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What Keeps Energy Executives Up at Night?

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Besides profits, energy companies care about a lot of things. But if they had to pick a few, what would they be?

According to a recent report by Ernst & Young, which surveyed more than 100 energy company executives from 90 companies in 21 countries, oil and gas companies' top priority is health, safety, and the environment.  

The report, titled "Business Pulse: Exploring the Dual Perspectives of the Top 10 Risks and Opportunities in 2013 and Beyond," further found that price volatility, access to reserves and markets, cost escalation, and uncertain energy policy were the next largest business risks identified by the executives surveyed.

Other top priorities/risks
A new entrant into the list of top 10 risks this year was IT security, referring specifically to the threat of cyber-attacks and cyber-theft, which have increasingly plagued both private businesses and international organizations over the past few years.

Another major risk that even got its own category was the increasing scale and technical complexity of new projects -- a development that's largely a consequence of the end of the era of "easy" oil. As oil companies attempt to offset sharp declines from maturing reserves, they have to venture into some of the harshest, most remote regions of the world, where costs and uncertainties are both sky-high.

Offshore exploration risk
Deepwater locations, especially off the coasts of Brazil and West Africa, have emerged as popular hotspots. For instance, Brazilian oil major Petrobras (NYSE: PBR  ) is planning to drill exploratory wells off the coast of Tanzania, where it holds 50% stakes in two offshore exploratory blocks, while Chevron (NYSE: CVX  ) recently announced that it will move forward with the development of the Moho Bilondo "phase 1 bis" and Moho Nord projects located offshore the Republic of Congo.

While some of these ventures turn out to be quite successful, others don't pan out too well. Just take a look at Royal Dutch Shell (NYSE: RDS-A  ) , which has plowed billions into its operations in Alaska -- a venture it recently shelved because of weather-related and other challenges. The Hague-based oil giant has also taken heat for operational blunders in Nigeria, where oil spills, theft, and vandalism have cost the company 60,000 barrels of oil a day in lost production.  

Cost overruns and delays
In additional to operational mishaps, oil and gas companies continue to be plagued by projects that repeatedly run over budget and over time. According to an assessment by Independent Project Analysis, the typical exploration and production "megaproject" ends up being 25% over budget and takes 22% longer to finish that initial estimates. 

Perhaps the most overwhelming example is the giant offshore Kashagan oil field, located in Kazakhstan's zone of the Caspian Sea. Even after the project's stakeholders -- a consortium of global energy companies including ExxonMobil (NYSE: XOM  ) , Shell, and Eni -- have plowed more than $30 billion into the project over the past 10 years, Kashagan has failed to produce a single drop of oil.  

Final thoughts
Despite their best efforts to minimize accidents, the world's largest oil and gas companies operate in an environment fraught with risk. As they push further into new, remote regions around the globe, often conducting business with unstable foreign regimes, these risks often multiply.

Like the big four banks that have been deemed "too complex to manage," the large Western oil majors may similarly have become too complex and diverse to ever be able to completely eliminate accidents. ExxonMobil is perhaps the best example.

Despite its overarching focus on operational safety, an objective it has pursued -- quite successfully -- in the aftermath of the infamous 1989 Exxon Valdez oil spill, the company still hasn't been able to attain its goal of zero accidents, as shown by the recent rupturing of its Pegasus crude oil pipeline.

The bottom line is that no matter how good energy companies' workers, equipment, and executives are, some mistakes will continue to occur from time to time. This is simply the harsh reality of the nature, scope, and scale of their operations.

Though integrated oil companies face substantial regulatory, environmental, and weather-related risks when operating abroad, many exploration and production companies are homing in exclusively on U.S. oil and gas plays, where risks may be lower. One such company is Chesapeake Energy, which is focusing its activity this year mainly on Texas' Eagle Ford play, the Greater Anadarko Basin, and the Utica shale. Will it manage to meet its oil production target and boost cash flow? Or will it languish under the weight of its heavy debt load? To answer that question and to learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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