Oil Search Limited, established in 1929 in Papua New Guinea has its focus on oil and gas exploration and development . During the course of this long standing relationship with the Government of Papua New Guinea and its people, the company has shown immense commitment in ensuring the welfare of the country and its people through various societal benefit programs. This report focuses on Oil Search Limited; various corporate responsibility programs initiated and implemented the company, and the company’s risk management framework and infrastructure.
Company Overview
Among the various projects, the main asset of the company is its 29% stake in the 6.9 MTPA PNG LNG Project . The project is operated by ExxonMobil PNG Limited. This project has transformed Oil Search into a major regional player with a steady supply of LNG and revenue. Oil Search is also involved in significant export operations gaining revenue for the Government. The other major area of interest for the company is oil operating all of Papua New Guinea’s oil fields. The complete ownership of the oil fields were taken over by the company in 2003, post which the company implemented industry leading processes to ensure optimal efficiency, thereby mitigating the production decline rates. In addition to oil, gas is also sourced from these fields.
Oil search is not just involved in extraction; the company is also involved in exploration, with significant operations in Papua New Guinea. In addition to Papua New Guinea, the company also has exploration operations in the Middle East and North Africa.
For the year ended December 31, 2015, the company earned annual revenue to the tune of $ 1.6 billion and employing over 2400 resources. The following section will talk about the corporate responsibility initiatives of the company including environmental, social and governance responsibilities.
Corporate Responsibility
Oil Search is actively involved in corporate social responsibility (CSR) programs in Papua New Guinea. The activities span across the areas of societal, environmental, infrastructural, human rights, prevention of corruption etc.. A brief of the CSR activities carried out by the company in PNG is mentioned below-
The Oil Search Foundation: Founded by Oil Search, the company is also the principal contributor to the foundation that focuses on the health and welfare benefits of the citizens of PNG. The Foundation, on behalf of the government of PNG also manages $14.2 million Global Fund HIV Grant program. Some of the focus areas of the foundation include women health, protection and empowerment, improvement of maternal and child health in remote locations through vaccination programs, equipping deliver rooms with water and electricity, ensuring availability of midwives and nurses etc., fighting malaria by conducting mosquito control programs in vulnerable areas, providing HIV patients with access to life saving programs. Oil Search being the primary contributor to the Foundation has provided over $ 28 million between 2011 and 2015 has committed to contribute $ 50 million for the period 2016-2020 .
Infrastructure Delivery: Every year, Oil Search manages multi-million infrastructure projects on behalf of the government of PNG across areas like health, law and order, education, transports, sports etc. Some of the prominent projects completed or initiated in 2015 include construction of the football stadium, refurbishment of Manasupe Haus, road construction projects, etc. The company also assists the local government bodies in preparing development roadmap and five year plans through a coordinated and consultative approach .
Human Rights Awareness: The Company is fully committed in ensuring the upkeep of human rights from the oil and gas industry point of view. The company works in accordance with the UN Global Compact on implementing the opportunities identified in the area of human rights. Risk assessment and evaluation works are undertaken periodically as part of the company’s responsible supply chain strategy. Also, human rights management is embedded into the company’s social responsibility policy and company risk framework .
Conservation Management: In addition to the areas mentioned above, the company also works collaboratively with the local community in activities such as lake conservation management and fish population protection. Oil search is also engaged in activities like drought relief in which the company in coordination with the local authorities distributed food and water to the affected population. The company also assists the local hospitals and helps in ensuring uninterrupted availability of electricity and running water .
Corruption Prevention and Transparency: The fundamental elements of Oil Search’s operation include prevention of corruption, availability of a robust code of conduct and ensuring continued support to transparency. Based on this, the company identified 19 breaches of the code in 2015 resulting in five terminations. Strict vigil is enforced to ensure all the employees undergo training on corruption prevention standards and procedures .
Climate Change: Climate change strategies are in place to monitor and control emissions and ensuring reduction in emission intensity throughout its gas and oil fields. Among its focus items of 2015, the company is committed to complete the climate change strategy for 2017 onwards during this year .
Sports and Games Sponsorship: In addition to the above mentioned activities, the company also promotes sports and games in PNG through event sponsorship like the July 2015 Pacific Games Relay .
Risk Management Framework
Oil Search has a comprehensive risk management framework in place to anticipate any potential risks and mitigate those risks to ensure uninterrupted operation. Before looking into the risk management framework, it is essential to identify the types of risks faced by the company which is a part of the highly volatile oil and gas industry. Some of the potential risks that can impact the operations of the company include-
Pricing risk: Oil and gas industry is highly volatile when it comes to pricing and has witnessed a downward spiral since October 2014. Oil Search has been impacted by this pricing risk and has impacted their financials for the year 2015. Oil and gas prices are dependent on a number of macroeconomic factors at the geo-political level and individual companies like Oil Search cannot influence it directly. The company has entered into long term purchase and sales agreement for LNG, with pre-established pricing factors .
Production risks: The oil and gas fields are vulnerable to production loss and the resulting revenue loss. Also, significant investment will be needed to bring the wells and plants back to full capacity operations. These conditions may arise due to various factors like facility shutdowns, mechanical failures, technical failures, reservoir or other subsurface impediments, safety breaches, natural calamities and other unforeseeable occurrences. Oil Search has risk mitigation mechanisms in place to ward off any such threats and minimize their impact .
Safety and Environmental risks: Oil and gas industry is highly vulnerable to various safety and environmental risks necessitating the presence of foolproof mitigation mechanisms in order to avoid or reduce the associated risks. Some of the high probability risks associated with the industry include fire, explosion, blow outs, pipe failures, transportation mechanism failures etc. In addition to this are the occupational safety hazards where workers work in a highly dangerous environment with little or no room for a wrong step. Many of these potential and highly probable risks can transform into a bigger environmental risk such as oil spillage, gas leakage, ruptures, discharge of toxic gases etc. These occurrences have the potential to cause substantial damage to property, lives, natural resources, equipment, pollution/environmental damages, heavy costs associated with clean ups etc. The above said risks can be mitigated to a large extent by focusing on internal training and precautionary safety measures. However, there are a host of external factors as well like cyber security breach, natural calamities etc. which are beyond the control of the company .
Reserves and Resource risks: Oil Search faces the risk of declining level of reserves and the resultant impact on the organizational value. The company is constantly striving to grow its reserves and resources through exploration and commercial activities. Significant investment is required to carry out speculative explorations and carries the risk of revenue loss if hydrocarbons are not found at satisfactory levels for commercial extraction. The investment needed for exploration and assets development will depend on a large number of factors like the macro-economic conditions, socio-political conditions, composition of hydrocarbons discovered, changes in estimates and other operational issues like any unforeseen event. In order to ensure that Oil Search manages the value of production to maximize the business, the company has a monitoring mechanism to oversee the investment decisions. The mechanism comprises of the company’s Board of Directors and Investment Review Board who performs the economic and risk analysis on the investment decisions made and in line with the company’s management system. Also, the teams involved in exploration and drilling will constantly monitor the organization’s inventory and exploration plan. For long term management guidance of operated producing assets, the company has established a developing life of asset planning process .
Legislative and Regulatory risks: The operations of Oil Search spans across multiple international jurisdictions and hence the business is exposed to the laws and regulations in those countries. Any legal changes, changes in government policies, fiscal and regulatory regimes will impact the operations and financial performance of the company. Due to this risk, Oil Search may get impacted by rising costs in multiple areas like taxes, delays in execution or even prevention in some cases. Also, any changes in taxation and royalty policies will impact the revenue and profits of the company.
Political and Community risks: As Oil Search is operating in multiple countries; it is exposed to varying levels of political and commercial risks, particularly in the developing countries. The profitability may get impacted owing to any political unrest, land disputes, community disputes, civil unrest, terrorism or even war. Difference of opinion and agendas among political parties, evolving environmental and social policies, corruption etc. are some of the other major potential political risk that the company will have to overcome in order to ensure an uninterrupted operation. Other local factors that may impact the company’s operations and reputation include the media, Non-Governmental Organizations and other activists who may influence the governments at the regional and international levels. Lack of any support from the government on the timely implementation of policies, red-tape-ism or other stumbling blocks like lack of adequate infrastructure may also severely impact the operations and business of Oil Search, exposing the company to significant financial risks. Oil Search has mechanisms in place to engage and work with the governments to minimize any risk arising out of political changes. Also, the company has a comprehensive corruption prevention mechanism in place, which aims at preventing corruption and negating any possibility of getting involved in any corruption scandals or related cases. The company also works with the local communities and gets involved in social responsibility activities to leave a positive legacy and gain the confidence of the citizens .
Joint Venture risk: Oil and gas industry is no stranger to joint ventures. Oil Search also has active partnerships with various companies operating at the different stages of the oil exploration and extraction life cycle. In most cases, joint ventures are mutually helpful as the companies share the costs, expertise and resources which help them in achieving significant savings. However, risks arise when the partners fail to establish an alignment, poor performance of the partners along the value chain, failure in respecting commitments etc. will have adverse impacts on the operation and business of the company. Oil Search attempts to mitigate such risks through careful evaluation and selection of joint venture partners, stakeholder engagement and relationship management. The stakeholders involved in the joint venture are made to bind both commercially and legally with well-defined responsibilities and obligations .
Now that the various risks faced by the company are identified, this report will now look into the risk management framework in place at Oil Search to effectively manage these risks and fend off any potential losses.
Oil Search has adopted the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations in implementing rigorous corporate governance practices across its activities including the risk management and mitigation. Accordingly, the company is fully compliant with the recommendations made by ASX Corporate Governance Council for recognizing and managing risk. The recommendations satisfied include -
Ensure the availability of a committee or committees which has at least three members, with independent directors as the majority and chaired by an independent director .
The company should disclose the charter of the committee or committees, the members and the number of meetings conducted by the committee and also the attendance status of the members .
The company board or the committee of the company board should review the company’s risk management framework on an annual basis to ensure that it is up to date and satisfies the intended purposes. The board or the committee of the board should also disclose on the number of meetings held and the status of the reviews conducted .
The company should disclose the structure and the role of the company’s internal audit function
The company should disclose any material exposure to social, economic and environmental sustainability risks and the ways of managing those risks .
Further reference to all other risks within the annual report
In addition to the above mentioned risks the annual report also talks about financial and capital risk management. Oil Search is exposed to various types of financial risks arising out of macro-economic factors such as fluctuating oil and gas prices, variances in the exchange rates between currencies and differing interest rates and structures across the global markets. The company’s overall approach to mitigate this risk is to enter into hedges using financial derivatives. This helps in ensuring adequate cash flow to meet current and future financial commitments. The types of financial risks that the company is exposed to include -
Foreign exchange risk: Company’s residual currency risk exposure originates mainly from the administrative expenses incurred at the corporate level in Australian Dollars and the operating and capital expenditures incurred at its fields in PNG Kina and Australian Dollar.
Interest rate risk: Exposed to interest rate movements in the various currencies that the company does its business with.
Commodity price risk: Risks associated with the production and sale of oil, natural gas and liquefied natural gas.
Credit risk: This risk arises when the company’s counterparties are unable to meet their financial obligations.
Liquidity risk: Oil Search may face the liquidity risk, if it is unable to settle financial transactions during the course of its operations and fails to find new funding options on reasonable terms.
References
Oil Search Limited, 2016. Annual Report 2015, Port Moresby: Oil Search Limited.
Oil Search, n.d. Company Profile. [Online] Available at: http://www.oilsearch.com/About-Us/Company-Profile.html[Accessed 10 May 2016].
