By Richard Rowe and Linda Zwick
The recent news that Shell expects to sell a further US$15 billion-worth of upstream and downstream assets will have raised the intense interest of other O&G companies and their advisers in different parts of the world. The same “risks and opportunities” interest will apply to other assets which are being offered for sale by their owners in order to manage costs and maintain forward momentum in a more challenging global market place.
What’s clear in a strong market for oil and gas transactions is the increasing inclusion of process safety liabilities in the due diligence process. Would be purchasers of assets need to determine the full range of these risks in order to have a clear view of the value of the assets in question. Failure to do this may require unexpected investment after the purchase and prove both costly and damaging to reputation in the event of a major incident.
Due diligence risk assessment
It’s therefore no surprise that process safety risk assessment is part of the due diligence process in a growing number of deals. A buyer may want to be advised, not only on the risk of a catastrophic incident but also on the cost/effort of addressing that event.
A key driver for the incorporation of process safety risk in the due diligence process is, arguably, the rising costs of a major incident – which, in extreme cases, could put all but the largest super majors out of business. There is also the increasing scope of due diligence for upstream assets in terms of investigating not only the threats to human life but also for the risk of major spills and leaks and their potential consequences.
An investor may also be sensitive to reputational risk, particularly if they will not have hands on involvement in the operation of a facility. This was the case when ERM acted for a client as part of their decision to invest in an offshore operator. A priority for the client in this case was to determine the integrity of the assets under review.
Asset integrity in this context makes the link between the condition of an asset and the risk this poses in terms of a major incident. A heavily coated pipeline, for example, could lead to a loss of production or seize up altogether. Worn vessels could cause a leak or a major explosion. Understanding both the physical condition of assets and the systems in place to manage the risks associated with any deterioration, is an essential part of determining asset integrity.
The transaction above did require ERM to look at such aspects as the target company’s systems and processes for identifying, managing and mitigating risks, such as their inspection and maintenance strategy. For example, was there a proper inspection programme in place and where, if any, were the gaps? Discovering that certain assets are in a poor state of repair can put the buyer in a position to negotiate rigorous indemnities from the vendor.
The process safety specialist can gauge the operational condition and performance of a facility while also relating that performance to the HSE Management System. This could include examining the relevance of existing KPIs as they impact on process safety. Are these covering the right material issues from a process safety perspective? It is likelt to involve not only looki ng at individual issues but also at the overall process safety regime at a facility, considering, for example, how safety is viewed by the workforce or whether there is a safety case in operation? Only by taking these types of issue into account can the specialist develop a picture of the risks and opportunities relating to process safety as part of the deal.
Another factor is the rising level of upstream investment in mature markets and frontier facilities. While these deals are, to some extent, being fuelled by new technologies and methods of recovery, the risks and indeed the consequences of an incident can be particularly significant. From a buyer’s perspective these risks need to be factored in as an integral part of the negotiating process.
The same applies to the growing number of refineries which have been up for sale in the last few years. In these cases, due diligence issues can range from the safety of personnel in an office building to the inadequate inspection and cleaning of pipelines. Whatever the issue, the need for significant future investment may well have to be reflected in the purchase price of an asset.
In short, anyone in the market for oil and gas assets will want to consider some form of process safety due diligence. The risk of not doing so may be too damaging to ignore.
For further information on the above, please email [email protected], or [email protected]. Richard Rowe is an ERM risk Partner based in London. Linda Zwick is a Principal Consultant in ERM’s London transactions business.