Aon Global Risk Management Survey

Unpacking the key risks facing the Energy, Utilities and Natural Resources industries

Aon’s 2021 Global Risk Management Survey polled more than 2,300 respondents in 60 countries across 16 industries at both public and private companies. The report highlights the top 10 risks by industry and region, as well as risk readiness, associated losses and mitigation actions for each of the top 10 risks. In addition, the report includes the predicted top 10 risks in the next three years and Aon’s analysis of underrated risks.

In terms of the industry specific view for the Energy, Utilities and Natural Resources industry, the survey provides the following global insights:

Current Risks (in order of ranking)

1. Business Interruption
2. Commodity price risk / scarcity of materials
3. Regulatory / legislative changes
4. Economic slowdown / slow recovery
5. Environmental risk
6. Cyberattacks / data breach
7. Accelerated rates of change in market factors
8. Climate change
9. Cash flow / liquidity risk
10. Political risk

Future Risks (in order of ranking)

1. Commodity price risk / Scarcity of materials
2. Business Interruption
3. Cyberattacks / data breach
4. Accelerate rights of change in market factors
5. Climate change

• 34% loss of income – up from 2019
• 60% risk readiness - up from 2019

Key issues for the energy, utilities and natural resources industry currently reflected in the risk selection

Energy companies are grappling with Environmental, Social and Governance (ESG) obligations, so it is unsurprising that environmental risk ranks at number five. Transitioning to carbon neutrality will alter their risk profiles, requiring them to simultaneously maintain their capital positions while addressing scrutiny from investors to meet ESG obligations.

Macroeconomic and regulatory trends are already affecting not only the availability of risk transfer for some industry sectors but also the profile of boardrooms — for example, through activist investors.

The Colonial Pipeline cyberattack demonstrated an increase in cyber risk, which has been exacerbated, at least in part, by increased remote-work arrangements during the COVID-19 pandemic. Energy companies should be assessing their IT environments to understand their ability to defend against attacks, but changes to their operating technology environments will expand this threat in the long term.

Talent management is becoming increasingly important. Energy companies need to retain and attract talent to support the sector’s transition to carbon neutrality, as well as to compete with other industries that prospective employees perceive as more advanced in their sustainability initiatives. This is developing into a key risk, and the energy industry has to adapt to mitigate and manage it. As the energy transition accelerates, the workforce of the past may not have the skills needed for the future, including expertise in new technologies such as hydrogen and carbon capture. Demand for engineers and skilled labour is likely to surge as more new, low-carbon projects come online in response to heightened concerns over climate change, governmental action and the global drive to net zero.

According to Jacques de Villiers, General Manager for Aon South Africa’s Inland Region, there is a heightened need for new infrastructure. “Long term investment in energy and utilities is imperative to create the energy infrastructure that will support the new generation mix. We also require an increased focus on retail propositions that are attuned to demands for cleaner and more sustainable energy such as electrification of transport and localisation of power generation.”

In order to pivot the composition of our total energy mix towards renewables, renewable energy infrastructure needs to become a focal point. This will only be achieved if battery storage and grid infrastructure is supported by higher degrees of digitisation, which are key enablers. And with digitisation forming an integral part of energy transition, it will bring both opportunities and risks with players in the field having to contend with the inherent risk that cyber risk plays in the space,” Jacques explains.

Most underrated risks

Climate change and reputation risks do not appear to be top of mind for energy respondents. However, as the world is becoming more aware of industries that could pose an existential threat to humanity, these risks could become relatively significant threats to the industry. The World Economic Forum’s “Road to net zero in four charts,” among other analyses, points to the impact of decarbonisation initiatives in the developed and developing worlds on current oil and gas economics. Additionally, although weather and natural disasters did not make the top 10 risks list, they are more consequential than some higher-ranked risks considering recent extreme weather events globally.

Given the industry’s heavy reliance on governmental decision making, political risk should rank higher as regulators across the world grapple with the appropriateness of actions, subsidy protections and their impact on energy transition. “While the Covid-19 pandemic has accelerated the transition towards renewable energy on a global scale, we have seen regional variations in terms of how the pace of change is being dictated, which has a knock-on effect for global energy companies,” says Jacques.

Challenges the industry will face in the next three years and what organisations can do to address them

Utility companies will need to devise ways to shift power to consumers. This will include smart technologies to help control consumption and possibly to share non-fossil-fuel sources via a two-way grid. As reliance on fossil fuels diminishes, non-fossil energy sources — renewables and nuclear options such as thorium — will become important commodities. The energy sector faces game-changing trends and technologies over the next few years. With global warming and extreme climate conditions becoming the new normal, there is growing global recognition that changes are needed quickly.

Companies need to demonstrate well-developed ESG objectives because these will become important for continued access to capital, specifically when pursuing new investments. The industry has made some ESG progress on its own, but government action — for example, placing a price or tax on carbon — may accelerate change.

“On the asset side of the balance sheet, safe and sustainable infrastructure transition, as well as the necessary decommissioning and repurposing of assets, will alter risk profiles, influence capital requirements and necessitate a review of risk retention and transfer mechanisms, as well as of insurance coverage and levels. Significant growth opportunities and even potential divestment may require capital investors to view companies with strong ESG credentials as an attractive opportunity,” says Jacques.

How new challenges will require companies to change their approaches to risk management and mitigation

Companies need to adopt a holistic risk management framework that includes physical and human assets. ESG and climate change realities will drive significant change in the way energy and power companies manage the risks of their assets.

Power sector insurance needs are increasing exponentially as companies work to eliminate fossil fuels from their energy mix and invest in new technology. “Energy companies are used to managing high-profit projects and now are confronted with technologies such as hydrogen that could take many years to generate a return. Some integration of power and traditional oil and gas businesses is inevitable as the industry transitions toward carbon neutrality. This could take over 30 years, but energy companies need to adapt to a new reality to meet changing obligations. Increased competition will see new entrants to these markets and business models will change, these new entrants will be looking to bridge into the green sector that is supported by significant levels of M&A activity,” Jacques explains.

ESG and the energy transition have created new and evolving risks that boards and companies need to navigate. With limited historical precedent to guide them, businesses must find new ways to define how they look at risk and return on capital, including issues such as decommissioning and the management of stranded assets and implications for production. The transition to new forms of energy and the convergence of power and energy sectors will potentially affect the speed of return on capital investment.