Top headaches for the natural resources industry

Difficulties arising from operating in more technically challenging physical environments is the number one risk on the minds of executives in the natural resources industry, according to Willis Towers Watson’s new natural resources risk index (NRRI) and top ten ranking.

According to our 2016 NRRI, the top three risks affecting the industry are: operating in more technically challenging physical environments, currency and interest rate fluctuations and increased cybersecurity and data privacy risks. Natural disasters and epidemics, technology that opens up the marketplace to disruptors and vulnerability to reclamation obligations are ranked fourth, fifth and six in the index respectively.

The NRRI was compiled using responses from 350 C-suite executives across the natural resources industry – including oil, gas and chemicals, power and utilities (including renewable and nuclear energy) and metals and mining – to rank 50 risks in accordance with their impact and how difficult each one is to manage.

Among those who participated in the survey, conducted in the first half of 2016, were 70 chief executives (CEOs), 60 chief financial officers (CFOs) and 60 chief risk officers (CROs). Their responses were supplemented by in-depth interviews with selected executives to gain greater insight into the risks they face.

According to the ranking, executives are also seriously concerned about the increasing complexity of regulation (ranked seventh), a general shortage of industry-specific skills (eighth), difficulty in attracting and retaining key talent (ninth) and the uncertainty over, and the encroachment of, climate change and environmental policy (tenth).

Regional variations

Our first NRRI shows that the industry is united on its views of the key risks it faces today and over the next 10 years. Certainly geopolitical instability and regulatory change, coupled with digitalisation and new technologies, have created new risks for the industry to understand and mitigate. At the same time, a changing industry landscape provides opportunities for companies willing to embrace a degree of risk.

Expanding into new, more demanding areas without overexposing businesses to risk is a top challenge for today’s executives. Unearthing new stores of natural resources has become an increasingly challenging task. It requires producers to adapt to ever more demanding environments and technically complex projects during a period when the pressure to generate returns and provide the highest possible operational efficiency is greater than ever. The cost of getting things wrong is also at an unprecedented high.

Among other findings from the research, perhaps the greatest surprise is the extent to which fluctuations in currency and interest rates have become a cause for deep concern among executives. The global financial crisis may be over but its effects, coupled with policymakers’ attempts to stabilise their economies with radically different strategies, continue to foment uncertainty in key financial markets.

The executives we surveyed are also clearly troubled by shifts in the way that today’s governments approach regulation. In the next decade, it is likely government regulation of the industry will increase. If companies want a role in shaping the regulatory agenda and to have a voice, they need to engage proactively with government and other key stakeholders and put forward their point of view.

Natural resource executives are also deeply concerned about the risks associated with digitalisation and new technologies, according to the research.

Companies’ growing dependency on IT infrastructure has ushered in a litany of new risks of which executives would never have dreamed of, 20 or even 10 years ago. In all its varieties – from unintended data breaches to cyberterrorism – cyber risk is now a boardroom issue for the industry. Companies that focus on effective risk mitigation strategies and continually review how their risk profile is changing will go a long way toward developing resilience against this growing threat.

Our research found marked differences between how natural resources organisations in different regions of the world view risk, with the number one perceived risk varying significantly across the globe.

North American natural resource leaders are preoccupied by increased cybersecurity and data privacy risks. In Europe, the risk posed by operating in more technically challenging physical environments was highlighted as the principle concern in the minds of respondents. In South America uncertainty over climate change and environmental policy was the top concern.

Despite these challenges, the companies that are best at maintaining cost discipline, driving efficiencies and adapting to change will be positioned to grow market share and build competitive advantage. Given the cyclical nature of the industry, anticipating and managing the key organisational and people risks now and taking considered risks that hold potential for reward will be key to unlocking future potential.

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