A Risk Culture That Looks Beyond CostsTue, 01/21/2020 - 18:55
Q: What specific knowledge and experience does Marsh JLT Industry Speciality Mexico bring to Mexico’s oil and gas industry?
MG: To make operations safer, Marsh has an extensive knowledge and world-leading capacities in risk analysis, consulting and management, together with international experience regarding best practices and a capacity to benchmark them according to what is being implemented in other parts of the world. We have close to 500 specialized colleagues worldwide and our international oil and gas reinsurance and insurance market totals over US$3 billion globally.
The energy practice was our first as a company 80 years ago, so we know the business really well. Having a strong presence in the country also allows us to bring the Mexican flavor to all our operations, knowing exactly what regulators in Mexico want and why they want it. Marsh also participates on a yearly basis in the Leadership Meeting at Davos, where the major economic and political leaders gather to discuss the world’s most pressing issues. Some of the main issues are related to cybersecurity and climate change. Most companies in the risk management area are not prepared to deal with those risks as they are relatively new, which is why it is necessary to create professional structures to deal with them.
Q: What main risks will be affecting the oil and gas industry on a global level, according to Marsh’s perspective?
MG: Cyber risks are already heavily threatening the energy industry, and they usually can be divided into two types. The first is related to information, meaning that when a hacker gets into a system, he might steal information about the company to use it in a way that will offer him a profit to the detriment of the company. When the stolen information is about the company’s clients, the company is still liable because it was its duty to safeguard this information. The second is related to actual physical threats to the electronic systems that operate in the industry and that may be used to cause physical damage to both the company’s operations and the people who work at the facilities and the environment. In a world where more and more systems are connected through SCADA, this threat is increasing and can jeopardize millions or even billions of dollars of a company’s operations.
Another emerging threat to consider is climate change. As climate change intensifies, extreme weather events become stronger and more frequent, which puts facilities at risk. This is clear considering the big oil and gas activity taking place in the Gulf of Mexico and the fact that over the last few years the intensity and frequency of hurricanes in that region has heavily increased.
SA: Marsh does not stop at offering solutions to its clients from insurance companies to cover upcoming threats like cybersecurity and climate change. We instead perform pre and post-analyses of events in terms of risks, considering what elements can make them into a real threat. Once that is done, we advise the client on how to prevent the event from happening and how to act in case it happens to contain the damage as much as possible.
This is a much more holistic and useful approach that is truly value-based. Simply helping clients to select the best insurance option is not what we do, as this approach only bases the decision on costs. Marsh is very aware of data trends in the industry, even more so in the oil and gas industry. We perform constant benchmarking studies that are also revised by other teams inside the company. We do this to avoid data blindness, a problem that can easily arise when managing large quantities of information and that may keep people from finding the red lights for risk.
Q: How does Marsh help its clients in Mexico to mitigate their risks?
SA: Risks are usually twofold. One side is related to technical factors. This means that to diminish risk in oil and gas operations, strong knowledge and experience in the industry from the people on the operational side is needed. The other side is related to administration, such as the risk introduced by creating contracts for the first time in a young and inexperienced ecosystem.
MG: IOCs know how to do business. They have been doing this for a long time and are well aware of the technical risks present and to which ones they are exposed on a worldwide level. What they are worried about in Mexico is the country’s regulatory framework, and especially how it differs compared to the regulations they already know and are used to working with. Lack of familiarity with regulation can easily transform into capital losses, considering that one very small noncompliant element can stop an entire project for a long time. This problem is not only present in Mexico but as the country is just rolling out its brand-new regulation it is more evident here.
Q: What examples of regulatory risks can be easily underestimated by companies coming to Mexico?
SA: Projects for liquid fuel terminals are increasingly taking place in Mexico. The technical knowledge to build the facilities is there and is regulated with top-level standards on the international level, backed up mostly by the experience of countries with more advanced markets. On that side, the Mexican NOM is very strict in ensuring quality and safety is at the forefront of every activity. Nevertheless, on the administrative side we are seeing that there is a high risk for companies not being fully aware of the regulation’s requirements before starting construction.
Unfortunately, in that sense companies tend to be misguided and most of the time they do not know that when they own or lease a piece of land, they are completely liable for everything related to its current and future conditions. This means that if the land is polluted, they are responsible for any cleaning that has to be done, even if the pollution was already present before the acquisition. To avoid this from happening companies need to perform exhaustive environmental baseline studies before acquiring anything, but they are not aware of that because this practice is not common in other locations where they work. This very specific regulatory element in Mexico can easily increase the cost of a project, and companies should be aware beforehand.
Q: How is Marsh working to strengthen its footprint at both the global and national levels?
MG: While most of our growth is organic, Marsh has recently gone through a series of acquisitions to make the company stronger. One of the most important and recent is Jardine Lloyd Thompson, one of the most important risk assessment and brokerage companies in the world, which also has a top-level energy unit. In Mexico, Marsh also acquired Lorant Martínez Salas y Compañía, an important local insurance broker that strengthens our presence in the country. It is an honor to now have the strengths and expertise of the acquired companies but we also have to admit that going through an acquisition process represents a challenge as different people and processes are added to ours. Fortunately, we are not new to this and are very capable of taking advantage of the best of every company to make our offers to clients stronger and diminish their risks.
Q: What would Marsh like to achieve with its clients in Mexico during the coming years?
SA: Promoting the creation of a Chief Risk Officer for one of our clients would be a major success for us, because that C-Level person would know the language we talk and how to diminish risks inside the company, bringing a whole new culture to the entire company. Mexico has a traditional insurance-purchasing culture but the focus is always on which insurance costs the least while covering the most risk. This should not be the case in the oil and gas industry. Many companies still need to evolve from being traditional insurance buyers to having a Chief Risk Officer capable of diminishing the risks inside the company and knowing how to deal with them.
MG: We want to create a risk-centered culture within our client companies. More than simply choosing insurance, we want them to be aware of the risks they are subject to and work to avoid them from happening or diminishing them as much as possible. The oil and gas industry in Mexico went through a strong slow-down in activities in the past years, and it is just starting to ramp up activities. Mexico has been, is and will remain a major oil and gas producer on a global level. As the market opened most majors stopped looking at the country as a potential opportunity and started investing in it, which is clearly seen in the number of companies that have entered and received oil and gas contracts during the licensing rounds. We see 2019 as a slow year as the public policy gets clearer, and players become more comfortable keeping up with their activities. In that sense, the activities that PEMEX performs will be critical to the development of the industry, as most service providers are still dependent on the NOC’s actions. Because of that, the culture that PEMEX brings to the table will be the one to be followed by most of the operators in the market. We hope to be able to get closer to the NOC and bring a risk culture to its very core.
Marsh Brockman and Schuh is the world’s leading company in insurance consulting and risk management. With offices in 130 countries, including Mexico, its oil and gas practice offers personalized solutions for all aspects of the industry.