatively impact the industry image, the environment, and the social lease. Nevertheless, risks related to damage to properties, injuries to people, business interruption, asset damages are intrinsic and normal in gas and oil business activities. In addition, there are added risks of non-compliance as well as those of key cost overruns for big construction projects, which are common in the current business industry. Moreover, the industry faced dangers such as Stuxnet virus and the current cyber threats that target the oil and gas firms. There has been an ever-increasing wave of attacks on oil vessels as well as crewmembers in the Nigerian waters, which lead to investments losses in the oil and gas sector (Ships & Ports 2013). The International Chamber of Commerce Maritime Bureau indicated in the global piracy report that twenty-seven piracy incidents were reported in 2012, whereby four vessels were hijacked, two hijack attempts, eight fired upon, and two attempted attacks (Ships & Ports, 2013). Such security issues have increased risk of doing business in Nigeria and, according to Shell and Exxon Mobil, security has made Nigeria one of the most expensive oil-producing places to operate in. This highlights the need for risk management practices, which are offered by both onshore and offshore insurance companies. These serious threats and risks negatively influence the profitability and operation of the firms. Insurance companies usually help to mitigate majority of these risks. This paper seeks to investigate the risk management principles and practices applied by organizations in the oil and gas business sector, and the risk management offers provided by both offshore and onshore insurance businesses.

Nigeria has abundant oil and gas resources; it is the third largest in Africa, 10th largest producer in the world, as well as the most productive oil-producer in Sub-Saharan Africa. The Nigerian economy is chiefly reliant on the oil sector that supplied about 95% of its foreign exchange earnings. Its downstream oil sector is also a major one and includes four refineries. The operational and other types of risks have meant that the oil and gas companied operate at less capacity, and this leads to shortages of refined products and the need to increase imports to meet the local demand. The oil and the gas industry also operate in harsh environmental conditions and remote geographical locations. This means that such companies require insurance policies as well to safeguard themselves against risks arising from such conditions. All oil and gas companies usually share a similar goal of necessity to raise production as efficiently as possible. However, failure to safeguard themselves against such risks normally means that this goal is negatively interfered with. Risk management practices by both offshore and onshore insurance companies are important in managing those dangers. Hence, there is the need to determine the extent to which such practices are applied by oil and gas companies.

Nigeria has experienced an increased insurers’ capital base since 2007 together with the implementation of the Nigerian Content Directive, which has lead to the placement of more gas and oil firms with the local insurers. This has resulted to the growth of the industry knowledge base after the constant training, as well as exposure to international underwriters and brokers. Various insurance firms have established oil and gas desks in order to bid for the insurance of the main oil risks, even when they are not yet positioned to quote on the risks. The insurance companies are involved in all the development phases in the oil fields in Nigeria. Nevertheless, most of the involvement of these companies in the country is limited to the exploration stage. Appropriate insurances are usually needed, and they are dependent on the stage in which oil and gas companies and their contractors are playing.

Various risk management practices are evident in different phases of oil and gas production. Before the exploration stage, most companies are required to attain a lease block for drilling. The lease terms usually generally necessitate that a specific minimum drilling research be undertaken. The lease block is expected to be left in the same condition as it was before exploration. The companies involved in this stage, thus, require a public liability insurance policy, which covers all their obligations as contained in any land permits and the lease. In addition, other basic insurances such as motor, employer liability, and property have to be covered in the local market. In the exploration stage, oil firms are required to obtain bids from the contractors to undertake either exploration or survey drilling. Once the optimum drilling place has been obtained after review of the seismic survey, the drilling contractors are engaged, as well as the contracts drawn up. Majority of these contracts between the drilling contractors and oil companies are usually on a “day rate” basis. Some contractors are, however, employed on a “turnkey” basis. Under this contract basis, the drilling company is responsible for the operators’ extra expenses insurance until the hand-over because any control issues fall to the contract’s expenses and such costs usually come out of the fixed prices. If not, the operators are responsible for not only some items that the contractor uses, but also requires insurance for employer liability, Debris removal, pollution and seepage and Marine Third Party. On the other hand, the contractors require insurances on vessels and/or equipment and rigs, employer liability on the employees, Protection & Indemnity (P&I) on vessels and pollution liability.

Insurance is also required on the development stage. This is only undertaken when oil discovery is proven commercially possible. This stage usually requires the construction of proper facilities for producing or partly producing as well as exporting the gas or oil to the consumption or point of sale of the “unrefined” product. The operator usually obtains a principal controlled all risk insurance even when numerous contractors are involved to reduce insurance costs on the immense values. Oil fields usually go into production once wells have been connected into the onshore or existing production or when an offshore platform is installed with complete export facilities. The operator usually requires insurances for covering all personal and/or real property or persons in his care, trust, control or custody or for which he may be contractually responsible as would be listed in the values schedule. The operators also require their additional expense insurance to cover the control cost well, removal of debris/wreck, deliberate well firing, joint venture contingent liability, evacuation expenses, making wells safe, underground control of well, seepage contamination and pollution, clean-up and containment, and extended re-drilling. Furthermore, operators demand general third party’s liability, which covers their operations for any damage to or loss of and/or loss of use of third party’s property such as products liability, personal injury, bodily injury, or any death. The insurance covers, which are being increasingly sought after, include kidnap, ransom, privacy, terrorism, sabotage, war, and loss of production revenue. While various operators opt to cover such exposures under a single policy during the operation phase, construction insurance coverage usually, necessitates specialized wording to accommodate for the outstanding aspects of the construction offshore. In addition, owing to the complexity of contemporary construction projects, it has currently become the practice for one policy to be bought to cover all co-venturers and to provide full cover the contractors for their project work, however, not for equipment and plant that the contractors own.

The subscription market usually almost exclusively provides the needed capacity to underwrite oil, as well as gas businesses. This is especially evident in the upstream sector where the subscription market as a rule controls more that 90% of placements. Oil and gas companies thus place a range of risks with an insurers’ panel and, in order to make sure that sufficient coverage is bought, placements are usually extended to professional reinsurers (Andersen & Mostue 2012). Typically, the companies usually place the business directly with the insurers who might lead an insurer’s consortium, and who negotiates the contract with an energy underwriter or Lloyds’ syndicate through an international energy broker/reinsurance that lays out the terms and conditions. The insurers’ panel takes a certain percentage of the risk (including the local reinsurers share), as well as the balance, is placed in the global market. A regional/local reinsurer may nevertheless be able to obtain shares from the global market given that the security criterion of the global brokers is met. For instance, Africa Re does not only receive business from almost every major broker internationally, but it also puts forward terms for some of the African gas and oil risks that underwriters follow in the global market. Other than reinsurers, Captive and Reinsurance Pools have an important function to seal the capability gap in the oil and gas risks underwriting. Almost every oil majors usually have their individual captive insurance firms. Chevron, Shell, Total, and Exxon-Mobil have Heddington Insurance Limited, Solen Versicherungen AG (SVAG), Omnium Insurance and Reinsurance Company (OIRC) and Ancon Insurance Company respectively. A pure captive is a firm established to insure just the risks of its parent firm; this is mostly evident in the oil industry. Some of the oil firms also usually subscribe to a joint captive insurance firm, mostly to address, for example, where insurance companies cannot be rationally acquired from the commercial insurance markets. Pools are the insurers’ group that as a rule come together to subscribe a capacity for a specific risk underwriting. Business that a Pool receives is shared to every member in line with their subscribed ability. For example, an Oil Pool usually requires every member to give up a proportion of one’s gas and oil business up to the capacity of the pool. The whole business that the pool receives is then offered based on the original terms to the member conditional on all reinsurance protection. The pools are normally created for high-value risks, which are of risky nature and for which there are limited underwriting skills. Pools are suitable for oil and gas risks: for example, the African Oil and Energy Pool, which was established in 1989, by the African Insurance Organization (AIO) and has been significantly successful. The insurance companies in Nigeria are well-positioned to provide their services to the oil and gas companies. Regardless of the generally low competency and capital base, there is an ever-rising keenness of Nigerian underwriters to underwrite gas and oil risks.

Currently, there is limited literature on the risk management role played by non-life insurance firms and life assurance companies in the oil and gas sector in Nigeria. In addition, there are limited studies on risk management practices and principles among these companies. As a result, there is a need to determine the risk management practices among these firms as well as the provisions that insurance firms offer to avert the highly evident risks in the considered sector.

Industry Background

From 2005, the Nigerian oil and gas industry has been falling in terms of production. Firms have not been taking conclusive investment decisions in deep water. Unlike other nations, Nigeria has no onshore-approved liquefied natural gas projects. Consequently, Nigeria is being overtaken fast by other nations. Its production of crude oil dropped to 1.82M barrels in 2009 (MBendi 2013). The continuous conflict has also been a major factor in failure of the industry; this has made much production capability to remain unutilized, especially in the delta area. The nation can produce much oil that could be enough for all, but some greedy groups attack the oil resources thereby forcing a ban on the oil regions. Similarly, theft has been a significant problem with pipes being damaged severely; this caused much loss. Despite the failure to grow, the production of crude oil in Nigeria has no appreciation signs. Nonetheless, petroleum owned by the state made an announcement claiming of some improvements. With a reduction in violence and amnesty from the government, the oil industry is recovering.

The country’s economy relies heavily on oil production as it accounts for export earnings of about 95% and government revenue of about 85% (MBendi 2013). With the consideration of the poor-performing industry, it is questionable how insurance companies in Nigeria have or are helping the oil and gas industry to recover and attain the optimal production levels. This is the motivation behind this research to uncover the risks and insurance and oil and gas companies have been managing it. Consequently, it will be clear the way forward to assist the oil industry towards growth.

Research Aim, Research Questions

The aim of this research will be to determine oil and gas companies, and also insurance risk management principles and practices in offshore and onshore insurance businesses.

Research Questions

The research questions are as follows:

  1. What insurance risk management principles and practices oil and gas companies in Nigeria have adopted
  2. What risk management provisions the life assurance and non-life insurance firms do offer oil and gas companies in the country

Hypotheses

H1 - Oil and gas companies in Nigeria usually apply risk management principles and practices to manage risks

H2 - Local and internationallife assurance and non-life assurance companies offer adequate risk management provisions for companies in the oil and gas sector.

Objectives

  1. To determine the risks associated with offshore and onshore operations in the oil and gas sector
  2. To detail the risk management practices and principles to deal in the highly risky business applied by companies in the oil and gas sector
  3. To consider the risk management provisions provided by local and internationallife assurance and non-life assurance companies

Methodology

The research will employ survey methodology, which is in line with research practices. Surveying is the most appropriate methodology for this descriptive study as it is easy to use, less time is spent in its development, it is cheap, and can enable the collection of large data sets among other benefits (Gratton & Jones 2010). However, the major limitation with the method is inaccurate provision of answers thereby necessitating the validation of the method.

The subject of the research will be comprised of a convenient sample of executives from different oil and gas companies in Nigeria. The firms will be obtained through researching the Nigerian databases, which provide a list of insurance firms in Nigeria from where the participants will be sampled. Permission will be sought from the Directing Managers in charge of the companies’ organization before commencing the survey. 

Buy custom Risk Management Practices in Oil and Gas in Nigeria essay

FREE Extras:
  • Free plagiarism report (on request)
  • Free formating
  • Free title page
  • Free title bibliography
  • Free outline (on request)
  • Free mail delivery
  • Free revision (with 2 days)
We guarantee:
  • BA, MA, and Phd degree writers
  • No hidden charges
  • Quality research and writing
  • 100% confidentiality
  • Never resold works
  • 24/7/265 Customer Support
  • 100% authenticity
Page Format:
  • Up-to-date sources
  • Any citation style
  • 12 pt. Times New Roman
  • Double-spaces/single- spaced
  • papers
  • 1 inch margins
  • Fully referenced papers
← Project Management Paper Customer Relationship Management →
Search essay
On your first order you will receive 10% discount
Order now PRICES from $11.99/page ×