Piper Alpha. Longford. Texas City. Deepwater Horizon. Everyone in the energy industry knows about these landmark energy losses, and everyone fears another one. But apart from being catastrophic, each of these occurrences has one common thread — human error.
Where can it go wrong on the people management side? For starters, poor management can result in an unclear organization in which roles and responsibilities are often confused, leading to low motivation and engagement. And if skills shortages and insufficient information are thrown into the mix, the effects on financial, operational and strategic risk can be profound.
The energy industry has been making this connection since Piper Alpha in 1988, and much has been done over the last thirty years to improve risk culture within the industry. Indeed, our Willis Towers Watson Energy Loss Database (WELD) shows a gradual overall improvement in energy industry-related losses since 2011 (see below).
The problem is the energy sector is facing a period of unprecedented change. Changing business models, shifting global supply and demand patterns, human capital challenges, cost pressures, the deployment of new technology, climate change, ageing assets, regulation/policy change and overall economic uncertainty are creating new risks for which some companies may not have fully appreciated. If we add to the mix issues such as resource nationalism, geopolitical concerns, cyber terrorism, and access to finance and commodity price volatility, it’s not difficult to see why the industry’s loss record might revert back to its historically volatile norm.
Unless, of course, energy companies ensure their commitment to continue evaluating their ever-evolving human capital risk and its effect on their financial, operational and strategic risk. Speaking at last month’s Willis Towers Watson European Energy Conference at Luton Hoo, Buckinghamshire, Thorsten Querfurt, Global Industry Leader for Natural Resources at our company, spent most of his introductory address highlighting this key issue.
“Our view is that Human Capital risk is not only a key component of a company’s broader Enterprise Risk Management strategy, but actually underpins it” he stated. “So insurers need to evolve to address emerging energy industry risks in a way that adds real value. Only by working together with both the HR and Risk Management functions can we begin to offer solutions to our clients that bring people and business risks together.”
At the same conference, we asked delegates whether they agreed that “there is a significant correlation between the way an energy company manages its people and the way it manages its risks.” Encouragingly, over 80% of our clients agreed with us. For far too long, the Human Resources and the Risk Management functions have operated in silos within the energy industry; too often, the two functions barely speak to one another. Now surely is the time for greater collaboration to address the future challenges of the industry head on.