Opinion: Plummeting oil prices expose hidden risks

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Opinion by David Wilson

It’s no secret that the oil and gas industry has suffered some volatile times in recent months. The drastic drop in oil price has been, and continues to be a major focus for the world’s media.

As companies across the globe feel the effects of this instability, key industry figures are highlighting the urgency to protect the enviable gem that is the North Sea oil and gas industry. This month saw a North Sea oil summit held in Aberdeen, where politicians urged ministers to back a £2billion finance deal for the city. This plea was in a bid to tackle the major challenges faced by operators in this field, the repercussions of which are having a domino-type effect across the industry, and in turn the economy.

When, and at what level the oil price will stabilise is unpredictable, casting significant uncertainty across the industry for the coming year. With energy being one of the largest and most valuable industries in the UK economy the government, alongside industry experts, are considering methods of stimulating investment in this vital sector given that the current state of the industry is impacting decisions, profits and personnel.

These are risks that oil and gas industry companies cannot afford to ignore, and are already working hard to minimise.

The falling price of the barrel demonstrates the necessity for all companies to take a closer look at their business and truly plan for potential risks. UK legislation calls for a strategic report as part of a company’s financial statements, a fairly recent requirement which outlines business plans and potential risks for the future.

Although previously required within a company’s directors’ report, introducing this separately as a standalone strategic report is now effectively shining a spotlight on what companies are reporting, and how well they are prepared for when business is not going to plan.

The requirement for this strategic report was introduced to medium and large sized companies with effect for financial years ending on or after 30 September 2013, so this new legislation should not come as a surprise.

Commonly, the most significant issues are outside the company’s control, and it is these risks that will have the greatest potential impact on the business. It is therefore imperative to develop, or have in place strategic plans which meet these challenges and through innovation, creativity and significant effort, create new opportunities.

Given our subject matter, the low price of oil is a principle risk and area of uncertainty to many businesses operating in the sector.

How many companies identified this in late 2013, early 2014, and were prepared for the effects?

Did the industry become too comfortable during its extended stable and lucrative spell?

For those caught off guard, have the ramifications of this oil crisis been more severe that if the risk had been pre-empted?

How well companies were prepared for this situation remains the million dollar question. What is clear is that planning and risk analysis is crucial. Oil and gas companies internationally need to recognise the importance of being prepared for, and ready to react to every eventuality. If the events of the last few months have taught the industry anything it is that nothing is set in stone.

David Wilson is an audit & assurance partner at Johnston Carmichael.