Contract Risk Management: From Macondo To The World's Hot Zones

As I sit here writing this article, the price of Brent Crude is hovering around the $105 per barrel mark and gold is at $1420 for a troy ounce. Rioting and unrest have exploded throughout North Africa and the Middle East, and the Coalition forces' death count in Afghanistan stands at 2,259 lives lost.

Prompted by the Macondo blow out and subsequent oil disaster that started almost a year ago, this period of significant economic and political upheaval has just served to heighten the focus on contract risk management.

The "economic loss" for insurers from the Gulf Oil Disaster has been estimated at $20-30 billion. With diminishing investment in the sector and those kind of losses fresh in the mind, it has become more essential than ever that oil and gas firms entering into contracts are optimally insulated against risk through proficient risk management and risk allocation.

Although the public's wrath has mainly been channelled in the direction of BP, the blame and shame game has been contractually shared out by the triumvirate of BP, Transocean and Halliburton, and the pay outs for liability claims are still disputed by the parties involved in a cyclic legal war that will drag on for some time.

The "systemic" flaws and "failure of management" that were both contributory and overarching factors in the Macondo well blow-out have resulted in the implicated parties looking for damage limitation to an already dented bottom-line.

The legal fracas that ensued has also brought into focus the difficulties involved in industry joint ventures. As well as highlighting the paramount need for well-defined contractual responsibilities, the whole experience serves as a disincentive for high-risk, big money collaborations.

High-Risk Zones

Current turmoil in Libya, which today controls 4 per cent of the world's accessible oil reserves, has underlined the physical threat to production, personnel and assets that is a growing theme in the contemporary oil and gas industry.

Contract risk management is of primary importance in high-threat level zones like the Middle East, Afghanistan and the Horn of Africa, where in addition to operators and contractors, oil and gas companies are increasingly dealing with government agencies and security firms working in states with poor national infrastructure and cultures of corporate and administrative corruption.

With seven of the world's top ten oil producing nations located in the developing world and a further 13 per cent split between Latin America and Asia Pacific, complex contract risk management will be the order of the day going forward.