Risk-based approach helps companies survive, thrive in a changed climate

Many of the hopes of the global oil and gas industry are pinned on some of the most inhospitable parts of the world, including the Far North. As it happens, it is the polar areas of the planet that are considered most vulnerable to climate change.

Melting permafrost in Polar Regions can cause differential shifting and movement in pipelines, well pads, buildings, and other structures. Changing weather patterns also can cause harm to agriculture, resulting in water shortages that could mean revocation of a company’s ability to use water. These changes also could cause social unrest that would make some areas too dangerous for E&P to continue.

Climate change adds up to a great deal of uncertainty. While the oil and gas industry is comfortable with a certain level of risk, there are limits beyond which corporate management and shareholders are not willing to go.

Climate change could result in different rainfall patterns in parts of the world, including the tropics. Oil and gas companies have the chance to help farmers such as these in Central Africa to adapt to the new circumstances. (Photos
courtesy of Carl Friesen)

There are many opportunities for operational personnel to help companies manage the risks that come from climate change through understanding the most likely changes that could come from climate change and taking steps to mitigate areas of operation that are at risk.

Dealing with uncertainty
One of the challenges comes from the fact that the effects that climate change will have are unpredictable. Accordingly, it is best to take a risk-based approach that considers the likelihood of a given event occurring – such as an extreme storm event – and determines the consequences if it occurs. This is a way to set numbers on the risk and plan ways to deal with it.

Some of the larger players in the oil and gas industry commonly apply risk-based methodologies to climate change, but many smaller companies have not run this type of analysis. The risk-based approach is particularly important for smaller companies that hold minority stakes in areas where they might not fully understand climate-related risks.

Regardless of company size, it is becoming increasingly important for publicly traded companies to address the ways climate change will affect them, from a strategic, financial, and operational point of view.

Climate change in the boardroom
Some oil and gas companies, particularly those with Arctic or near-Arctic operations, are starting to feel the effects of climate change. The effects of this worldwide phenomenon also are being felt in the boardrooms of Houston, Aberdeen, Calgary, and other corporate oil and gas centers.

Many of the decisions made at an operational level can help or harm the company’s ability to raise financing through public and private capital markets. In its “Guidance Regarding Disclosure Related to Climate Change” issued in February 2010, the US Securities and Exchange Commission (SEC) indicates that the requirement to disclose vulnerabilities to climate change is much like earlier requirements for companies to disclose their vulnerabilities to environmental legislation. “There may be significant physical effects of climate change that have the potential to have material effect on a registrant’s business and operation. These effects can impact a registrant’s personnel, physical assets, supply chain, and distribution chain,” the SEC says.

The Management Discussion and Analysis (MD&A) section of a company’s public filings is expected to include

One possible result of climate change is gradual decline in the snow mass in mountain areas, possibly affecting water supply at some operations, such as in Canada’s oil sands.

information on the company’s exposures and vulnerabilities. These now should include climate change. Assessing climate change risk might include such things as describing the

company’s exposures to greenhouse gas emissions limitations. The MD&A must include management’s analysis of the likelihood of a potential change and the magnitude of its impact on the company’s fortunes.

While climate change might not be a material issue for a company, it is impossible without diligent evaluation to come to the conclusion that it is not significant.

Companies in any industry could find it increasingly difficult to raise financing if they are not able to satisfy investors and securities regulators that they have investigated the potential impacts of climate change on their operations and have developed plans to deal with those changes.

Climate change pressures also are being felt indirectly through the companies that supply oil and gas companies. The potential for more extreme weather, such as more frequent and more severe hurricanes in the Gulf of Mexico, could affect drillpipe availability or the availability of other supplies that are shipped from the Gulf of Mexico to other operations around the world.

The new normal
Companies that want to demonstrate due diligence to stakeholders such as insurers, shareholders, and regulators need to understand that while it is big events like Hurricane Katrina that grab the headlines, climate change is a gradual process. It really is “climate creep.”

Most infrastructures are designed for a certain “envelope” of conditions – a given band of temperature variation, wind strength, rainfall, snowfall, or other factors. As the climate gradually changes over time, it moves the envelope, possibly toward greater variability. Rainfall could start to exceed the expected norms more often. Temperatures could spike higher or lower or there could be more days of high winds. Eventually, conditions exceed the previous “normal” often enough that problems become noticeable.

One commonly used design criterion is the “100-year” event. As the climate changes, so does the frequency of this 100-year event. Consider a pipeline access road that crosses a bridge that previously was large enough to handle occasional periods of storm-caused high water. Over the years, storms become more severe so that now the road gets washed out, disrupting traffic. Temperature change also could be a factor, causing more freeze-thaw cycles that do more damage to the roadway and limit the loads that can be carried over it.

A new normal can increase a company’s costs or require operational changes.

Operational opportunities
Inside every challenge is an opportunity, and many of these opportunities start at the operational level.

In designing a pipeline route, for example, it might be best to avoid areas close to a steep slope that could be vulnerable to collapse in the event of heavy rains. It might be appropriate to bury a pipeline deeper where it crosses a watercourse in case more severe storm events cause riverbed washout.

Climate change can bring rainfall changes – more rain or less, or rain at unusual times of the year, affecting local agriculture. A resource company operating in the area has the opportunity to improve community relations, perhaps by helping to find better sources of water for irrigation or helping farmers identify crops that are not as dependent on reliable rainfall.

Companies that learn to work within the trends brought about by climate change can gain competitive advantage. For example, near-shore drilling operations in some parts of the Arctic could gain an advantage by bringing in drilling equipment and pipe by ocean-going vessels rather than relying on ice roads.

Benefits of change
Companies can gain financial and market advantage by demonstrating that their operations are less vulnerable to the effects of climate change. Ones with operations in areas at relatively low risk from climate change can use this to attract investors concerned about the long-term investment security.

Reacting to climate change means developing an understanding of the risks and opportunities it brings and determining the steps necessary to deal with these changes. Clearly, the changing climate can be a threat, but to those who act wisely, it also can be a source of opportunity.