How quickly can your company adapt to political and regulatory change?

August 2nd, 2019

If recent events in Norway[1], Italy[2] and New Zealand[3] (to name but a few) teach us anything, it’s that we can no longer afford to be taken by surprise by politicians. With every new government and shifting political alliance, the potential increases for major regulatory change within the oil and gas industry.

Political drivers of changing oil and gas regulation

Concerns over climate change, and the rising influence of those concerns on political parties seeking election or re-election, are disrupting the oil and gas sector. Governments in New Zealand, France, Spain, Italy, Denmark, Norway, Belize and Costa Rica have all moved to ban or limit new oil and gas exploration activities to some degree with many others having tried (such as Ireland) or signaled changes. By contrast, the Trump administration has repealed many of the regulations adopted in the wake of the Deepwater Horizon disaster, in a bid to expand drilling off US coasts. However, the US debate rages on with six US states passing laws to restrict offshore drilling[4] and presidential hopeful Elizabeth Warren promising to ban fossil fuel extraction from all federal lands and coastal waters.

Canada has also had a high level of regulatory change in recent years. Between 2016 and 2018, 40% of laws and regulations that upstream operators must comply with were changed.[5] Most Canadians have high environmental concerns, but the oil industry in Canada – a country holding the third largest oil reserves in the world – is a huge provider of jobs.[6] With 500,000 jobs in Canada dependent on the oil industry, Canadian Prime Minister Justin Trudeau recently approved the contentious Trans Mountain pipeline to transport oil from Edmonton to Vancouver.[7] However, this was only after implementing the 2016 climate change plan to reduce carbon emissions, demonstrating a framework of environmentally-focused E&P regulations before continuing to stimulate the industry. Under the previous government, Canada saw huge growth in their oil and gas industry, but Trudeau’s administration has significantly slowed that growth through high legislative change, putting an emphasis on lowered emissions at the expense of job loss.[8]

Other causes of oil and gas regulator intervention

As well as government agendas and the values of voters, oil and gas regulation is extremely sensitive to operational incidents. We saw the effect a single event can have on regulatory change worldwide; the Deepwater Horizon disaster and resulting oil spill in 2010 reminded everyone of the high-risk nature of the petroleum exploration and production industry. A report released by an independent investigation panel appointed by the Obama administration concluded, “The most significant failure … and the clear root cause of the blowout … was a failure of industry management.”[9] As a result, thorough safety rules, higher accountability benchmarks, and environmental regulations for operating in US territories were adopted into law.[10]

Following this single event, countries throughout the world heightened their oil and gas regulations in order to prevent similar catastrophes. Health and safety and environmental incidents can prompt significant change to the regulatory regimes for upstream oil and gas operations, which is exactly what we saw in the changes under the Obama administration.

The one constant we can be sure of is continuous regulatory change

The rate of legislative and policy change in exploration and production has increased significantly in the past twenty years, and is only set to become more complex with environmental concerns becoming a higher priority worldwide.

Rapid legislative change has the power to derail businesses operating in upstream oil and gas, where the costs of non-compliance are painstakingly high. If companies are slow to respond operationally to new requirements, they face high fines, court cases, delays in production and loss of stakeholder confidence. Companies must prioritise their awareness of existing regulations, new regulations, and potential future changes in order to mitigate business-crippling consequences.

Positioning yourself to adapt to regulatory change

Increasing regulatory change poses a pressing threat globally to upstream operators. In BDO’s list of the top risk factors affecting the top 100 US oil and gas companies, 100% of the oil and gas operators surveyed said regulatory and legislative changes and increased cost of compliance was a crucial concern for business.[11]

In order to be in a position to quickly adapt to regulatory change, an organisation needs to have:

  • Identified and risk assessed all the regulatory obligations that impact its operating environment and business activities
  • Implemented systems and processes for:
  1. tracking regulatory change (both proposed and actual)
  2. risk assessing and mitigating the impact of regulatory change on the business
  3. communicating regulatory change across the organisation
  4. quickly and efficiently deploying changes to operational processes arising from regulatory change.

Using oil and gas software to manage regulatory change and reduce risk

Oil and gas software applications, such as Permitintel, make talented staff even more effective at doing their job. The ability to quickly add and update regulatory requirements, adjust compliance tasks for current and future operational activities and instantly generate a picture of where there is and isn’t compliance throughout the business, makes the task of overseeing this core function more transparent and manageable.

As well as giving you visibility of your exploration and production portfolio, Permitintel’s smart oil and gas RegTech solution allows ongoing management to reflect the exact requirements of a particular local, state or federal regulator. In effect, no matter where you are operating in the world, the software tool can tailor your compliance requirements to meet with particular governance needs.

For companies operating in multiple jurisdictions, the ability to view all the company’s assets, obligations and operational activities on a central platform allows you to proactively assess where the biggest risks are and how you should allocate resources to deal with them. This dynamic approach to oil and gas compliance and risk management is a powerful way to assess, minimise and mitigate not only the risks that arise from regulatory change but from any internal or external threats to your operations.

[1] https://www.independent.co.uk/environment/norway-oil-drilling-arctic-ban-labor-party-unions-a8861171.html

[2] https://www.petroleum-economist.com/articles/politics-economics/europe-eurasia/2019/italy-imposes-offshore-exploration-moratorium

[3] https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12030956

[4] https://www.offshore-technology.com/news/new-york-offshore-drilling/

[5] https://www.seapex.org/wp-content/uploads/Abstract/1_4%20IHS%20Markit%20-%20Where%20do%20Governments%20in%20Asia%20go%20next.pdf

[6] https://www.dw.com/en/canadas-oil-pipeline-workers-anxious-for-their-future/a-47868622

[7] https://www.theguardian.com/world/2019/jun/18/canada-trans-mountain-pipeline-expansion-approved-trudeau

[8] https://www.theguardian.com/world/2019/jun/18/canada-trans-mountain-pipeline-expansion-approved-trudeau

[9] https://www.theguardian.com/environment/2019/may/02/trump-eases-regulations-adopted-after-bp-deepwater-horizon-disaster

[10] https://www.vox.com/2018/6/22/17493414/trump-executive-order-deepwater-horizon-drilling-oceans

[11] https://www.bdo.com/getattachment/a1bf67be-1beb-42b1-8f0c-f3db2446c6ed/attachment.aspx?2017-Oil-Gas-Riskfactor-Report-Brochure_WEB.pdf