Enterprise_risk

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Thecurrentissueandfulltextarchiveofthisjournalisavailableatwww.emeraldinsight.com/1750-6220.htmERMintheEnterpriseriskmanagementMiddleEastoilintheMiddleEastoilindustryindustryAnempiricalinvestigationacrossGCCcountries59K.MuralidharReceived9July2009TheBahrainPetroleumCompany,Awali,BahrainRevised3August2009Accepted4January2010AbstractPurposeThepurposeofthispaperistoappraisethecurrentstatusofenterpriseriskmanagement(ERM)intheGulfCo-operationCouncil(GCC)oilandgasentitiestodevelopapractical,region-specific,andsystematicactionplanfortheGCCoilandgasindustrythatcantransformtheexistingERMmodelstoamatureandrobustframework.Design/methodology/approachThepaperreviewscurrentrelevantliteratureonCommitteeofSponsoringOrganizationoftheTreadwayCommissionERMFramework;andenterprisewideriskframeworkwithintheprecinctsoftheGCCoilandgasindustrytoidentifytheknowledgegapswhichformthebasisfortheresearchquestions.ThepaperthenempiricallyinvestigatestheGCCoilindustrythroughsixcasestudies,encompassingthesixcountriesintheGCC(GCCcomprisingofBahrain,Kuwait,Oman,Qatar,SaudiArabia,andUnitedArabEmirates).ThecasestudyhasfocusedbyexploringtheERMsystempersethroughcomparativecasestudiestoanswertheresearchquestions.Theresearchquestionsandtheworkhavebeendonefromtheperspectiveofthenaturalistic(inductive)researchparadigm.FindingsThispaperestablishestheunderstandingofthecurrentexistingERMmodelswhileidentifyingthedeterminantsofERMadoptionandthemostsignificantchallengesforitsimplementation.Furthermore,thepaperalsodevelopsthebestpracticeapproachforsuccessfulERMimplementationintheGCCoilandgasentities.Researchlimitations/implicationsTheuseofacasestudyhasbeenmadeprecludingtheuseofotherdirectmethodssuchassurveyquestionnaires.Theanalyticalmethodsusedaredeductiveanddiscursiveinnature,limitedtothenatureofthemethodologyofcasestudyused.Rigorousstatisticalmethodscouldnotbeappliedowingtothelimitationsofthecasestudymethod.ThepaperexploresandcomparestheindustrystructureofoilandgassectorinGCCcountries,forthispurpose,onlyafewselectedentitiesintheupstreamanddownstreamoilandgassectorarediscussed.PracticalimplicationsAlthoughERMisconceptuallystraightforward,itsimplementationinpracticeisnot.Furthermore,ERMisacceptedasacontemporaryhottopicandalsoaboardroompriorityinmostindustries.ThepresentpapersteersthewayforwardforanimprovedunderstandingoftheERMsysteminastrategicindustrydealingwithastrategiccommodity.Originality/valueThereisaneedforaproactiveERMprogramintheoilandgasindustryandalsoaneedforadditionalresearchespeciallyintermsofitsimplementation.Nevertheless,anapparentcaveatintheERMsystemisthatthereisnostandardapproachtoimplementingandentitiesgrapplewithhowtheyshouldgoaboutputtingtogetheranERMprogram.ThefindingsprovideusefulandtimelyanalysisoftheGCCoilandgasindustryfromtheperspectiveofimplementationofanERMframeworkwhichiscontemporaneousbusinesspriorityiteminmostentitiesintheGCChydrocarbonsector.KeywordsRiskmanagement,Corporategovernance,Oilindustry,MiddleEastPapertypeResearchpaperInternationalJournalofEnergySectorManagementVol.4No.1,2010Theauthorlikestoacknowledgetheanonymousparticipantsinsomeoftheoilandgaspp.59-86qEmeraldGroupPublishingLimitedcompaniesintheGCCandthoseconsultantswhowerewillingtodiscuss.Additionalthanks1750-6220mustgototheeditorsandanonymousrefereesforhelpingshapethispaper.DOI10.1108/17506221011033107 IJESM1.Introduction4,1Enterpriseriskmanagement(ERM)isanewparadigmformanagingbusinessrisks(Walkeretal.,2002),whichishighlystrategicinnature(Ward,2006)andisanarrayofcomponents(Psica,2008),puttogetherthroughdueprocess(Beasley,2006)withinanorganizationthatworktogethertomanageriskovertimeefficientlyandeffectively(Moeller,2007a,b)andispurposefullybroadinitsdefinition(Moeller,2007a;Kloman,602005;Lam,2003a;Rittenberg,2006).ERMnowisahottopicandacontemporaryareaintraditionalriskmanagementdiscipline(Roberts,2004;BeasleyandFrigo,2007;DeloitteReport,2008).TheseminalideainthecreationofanewtheoryonriskmanagementwaspromulgatedbytheCommitteeofSponsoringOrganizationoftheTreadwayCommission(COSO)andtheunderlyingprinciplesofERMareexplainedthroughtheCOSOCube.ThemajorfocusinthisstudyistheCOSOERMFramework.AsERMisrelativelyanewconceptandanewcorporateactivity,itisalsoyettobefullyimplementedinmostorganizationsglobally.COSOERMFrameworkiswidelyusedinmanyorganizationsanditisalsothemostcommonlyusedstartingpointforimplementinganERMinitiative(EuropeanCEO,2001).Oilandgascompaniesconstitutesomeoftheworldslargestcorporations.Accidentsofgeology(Noreg,2002)haveleftthisregionwithabundanceofoilandgasreservesandsuchsizeandscaleintroducesadditionalchallengesinmanagingrisks.Recentoilandgasrelatedinternationaldebaclesthathittheheadlinenewsacrosstheglobehadrisksinhardtodefineand/orhardtoquantifycategoriesacrosstheenterpriseriskspectrum.ThesignificanceofERMforoilindustryhasbeenelucidatedinseveralreportsthathavevividlyillustratedtheneedforaproactiveERMprogramintheoilandgasindustry(Minsky,2006;Fineberg,2006;Palast,2006;Lewisetal.,2005;BlancoandRegan,2006).Nevertheless,apartfrombanksandinsurancecompanies,therehasbeenlittleacademicresearchaboutERMsaccomplishmentsandimplementationchallengesespeciallyintheoilindustry.Furthermore,owingtothesignificantopacityofthenationaloilcompanies(NOCs)oftheregionandlackofexplicitdata(ValerieandMitchell,2006)havediscouragedacademicanalysisintheseentities.Theobjectivesofthisstudyarethefollowing:(1)toevaluatetheexistingstructureofERM;(2)toidentifythemotivatorsofERM;(3)toidentifythemostsignificantchallengesforERMimplementation;and(4)torecommendthebestpracticeapproachforERMimplementationwithintheGulfCo-operationCouncil(GCC)oilandgascompanies.2.LiteraturereviewThebackgroundresearchforsuchatopicisachallengesincenumerousdataarenotavailablethroughscholarlyarticlesandinparticularthereisnostudyavailablethatfocusesontheimplementationofERMintheoilandgasindustryandfurthermore,specificallyontheMiddleEastoilindustry.COSOERMFrameworkisalandmarkmodelwhichservesasabroadlyacceptedbenchmarktohelporganizationsenhancetheirriskmanagementefforts(IIA,USA).Thismodelisrapidlybecomingapreferredmodel(Minter,2006;Leech,2006;Rittenberg,2006;Everson,2006),thatgoesbeyondinternalcontrolstoprovideasystemtoaddressorganizationalrisksinacomprehensivefashion,asopposedtodealingwithindividualtypesofrisksthroughasilo-basedriskmanagement.Theoverallgoalisto providereasonableassuranceofachievingorganizationalobjectivesinfourareas,ERMinthei.e.strategy,operations,reporting,andcompliance,inthespiritofpreventingcorporateMiddleEastoildisastersandmaximizingentityvalue(BeasleyandHermanson,2004;Quinn,2006;industryMcNamee,2004b;Moeller,2007a,b;DeLoach,2003).AwiderspectrumofissuesrelatedtounderstandingofERMitselfandthemulti-disciplinaryinvolvementoftheprocess(Power,2005;Ward,2001)areessentialtounderstandthisemergingbusinesspracticewhichisnowaboardroompriority(KPMGSurvey;Shaw,2005;Lam,2003b;Wyman,612005).Risksaffectentitiesholisticallyandtheyneedtobemanagedinaholisticmannerbeyonddisciplinaryboundaries(SobelandReding,2004).AframeworkofERMshouldincludesuchanapproachtoriskmanagement,whichprovidesacommonunderstandingacrossamultidisciplinarygroupofpeople(SobelandReding,2004)andshowpossiblefutureexposurestorisk(McNamee,2004a).ToconsiderestablishmentofanERMsystem,someorganizationsinvarioussectorsarestimulatedbycorporategovernancebestpractices(SOX,2002;Moeller,2007a,b;Turnbull,1999;Carey,2000;Bartonetal.,2001;Burns,2003;Emen,2004),regulatoryguidelines(BaselIIAccord,2004;EC,2002),ratingagenciesrequirements(S&P,Moodys,andFitch)andwakeupcallsfromcorporatedisasters.Furthermore,globalinitiativesoncorporategovernance,internalcontrol,andriskmanagementhavegiventheimpetustoestablishanERMframework.SeveralstudieshavenotshedlightontheparameterswhichaffecttheefficiencyandeffectivenessoftheERMsystem(Berlin,2004;WalkerandShenkir,2006;Lewisetal.,2005;BlancoandRegan,2006)andalsoontheapproachtoimplementsuchasystem,expressingthelocationoftheERMmaturitylevelalongtheriskcontinuum(WalkerandShenkir,2007).Thisobservationisalsoespeciallytrueintheoilandgassector.Furthermore,ERMisanAnglo-SaxonphenomenonandtoadegreeAustralasian(Merrifield,2001;Leech,2006),anditisreportedthatentitiesinothercountriesseemtohaveembracedERMsystemandhavefocusedonCOSOERMimplementation(Lam,2006a,b,c).Itsoverreachingnatureappearsoverwhelmingforsomeorganizations(BallouandHeitger,2005)andyetnostudiesexistbyexploringthebusinessenvironmentforbetterimplementationofERMsystemintheGCCoilandgascompanies,investigatingtheextenttowhichtheseentitiesmanagerisksinatrulyholisticmanner.WhileexploringtheGCCenvironment,currentstatusofERMhasbeenstudiedinbusinessorganizationsinDubai(MarieandRao,2007),butthefindingsdidnotincludethehydrocarbonsector.TheupstreamanddownstreamentitiesintheoilindustryareentrustedtoNOCsintheGCCcountriesandareregardedasthesymbolofnationalsovereigntythatcontrolsthemostimportantandthemostvaluablestrategiccommodity(Bromley,1991)intheirrespectivecountries.Thereisadeepemotionalattachmentandsenseofemancipation,ideologyofresourcenationalizationintheexistingmodelofNOCsasinstrumentsofthestate,whichisnotonlyauniquecharacteristictoMiddleEast,butalsoinotherpartsoftheworldwithvastmineraldeposits.Furthermore,asmembersoftheOPEC,anumberofGCCoilentitiesarealsoexposedtotheeffectsofOPECintransigence(HuettnerandAlHajji,2000).Therefore,NOCsarenotjustcompanies,buttheyarepoliticallysacredentities(Hartshorn,1993;Aburish,1997;Noreg,2002;ValerieandMitchell,2006)involvedinthebusinesswithastrategiccommodityinastrategicindustry(Bromley,1991;Heiss,1997).ManyanalystssuggestrisksandchallengesinGCCOilindustryincludethefollowing: IJESM.Strategicchallengeduetoregionalgeopolitics(Marten,2008;Caruso,2006;4,1DiPiazzaandBremmer,2006)..Wideninggapintheskillsgap(Booz-Allen,2008)..OperationalchallengeinGCCwideco-operationwhichalsoincludetheco-operationinenergy(Asoomi,2008).62.Commoncurrencyinitiativesupposedlytocombatinflation(Handyetal.,2008a)..Interpretationofreserves-to-productionratiowhichisacontentiousparameterasitdependslargelyonthegeologic,technological,economic,andpoliticallimitations(FeyginandSatkin,2004;Campbell,2007)..Nationaldepletionpolicies(Handyetal.,2008b;Bromley,1991)oftheGCCoilcompanies..Extremesoflaissez-fairecultureinatraditionalsociety(ElMusa,1997;Albers,1989;Jreisat,1997)..Petroleumlawandlegislativeimpedimentsduetoweakarbitrationlaws(Angell,2006)..Projectfinancingandwiderinvestmentchallengesinupstream/downstreamsectors(Handyetal.,2008a,b;HIS/CERAUpstreamCapitalCostIndex)..Theloomingthreatofacontrol-drivenfailureduetoweakcorporategovernance(Ditcham,2007)thatmightoccurwithin2010.Consequentially,organizationsintheoilandgassectorintheMiddleEastcannotaffordtonotstepuptheirinternalcontrolframeworkandlagbehindtheworld.ItishightimethatoilentitiesstartplanningforandimplementinganeffectiveERMsystemintegratingitsbuildingblockscorporategovernance,internalaudit,andriskmanagement.3.MethodologySixcasestudiesorunitsofanalysis(Yin,2003)wereproducedbasedupontheoperationalreviewoftheNOCsintheupstreamanddownstreambusinessvaluechain,derivedfromthesixcountriescomprisingtheGCC.embeddedmultiplecasestudiesmethodologyaremorecompellingandtheresultsaremorerobust(Remenyietal.,2000;Yin,2003;EisenhardtandGraebner,2007);andthisapproachwasusedtofurtherexploretheextentofERMapplicationintheGCCoilindustry,withadefinedtimeboundarybetween2005and2010.Byfurtherinvestigatingthebusinessvaluechain,corporateethos,corporategovernanceframework,upstreamanddownstreampetro-strategies,categoricallyasthevariablesinthecasestudyunit(Stake,1995),thestudydistilleddownwithafinalcomparativeanalysis.ThepurposeoftheunitsofanalysiswiththeabovevariableswastostudythestrategicfitbetweentheERMstrategyandthecorporatestrategy/petro-strategybeingpursuedbytheentitiesacrossthevaluechain.Tocarryouttheresearch,asemi-structuredtypeofinterviewwastakenuptohaveamixofinterviewing,observingandanalyzingstrategyforprimarydatacollection(HusseyandHussey,1997).Asemi-structuredapproachtodatagatheringgeneratesgreatideasandworksbetterthanunfetteredbrainstormingorstrictqualitativeanalysisorquestionnaireformat(Coyneetal.,2007).who,why,what,andhowquestionswereaskedintheinterviewtoexploretheanswerstoalltheobjectivesof thestudy.Furthermore,awiderviewanalysiswithathemebeyondERMwasERMintheinstigatedbystretchingmanagementthinkingintheirERMjourney.TheMiddleEastoilinvestigationswereformulatedusingachecklistthatwasstructuredaroundtheeightcategoriesoftheCOSOcubewithrespecttotheGCCoilandgasindustry.industryBeingaboardleveltopic,participantsapproachedtocollateprimarydatawereC-suiteexecutivesengagedwithinternalaudit;corporateplanning;financeandengineering.Furthermore,insomeentities,participantsalsorespondedat63superintendentandmanageriallevels;addingupto25responses.Informationwascollatedafterassuringparticipantsthattheirresponseswillbetreatedasanonymousandconfidential.Furthermore,owingtothesensitivityoftheinformationbeingsoughtandanalyzed;andduetotheprevailingcorporatecultureoftheregion,thespecificentitiesbeinganalyzedarenotdisclosedinthisstudy.Owingtotheabovereasons,thecomparativeanalysesthereforeamalgamatetheoverallfindingsanddonotportraycountry-specificdata,withregardstothecorporateinformationbeinganalyzed.However,anonymityisbelievedtoincreasetheveracityofthefindingsinthisstudy.Toextendknowledgefurther(Remenyietal.,2000)intheGCCoilindustrywiththebackdropofERM,secondarydatacollection(HusseyandHussey,1997)werecollectedthroughseveralregionalpublications,journals,reports,conferenceproceedingsintheMiddleEastandcorporatewebsitesofinterest.ThesummaryoffindingsfromthesixcasestudiesarepresentedbrieflyinAppendix1,TableAI.4.Analysisoffindings4.1FindingspertinenttoObjective1:toevaluatetheexistingstructureofERMTheoutcomeofthecomparativecasestudyanalysesindicatesthatERMmeansdifferentthingstotheGCCoilandgascompanies.EmergingthemesinERM.Analysesoftheinterviewshaverecognizedthreeemergingthemes/trendsintheGCCoilcompanies,namelystandardization,integration,andcentralization.Standardizationisatechniquethathasaneffectonanumberofareasofpublicconcern,suchasthecompetitivenessofindustryorthefunctioningofasinglemarketenvironment.Therefore,standardizationcanalsoplayaroleinregulatorypolicy.However,ERMisnotyetaregulatoryrequirementintheGCCbusinessenvironment.TheawarenessoftheERMframeworkwaslessseeninthelowerlevelsoftheentity.Participantsinsomecasesbroadlyseemtoattributeariskmanagementframeworkasadejurestandardwhichwasextensivelyaimedatstatutoryrequirementsforcomplianceandlegalrequirements.WhileothercasesdifferentiatedariskmanagementframeworkfromtheconventionaltechnicalstandardsbyrecognizingtheCOSOERMframeworkasadefactostandardandwerewillingtoconsiderotherframeworkforfutureimplementation.Integrationisatechniqueforaggregationofdifferentpartstoaholisticframeworkacrossalayeroforganizationandbetweenlayersoforganization.Integrationisaboutvalue-additiontotheoverallentitythatispreciselypossiblebyintegratingthesiloswithintheentity.COSOacknowledgesthat,everyenterprisefacesamyriadofrisksaffectingdifferentpartsoftheorganization,andERMfacilitateseffectiveresponsetotheinterrelatedimpacts,andintegratedresponsestomultiplerisks. IJESMCentralizationisatechniquethataccumulatesdifferentdataasanactof4,1consolidatingdecision-makingpowerunderacentralcontrolwithinaframework.Knowledge,information,andideasareconcentratedonlyatthetopanddecisionsarecascadeddowntheorganizationdepartmentsorsubsidiaries.Althoughthesesubsidiariesareenjoyingcertaindegreeoflatitudebydelegation(de-centralization),theyareultimatelyaccountabletothecorporateparentwhichisgovernedbyanational64authorityasseeninthecases.Centralizationresultsinlessempowermentforthemanagementalthoughitdoesensuretheentitytakesaconsistentriskpolicyline.Whentheoilandgasvaluechainiscontrolledbyoneentity,whichiscentraltoallthemajorpiecesofthehydrocarbonindustryandplacedassubsidiaries,centralizationwasadvocated.Asanintegratedoilmajororasacentralizedentity,itisentrustedwiththecentralplanningfunctionoftheindustryandisseenasacoordinatingentitybetweenvariouselementsofthebusinessvaluechainandtheriskgovernanceframework.ERMprogressionandmaturitymodel.ProgressionoftheERMimplementationprojectandthepresentstateofERMisdefinedbyanERMmaturitymodel.Severalmaturitymodelsalongtheriskcontinuumexist,however,inthisstudy,basedontheresponses,threelevelsofmaturityindicatingtheERMprojectcompletionphasesaresetout:(1)underconstructionorinvestigatingconcept;(2)partialERMframeworkinplace;and(3)completeERMframeworkinplace.WhilethepositionoftheERMwouldseemtoresideinadebatablelocationalongtheriskcontinuuminthecases,however,basedontheempiricaldata.Figure1showsthepositionoftheGCCcountriesconsideringtheirERMimplementationperse.AlthoughtherewasawidespreadconsensusontheimportanceofERM,onlyfewoftheentitiescouldshowsubstantialprogressasERMisalsoperceivedasboardandseniormanagementpriorityandnotnecessarilyalinemanagementpriority,drivenbyacentralizationprocess,particularlywherepowerwasconsolidatedwithintheentity.Thisperceptionistriggeredduetothecreationofanewfunctionchiefriskofficer(CRO)whichisalsotypicallyapositionfromthefinancedisciplines(Aaboetal.,2005),locatedinthecorporate/headoffice.Nevertheless,mostGCCoilandgascompaniesarefar-offfromtheexpectedandactualperspectiveofIntegrationaspromulgatedbytheERMframework,maskedbyahostofdifferencesarisingduetocorporateculture.ThetypicalriskgovernancecharacteristicsexemplifiedintheentitiesaligningwiththethreethemesidentifiedinthestudyarepresentedinAppendix2,TableAII.Riskperception.TheanalysissuggeststhatERMdoesnotemergeinGCCoilandgascompaniesinaconsistentpattern.TheunderstandingofwhatERMrepresentsdiffersfromorganizationandalsoatdifferentlevelsofmanagement.ERMprocessneedstodevelopacommonriskvocabularysothattheunderstandingofERMisnotjustwiththetopechelonoftheorganization.AsNOCs,thenationalizationpolicyisappliedinallindustriesincludingtheoilandgassector.Therelationshipbetweencorporatesocialresponsibility(CSR)duetotheirobligationtoprovideemploymentfornationalsandexpenses/lossduetoinefficiencywerenotcommentedastheywereculturallysensitiveissuesandparticipantsrefrainedtocomment.ItalsosupportsthecommonnotionthatmostNOCsarenotexactlyrunonacommercialbasisandsuchhumanresourcesrisksareaccepted ERMintheMiddleEastoilindustryCompleteERMframeworkBahrain65QatarSaudiArabiaPartialERMframeworkERMprogress/maturityUAEOmanKuwaitFigure1.Underconstruction/investigatingconceptEmergingthemesStandardizationIntegrationCentralizationinERMimplementationintheirbusinessprocessesanditisregardedasanormwithinthefacetsofthecultural/organizationalentropy.Aphase-gatedmechanismwasevidentinmostcasesandthemanagementdecisionisbasedonfixedparameterstherebyobstructingtheintrinsicflowofinformationfromthemanagementandstaff.Mostimportantly,theexistingmodelsdidnothaveamechanismtoidentifyandexploitlostopportunities.Furthermore,itwasevidentthattheriskscapturedwerenotbasedontransientconditionsofthebusinessenvironment.Itwasmostlysubjectiveandriskcontrolsweredecidedontheendconditionofanincident.Thecontrolswerebasedoncertainassumptionsandgivensandthematerialityoftheriskspresentedcouldchangebasedonthewidespreadweaknessesinevaluatingtheboardsriskappetiteandtherebythecorporaterisktolerancelevel.Roleofinternalauditandramificationsinriskcommunication.Inmostcases,theinternalauditteamdoesnotseemtofullyutilizethecollationofrisksfordeterminingtheirinternalauditplan.Toomanyauditreviewsexistinupstreamanddownstreambusinessprocessesthatarerenderedbyexternalandinternalparties.Severalexternalaudits,reviewvariousbusinessprocesses,apartfromtheusualenvironment,health,safety,andqualityaudits.Inascrambletocomplywithvarioustechnicalcodesandstandards,manysiloshavebeencreatedintheentitiesintermsofrisksandcompliancesbyexternalassuranceproviders.Manyofthesesiloshavetypicalrisksandarebasedonsameunderlyingdata,therebyduplicatinginternalauditefforts. IJESMEveninthosecaseswhereinERMisbelievedtobeattainingmaturity,internalaudit4,1doesnotverifytheERMimplementationprocess.Theriskcommitteeinsomecasesderivesonlyapassivesupportfrominternalaudit.Corporateriskgovernance.ThereissoaringrhetoricintheentitiesontheERMimplementationproject;butmostcasesdidnotemphasizeontheestablishmentofanintegratedframeworkmodelandtheriskgovernancethereof.Somecasesevenlacked66establishedpoliciesandproceduresfortheERMprocessandERMfunction.Top-tenenterpriserisks.Inthecaseswhereariskregisterwasgenerated,theentityscorporateriskregisterisloggedoutusingin-housesoftwaretoolsandtheregisteristhemasterdocumentoftheentireCOSOERMFrameworkimplementation.Thefollowingriskscanberecognizedasthetop-tenrisksfacedbythecases:(1)disruptionofrefinedproducts;(2)environmentalcontaminationduetohazardousleakage/fire;(3)negativeperceptionaffectingcompanysimage;(4)lackofbusinesscontinuityplanning;(5)non-compliancetoprocesssafetymanagement;(6)inadequateexplorationstrategyinupstreambusiness;(7)lackofteamwork/inter-disciplinaryco-ordination;(8)ineffectivefinancialcontrols;(9)ineffectivemaintenanceinterruptingrefinerythroughput;and(10)inabilitytoidentify,plan,andacquireskilledpersonnel.Otherprominentcorporaterisksrecognizedinsomecasesarethefollowing:.bank/fundingcrisis;.legalrisksinvariousengagements/contractrisks;and.smugglingofsubsidizeddieselbringinglossduetosubsidiesgivenonlocalfuels.Apartfromtheaboverisks,participantsinsomecasesconfirmedthattheriskregisteralsoprovidesavarietyofinformationincludingriskownersandeventheprobabilityofoccurrence.ThetypesoftoolsusedbytheentitytoimplementERMarethroughriskassessmentworkshopsconductedacrosstheorganization,financialmodelingandweightedaveragescore.ThereisawidedeparturefromtheentitysERMstrategyandconsequentlythepetro-strategy.Thisobservationprimarilystemsoutofthefactthatallriskarenotactuallybeingconsidered.Furthermore,nosignificantinformationwasavailabletounderstandtheextensionofERMtothenationalenergypolicyasitwasaculturally/politicallysensitivetopic.Performancemetrics:businessvaluedrivers,keyriskindicators,andriskmetrics.Businessvaluedriversvarywiththetypeofbusinessandindustry.Oncebusinessvaluedriversareidentified,enhanceddecisionscanbemadesurroundingthebusiness.Thetop-fivebusinessvaluedriversare:(1)localgasolineconsumption;(2)globalmarketdemand; (3)crudeprices;ERMinthe(4)explorenewacreage;andMiddleEastoil(5)mechanicalavailability.industryThebusinessmodelsinthecaseshavenotyetrealizedthatERMcanitselfbeabusinessvaluedriver.Furthermore,marketsharewouldalsobeanappropriate67businessvaluedriver,whichwasnotpickedfromtheresponse.Keyriskindicators(KRIs)aremeasuresusedtoindicatehowriskyanoperation/activity/projectis.KRIsmaybetangibleorintangible,butgivesanearlywarningtoidentifypotentialeventthatmayharmcontinuityoftheoperation,tobettermanageoperationalrisks.Thetop-12KRIsare:(1)revenue;(2)labourcosts;(3)refiningmarginstocrackspreads;(4)capacityutilization;(5)operationalflexibility(torunanycrudeslate);(6)reservesestimate;(7)numberofnearmisses;(8)numberofaccidents;(9)breakdowntime;(10)protracteddelivery(leadtime);(11)contingencyplans;and(12)managementoversight.Upstreamanddownstreampetro-strategiesaregenerallydriveninmaximizingthebusinessvaluedriversandtheKRIspresentedabovepositivelyaddvaluetothebusinessvaluedrivers.Insomecases,participantsdidnotdistinguishbetweenKRIandriskmetric;andbelievedthattheybasicallymeantthesame.Whilevalueatrisk(VaR)isapopularriskmetrictoaggregateriskacrossanenterprise;itisnotapreferredmetricinthecases.Consequentially,riskmetricsusedbytheentitiesisprimarilytheimpact/likelihoodanalysisandisderivedfromfinancial,operational,andcomplianceperspectives.Thecasesthengravitatetowardsabandscoremethodwithhigh-,medium-andlow-riskcategorybeingestablished.Ideally,thisapproachcouldonlybeviewedasariskassessmentmethodwithmoreemphasisonfinancialperspectiveandlessemphasisonstrategicperspective.Furthermore,participantsinsomecasesstatedthattheentityisalsousingmetricslikecostofriskandreturnoncapitalemployeddependinguponthebusinessprocess.Thefindingsfromtraditionalriskmanagementsystemslikehazardandoperabilitystudies,hazardidentificationstudies,environmenthealthandsafety(EHS),andqualitymanagementsystemaretakenintoaccountintheERMsystem,onlyinsomecases.Performancemetricsanditscorrelationtocorporateobjectives.TheultimategoalofERMistohelpmanagementinachievingcorporateobjectives(Dickinson,2001)and IJESMERMframeworkismaturingasaresultofinitiativesfromatleasttwoperspectives4,1(Power,2004;Dickinson,2001,2005;Lam,2003a;Bartonetal.,2001):(1)finance-drivenshareholdervaluemodel;and(2)compliance-drivenriskgovernancemodel.Basistheaboveperspective,whenthefocusistoincreaseshareholdervalue,someof68theKRIsdemonstrateaddedvalueinatangibleform.Somecasesseemtofeelthatfinancialindicatorsaregivenimportancethannon-financialindicators,solelybecauseERMisdrivenmorefromafinancialperspectivebypeoplefromfinancebackground.However,whentheseentitiesfocusonriskgovernance,thequandaryovervaluecreationisarguable.Nevertheless,theanalysisfurthersuggeststhatthecasesalsoutilizedmanytypesofdeterministicriskmetrics(typicalofacompliance-drivensilomanagementapproach).Thiscouldleadtointegratethesystemacrosstheupstreamanddownstreamvaluechain,toperhapsarriveatauniformriskmetricsimilartoVaRinthefuture.Furthermore,thespiritofERM,performancemetricsthereofanditsimpactintheentityisnotarticulatedthroughthecorporateobjectives,values,mission,andvisionstatements.Whiletheentitiestakeconsiderableprideintheirbusinessandtechnologicalexpertise(ValerieandMitchell,2006),ingeneralERMunfortunatelyisregardedonlyasabusinesstoolandnotasabusinessdriverwhichcanbeattributedtotheweaknessesinriskcommunicationandthecorporatecultureintheentities.4.2FindingspertinenttoObjective2:toidentifythemotivatorsofERMClearexpectationsfromachievingTurnbull,SOX;capitalrequirementsfromBaselAccords,Solvency;andRatingAgencysevaluationhadbecomethekeyfactorthathaveledbankingandinsurancesectorstoembraceanERMsystem.ButinthecaseoftheGCCoilandgascompanies,noneofthestatedfactorsseemtohaveanimpact,butitjustoffersaraftofvalue-creatingopportunitiesthatmakesgoodbusinesssenseinembracinganERMsystem.Howfaropportunitiesarebeingexploitedintheseentitiesareyettobefullyunderstood.Nevertheless,theentitieshaveindeedembarkedsomewhereintheirERMjourney,enablingthemtobetterunderstandtheaggregatelevelofrisk,allowingthemtotakeriskwiththeireyesopen,ortomitigatetheexposure.DeterminantsofERMadoption.Theanalysissuggeststhatthemostsignificant,top-fourdrivingforces/motivatorsforERMinthecasesareself-fulfillingbyvirtueofthestronginterconnectionbetweenandacrossthedriversidentified:.corporategovernance;.leadershipofthechiefexecutive;.goodbusinesspractice;.initiativeofboardofdirectors;and.internalauditrecommendation.Acause-and-effectscenario(BurtandVanderHeijden,2003)thathasbeenrepeatedlyfeedingeachotherisevidentinthenatureofthedriversandthereforeideally,robuststrategicthinkingandcorporateexpectationsshouldbestronger,asaconsequencedrivingasynergywithintheentitytoshapeupbetterorganizationalfuturescoupledwithorganizationalforesight(BurtandWright,2006).SomecaseshaveevenacknowledgedthattheyareembracinganERMsystemasitjustmakesgoodbusinesssense. CasesfurtheracknowledgedthattheothermotivatorsforERMcanalsobeERMintheattributedtodriverslike:MiddleEastoil.marketcompetition/competitiveadvantage;industry.changingrisklandscape;.investmentcommunitypressure;and.brandimage.69Furthermore,volatileeconomicsituation,corporatedisasters,SOXcompliance,globalization,recentcatastropheintheorganization,andpressurefromratingagencieswereregardedasalmostinsignificantconsideringthenatureofbusinessenvironmentofmostoftheNOCsinGCC.environmentdidnotseemtobeamotivatorforERMalthoughmostcaseshavepetro-strategiesdrivenbyenvironmentalchallenges.EntitiesarenotexactlypressuredbyregulatorsorratingagenciestoadoptERM;corroboratingthefactthatinpractice,banksandratingagenciesdonotactivelydemandriskmanagementdisclosuresfromGCCoilcompanies.4.3FindingspertinenttoObjective3:toidentifythemostsignificantchallengesforERMimplementationOilgovernanceintheoilandgassector.Averyuniqueaspectthatthrowsaspecificchallengeintheoilandgassectoristheexistingscenarioonoilgovernance,withfragmentedroleinpolicy,regulatory,andoperatorfunctions.Thishasleadtoadisjointedriskgovernanceframeworkatanentity(operator)levelanditsramificationsarefar-reachingespeciallyinanERMenvironment.Top-fivestructuralchallenges.ThefollowingaretheemergingstructuralchallengesforERMimplementationinthecases:(1)riskcommunication:aconsistentframework;(2)lackofriskawarenessatboardlevel;(3)auditcommittee;(4)corporateculture;and(5)linkingriskstooverallcorporatestrategy.Somecaseshavestatedthatlackoftransparency,weakriskgovernance/riskcommittee,lackofriskawarenessatexecutivemanagement,andevendisassociationbetweeninternalauditplanandERMfindingsassignificantstructuralchallenges.Top-fiveoperationalchallenges.ThefollowingaretheemergingoperationalchallengesforERMimplementationinthecases:(1)determiningriskowners/ownership;(2)riskawarenessatlowerlevels;(3)riskcommunication:riskculture;(4)riskidentification;and(5)riskclassification.Somecaseshavestatedthatappropriateriskanalysistechniques,riskawarenessatmiddlelevels,allocationofcapitalforriskresponse,riskcommunication: IJESMacommonrisklanguage,andriskcommunication:acrossdisciplines/departments4,1assignificantoperationalchallenges.Top-fivetechnicalchallenges.ThefollowingaretheemergingtechnicalchallengesforERMimplementationinthecases:(1)dataaccuracy;70(2)riskmeasurement;(3)determinationofriskappetite;(4)riskassessment;and(5)riskmodeling.Somecaseshavestatedthatdatastoring,dataadequacy,determinationofcorrelationamongvariousriskclasses,anddeterminingoffsetbenefitsinriskresponse/strategyassignificanttechnicalchallenges.Awiderviewanalysis:“beyondERM”challenge.AdoptionofERMintheotherbusinesssectorsisprimarilyduetotakingtheirERMsystembeyondRatingAgency,Basel,Solvency,andSOXrequirements.Onsimilarlines,awiderviewanalysisexploredthechallengeofextendingtheERMsystemtointegratewiththechangingbusinessenvironmentutilizingappropriatebusinesstools(Beasleyetal.,2006;McWhorteretal.,2006)inallcases.(A)Extensiontocorporatestrategicplanning.AdisassociationbetweencorporatebusinessplansandERMfindingswasfelttobeinadifficulttocommentcategory.SomecasesareutilizingtheERMfindingsincorporatestrategicplanningexercisewhileothercasesfeltthattheirERMmaturityhasnotyetattainedastatustothinkbeyondERM.Thiswasalsoviewedasastructuralchallengeinmostcases.Inonecase,participantsmentionedthatnotseriouslyperceivedasaprioritybytopmanagementasoneoftheprimaryreasonsfornotthinkingbeyondERM.(B)Ambiguityintheriskcommunicationprocess.Theanalysissuggeststhatthecasesexhibitamajorweaknessinriskcommunicationasitposesstructural,operational,andtechnicalchallenges.Riskcommunicationisnotanisolatedissue(Tansey,2004)asitcorrelateswithindividualattitudetowardsriskandgetssubsequentlyassociatedtotheriskcultureoftheentity.Furthermore,participantsinvariablyagreedthatcorporatecultureisamajorbarriertoeffectivecommunication.Thespecificchallengeontheaccuracyofdata,measuringrisks,assessing,andmodelingrisksforagivenriskappetiteisdifficultprimarilyduetotheignoranceassociatedwiththesubjectivityattachedtotheeventsthatcouldplausiblyunfold.Someoftherisksarequantifiableandsomenon-quantifiable.However,anothersignificantoutcomefromthestudyistounderstandthattherisksarejustaccepted,simplytransferredorsharedamongthestakeholderforachosenpetro-strategy.Theexactapproachisfirm-specificandalsoculturallysensitive.Nevertheless,riskcommunication,corporateculture/riskculture,andriskawarenessneedtobealignedthroughacommonrisklanguagetodevelopanefficientERMsysteminallthecases.(C)ChasmbetweentheERMstrategyandpetro-strategy.ThecasesacknowledgedthebenefitsofERMimplementationas:.increasedmanagementaccountability;.bettergovernancepractices; .greatermanagerialunderstandingofcorporatestrategy;andERMinthe.consensusaboutcorporatestrategy.MiddleEastoilindustryNevertheless,thechasmbetweenpetro-strategyandERMstrategyisapparent.AgreaterunderstandingofstrategicrisksandoperationalrisksisparamounttothesuccessoftheoverallERMimplementation.Entitieshavealmosttypicallysetoutsimilarupstreamanddownstreampetro-strategies(Appendix1),buttheoutstanding71riskshavenotbeenpickedupintheriskassessmentoftheexistingriskmodels.Thetoolsandtechniquesusedtoidentifyandmeasuretheimpactofstrategicrisksappeartovary,dependinguponthestageofERMimplementation.However,corporateattemptstoidentifyandmanagestrategicriskswhileintegratingthemintoacorporate-wideERMframeworkisanareathatneedsgreaterfocusinthecases.Furthermore,thereisnostrongco-relationbetweenthepetro-strategiesbeingpursuedandtheERMstrategyastheentitieshavenotactuallyconsideredmanagementofallrisksinaholisticframeworkasespousedintheliterature.Theyhavenotexactlyaccomplishedanout-of-boxthinkingassomeofthepetrostrategiesseemtoeventriggercertainimmeasurableproject,contractual,strategic,credit,andlegalrisks.(D)ChasmbetweencorporateobjectivesandERMstrategy.Analysissuggeststhatthecaseshavefourcommonandprincipalcorporateobjectives:.CSR;.profitability;.operationalexcellence;and.sovereignreservesreplenishment.SeveraluniquecharacteristicsintheGCCindustrydrivetheseprincipalcorporateobjectivesasshowninFigure2.AbroaderunderstandingisattainedbymappingtheobjectivesfurtherintotheCOSOERMFramework:.Fromthereporting/financialpointofview,themaximizationofshareholdervalue(Power,2004;Dickinson,2001,2005;Lam,2003a,b)isdirectlylinkedtoprofitability..Fromtheoperationalpointofview,theexcellencemodelsintermsofutilizationofstateofthearthydrocarbontechnologyandskillsaredirectlylinkedtooperationalexcellence..Fromstrategicpointofview,thelong-termprospectsoftheentitiesisdirectlylinkedtothesovereignreservesreplenishmentwithutmostco-operationwiththegovernmentandrulersthereof.Itmustbenotedthatthelong-termeconomicprospectsarenotessentiallylinkedtofinancialfigures,butwithvariouswin-winrelationshipswithinthesocietyandthegrandstrategyofthenationaldepletionpolicies..Fromsocialpointofview,thetrusteeshipbetweensocialgroupsandthevaluecreatingNOCislinkedtotheCSRextendingitselffurtherintermsofenvironmentalprotectionandsustainablevaluecreation(Wade,2003). IJESMProfitability4,1·Meetingexpectationsofthegovernment·Providinggovernmentwithreliablecashflow·MaximizeeconomicreturnstotheState·Tomaintainandgrowmarketshares·Settinghighperformanceensuringlongterm72benefitstostakeholdersOperationalexcellence·Meetexpectationsofcustomer·Attractingandretainingskilledmanpower·Meetinglocalandinternationaldemands·Achievingsafety,health,environmentandqualitymilestonesthroughappropriatetechnologiesandstaffSovereignreservesreplenishmentPrincipalcorporateobjectives·Meetexpectationsofthegovernment·PreservingassetsandresourcesCorporatesocialresponsibility·Sustainableemploymenttonationals·SubsidizedfuelforlocalmarketsFigure2.·SupportingcommunitywelfareandupliftmentDriversofprincipal·Leadershipinenvironmentalprotectioncorporateobjectives·EngaginglocalenterprisesinbusinessAlltheaboveviewpointshavethecomplianceviewpointinterspersedintheirbusinessefforts.However,fromriskmanagementpointofview,oneofthekeyobjectivesintheGCCupstreamvaluechainissovereignreservesreplenishmentandintheGCCdownstreamvaluechainisoperationalexcellenceasrefinershaveanoverwhelmingoperationaltaskofhoningitscapabilitytotreatvaryingcrudeslateswhileguaranteeingexactingproductslates.TheultimateofgoalofERMistohelpmanagementinachievingcorporateobjectives(Dickinson,2001)throughappropriatepetro-strategiesacrossthebusinessvaluechain.Corporateobjectivesintheseentitiesrequireajointinitiativefromfinancial,technical,andstrategicplanningpersonnelwhileinternalauditprovidescomforttoboardonthedecisionstakenbytheabovedisciplines.However,allriskmanagementfunctionsarepredominantlytackledfromfinancialperspectiveinthecasesandthefunctionofCROisundertakenbyfinancepersonnel.Financialperspectivedoesnotconsiderthebehavioural,individualriskpreferences,psychological,andsocialaspects.Furthermore,mostentitiesarenorexactlycommerciallyrun,buthavealargeburdenintermsofCSR;paradoxically,theultimateobjectiveofERMistoreducelossduetopotentialsurprisesandexploitopportunities.Consequentially,thereisatensionbetweenfinance-drivenstrategythatseemstobeat loggerheadswiththeCSR.Thereisnostrongco-relationbetweentheenterpriserisks,ERMintheERMstrategythereofwiththecorporateobjectivessetoutinthecases.MiddleEastoilindustry5.DiscussionThefindingsfromthecomparativeanalysishasrevealedanumberofdifferencesandinconsistenciesbetweentheERMframeworkasespousedintheliteratureandtheexistingriskmodelsintheGCCoilindustry.Thereareenoughsimilaritiesbetween73eachoftheseentitiestomakeameaningfulcomparison;whilsttherewereenoughdifferencespresentintermsofriskperception,riskvocabularyandcorrelationbetweenpetro-strategyandERMstrategythatofferedpotentialforinterestingwithinandacrosscaseanalysistoprofferapracticalrecommendation(finalobjectiveofthisstudy)andlearningexperience.ThelimitationsintheERMframeworkinthecasesincludethefollowing:.Weaknessesinquantifyingemergingrisksforthepetro-strategies,i.e.allrisksarenotconsideredwithaholisticapproachtoriskassessmentinmostcases.Therewasasignificantchasmbetweenthepetro-strategybeingpursuedandtheERMstrategybeingimplemented.Theweaknessthereforeisalackofbettermechanismtocommunicatetheriskappetiteandriskcommitmentwhichisparamounttoriskassessmentandasaconsequenceabetteralignedstrategydevelopment.OneofthechallengesfacingmanagementteamsishowtolinkbusinessplansandERM(Frigo,2008).Recentglobaleventsshowusthatstrategydevelopmentandriskmanagementmustbecloselylinkedtobeeffectiveinprotectingshareholdervalue.Riskcommitmenttoconsidercross-segmentriskissuesandinterdependenciesfacilitateanenterprisetoremediatesignificantriskissues;whichisacriticaldrivertoattainanefficientERMmaturitymodel.Aclearlyarticulatedriskappetitewithclearriskprioritizationandinterdisciplinarycoordinationtoachievegoalcongruencebetweenpetro-strategyandriskstrategycansustainasmartriskculture..Theunstableriskappetitevarieswiththechangesinboardmembersandthereisastrongrelationshiptocorporateculture.Astrongriskmanagementculturerequirestherighttoneatthetopdrivingeverydaybehavioursofpeoplefromtheboardleveltothefrontlinestaff.Consequentially,C-suiteexecutivesneedtocultivateaculturethatincorporatesoriginators-conservers-pragmatistperspectives(MusselwhiteandRandell,2004)..Thecasesexhibitinconsistentriskpreferences.Thereisasignificantoverlapbetweentheplayersofoilgovernanceleadingtoambiguityintheriskmodels.OthersstudieshavealsoacknowledgedthatasignificantnumberofdistortionsandinefficienciesinthebusinessindicatorsofoilexportersintheMiddleEasthavebeenprimarilyduetopoorqualityofgovernance(Askari,2006),furtherexacerbatedandnebulousduetoOPECintransigence(HuettnerandAlHajji,2000).Furthermore,theCEO,asanadvocateofERM,shouldagainexemplifyadynamicleadershipstyletodevelopastronginstitutionalgovernancemodel..Somecasesplacefarmoreemphasisonriskmitigationandpreservingvaluewithriskstrategiesthatwerefairlyconservativeratherthanaddingvalueandusingriskinformationtogaincompetitiveadvantageusingadvancedriskstrategies. IJESM.Unquantifiableriskslackedascientificapproachtoquantifyasallthecasesdid4,1nothavethenecessaryexpertisetohandlesuchsituations.Thereareseriousconsequencesduetoahighdegreeofsubjectivityinriskassessmentwithapredeterminedprobabilityoffailureinapredeterminedperiodoftime..ThegenesisofERMinmostcasescomesfromboardinitiatives;thestudyhasrevealedthatcaseshaveanorganizationaltensionintermsofaccountability.74Whileboardresponsibilityshouldbelimitedtooversight(SobelandReding,2004),somebelievethatitisboard/executivemanagementsresponsibilitytoupholdERM.Managingrisk,likemanagingcostorrevenue,cannotbedonefromthetopalone.Itmustbeownedbytheonesclosesttoitsoccurrence,i.e.betterriskownershipisrequiredinthecases.AddressingthechallengeofchangeandestablishingsuccessfulERMthroughaseriesofbottom-upstepsthatbuildonexistingfunctionalcapabilities(Mosimann,2008)contributetosmartriskculture.Thisshouldnotbeseenasreplacingatop-downapproach;howeveritisshouldbeseenasactinginparallel,inaniterative,mutuallyre-adjustingandreinforcingmanner.Todevelopsuchaprocess,entitiesmusthaveappropriateincentiveschemestomotivateabottom-upprocess,improvetransparencyandcommunicateunequivocallytheboardsriskpreferencestothefrontlinestaff.Extendingtheriskassessmentsandintegratinginternalauditfindingsisthenextpracticalsteptowardsbetterimplementation..Inmostcases,entitysmissionand/orvisionstatementdidnotconsidertheadoptionofERMasitisamajorposturingandcommunicationtooltodefineitscorporateethosacrossthebusinessvaluechain..ThestudyhasrevealedthatalltheNOCShavealmoststereotypesetofcorporateethosintermsofstatingthepurpose,objective,direction,mission,andvisionstatements.Nevertheless,itshouldalsoembracecertainotherculturalcharacteristicslike:transparencytoandabilitytorespondtochangesintheexternalenvironmentandstable,unequivocal,effectivesystemsforgettingthingsdone.Theabilitytorespondtochangingmarketsandstableoperatingsystemappearmutuallyexclusive.Butcompaniesthatlearntomanagethepositivetension,i.e.riskquotient(RQ)(Musselwhite,2005)betweenthesedivergentqualitieshavecreatedasmart-riskculture.Entitiesshouldviewinnovationasadailyongoingprocessandnotjustbeforetheboardreview.ERMleadersshouldcollaboratewithinterdisciplinarymemberstoassesseffectivenessofongoingoperationsand/orriskmitigationprocessaswellastheimpactofinnovation.Furthermore,employeeempowermenttopromoteemployeecommitmentgoesalongwayinmanagingtheRQ..ThereisasignificantchasmbetweentheproponentsofERMandtheplayersintheexistingsilos.ImplementingERMhastakenmanyshapesinthecases.Somehaveonlyonepersonnelinchargeofrisk,undertheaegisofaC-suiteexecutive;whileothersseemtoemployateam.AsERMisafourplayersgame(MarcusEvansConference,London,2007;Deloitte&Touche,2003)comprisingofboardofdirectors,internalauditteam,executiveteam,andtheriskcommittee;applyingtheprinciplesofthelawofthefew(Gladwell,2000)canintegratethesilostorenderaneffectiveERMsystem.Theseleadershipvoicesshouldhelpcreatesharedbeliefs,sharedboundaries,effectivedecision-makingprocesses,andeffectivechange managementprocesses(Brewer,2008;Simons,1994;Shapiro,2003).Furthermore,ERMinthethecasesdidnothaveamechanismtomotivatethemanagementandstaffwithMiddleEastoilincentiveschemestomotivateprudentmeasuresinmitigatingariskorexploitingindustryanopportunity.Infusinganorganizationwithsharedbeliefsincludesreinforcingtheentitysmission,ethicaltone,andattitudetowardsriskandemployees.RiskpoliciesandmissionstatementsincludingauditChartershouldacknowledgeandincorporatetheERMinitiativestodrivetheeffectivenessoftheERMframework.75.InternalauditdoesnotplayanactiveroleintheERMimplementation.However,internalauditcanplayauniqueroleinthisexcitingnewareaofcorporatemanagementbutonlyifitisuptothechallengeandonlyifitistrulyempoweredbytheboardofdirectorsoftheentities.ThegenesisofERMinmostcasescomesfromauditrecommendationasdeterminedinthisstudy.However,therecognition,importance,andeffectivenessofERMcomesnotfrommereauditrecommendation;butwhenthecorporateriskregisterisdrivingtheauditplanthroughasharpauditfocusonappropriatebusinessprocessobjective,scopeofauditandreviewofrisks.Furthermore,itprobablygoeswithoutsayingthatinternalauditingcanonlyparticipateeffectivelyintheimplementationofERMifithasembraceditsownparadigmshiftfromcompliance-basedinternalauditingtorisk-basedinternalauditing(RBIA).Itisimportantthattheentitiesunderstandthevalue-addingservicethroughRBIA(Deloitte&Touche,2003).Furthermore,embracingthisapproachaddressestheneedforanefficienttoolforreportingandmonitoringriskthatisadvocatedintheCOSOERMFramework..Theexistingriskmodelsinsomecasesdidnotfullyalignwiththeinternalauditfocusandthepetro-strategieswereweakinidentifyingandexploitinglostwindowofopportunities.RiskmodelswererevisitedatintervalsratherthanbeingacontemporaneousupdateastheseentitieshadanERMprocessbutnotadedicatedERMfunctionintheriskgovernancestructure.Itisimperativethatsuchriskmodelsrecognizedtransientconditionsinbusinesscycleslikethenewbusinessriskdeepeningrecession.Thishastriggeredanewriskbusinessmodelredundancywhichisalsothetop-tenglobalbusinessrisks(Ernst&Young,2009).ThiscouldforceleadingfirmsliketheNOCsoftheMiddleEasttoreinventtheirpetro-strategiesandtheriskgovernancestructures.Notwithstandingtheabovegaps,however,theGCCoilandgascompanieshavebeeninbusiness,eversince1930andhavebeenservingtheirnationsandtheworldatlarge,whichisevidentfromsomeoftheiroverarchingstrategicdirectionexpressedasenergizingthenationandenergyforourworld.Thisobviouslysuggeststhattheyhavesomeestablishedandtestedmechanismstomanagetheirriskstogenerateprofitandmeettheexpectationsoftheirstakeholders.Withthechangingbusinesslandscape,andwiththeemergenceofERM,theMiddleEastoilindustryiswitnessingachangeinriskattitude.ERMisnotafadoranewideaoramanagementprocesswhichisnicetohavebecausesomeotheroilandgasentityseemtohaveit,butisbecominganindispensablebusinesstoolnow;andispoisedtobeoneofthetopbusinessdriversorvaluedriversbyitselfinthenearfuture.Similartothebankingandinsurancesectors,theGCCoilandgascompaniesshouldregardERMastheprincipalcorporate IJESMobjectiveaswellasthebusinessvaluedriver.Someoftheentitiesareearlyadopters4,1whileothersarebeginningtoembraceanERMframework.BestpracticeapproachforERMimplementationThefinalobjectiveofthisstudyistoproposeabestpracticeapproachforERMimplementation.Thisstudyhasleadtothefollowingten-point,region-specific,and76practicalactionplanfortheGCCoilandgascompaniesthatcantransformtheirexistingERMmodelstoamatureandrobustframework:(1)Establishanunequivocaloilgovernanceframework.Toinstigatebetteroilgovernanceframeworkintheoilandgassectorandpushforreformsaimedatbettercorporategovernance,toenableoperatorstodesignarobustERMmodelupholdingestablishedintegrity,fosteringethicalstandardsandwithoutconflictsofinterestbetweenpolicymaker,regulator,andoperator.(2)AdjusttheCEO’salterego.Assumealeadershipstylethatfostersamanagementphilosophy,whichcreatesandinfusessharedbeliefsthatenableorganizationalchangeandinnovationintermsofenterprisewideriskmanagement.(3)CreateacontagiouscommitmenttoERM.FormaneffectiveriskcommitteewithanadvocatepoolusingthebestmixofpersonnelwhocanleadtosignificantadoptionofERMbestpracticesacrossever-widercirclesoforganizationalpersonnel.(4)Instigateaparadigmshiftininternalauditingprocess.EmbraceRBIA,whichisthecurrentbestpractice,whichhassupersededbothcontrols-basedauditingandbasiccomplianceauditing,butstillmaintainselementsofboth.(5)AligntheinternalauditingprocesswithERM.EstablishanauditcharterthatdeclaresthealignmentoftheERMinordertoaddresstheauditfocusoncriticalbusinessareasasidentifiedbyERMandhighlightanypotentialgapsthereof.Thiswilldevelopamorecomprehensiveriskmodelorriskregisterinturnwillfacilitateandenhancetheprocessofriskidentificationandassessmentandhencesettingupappropriatemitigationmeasures.Thisalsohighlightsandmonitorsthegapbetweenpetro-strategiesandERMstrategiesandanyrisksthereof,whichcouldgounidentified.(6)Upholdthecorporateriskregisteracrossthebusinessvaluechain.Developastrategicinternalauditplanusingthecorporateriskregistertherebyhavingaprioritizedauditcoveragedesignedtorenderindependentassuranceastotheadequacyofriskmanagementarrangements.(7)Managetheentity’sRQwithappropriateriskcommunication.Promotearisk-focusedculture,bydeclaringtheERMinitiativeinthecompanysvisionandmissionstatementstofosterriskdisciplineasabusinessvalueoftheentityleadingtobetterawareness.Riskawarenessisapowerfultoolbecauseincumbentswhounderstandthecompanysapproachtendtoself-align.(8)Establishunequivocalriskpreferencesacrosstheboard.Setoutacommonrisklanguageconveyingathresholdformaterialrisksforprocessesacrosstheupstreamanddownstreambusinessvaluechain,therebyboardsriskappetiteisopenlyexpressed. (9)Instigateapragmaticbottom-upandtop-downapproachtoriskownership.ERMintheIntroduceincentiveschemeforimprovedriskownershipandpromotingMiddleEastoilbottom-upapproachwhilstretainingthetop-downapproach.Riskpolicyshouldindustryincludeacommoninvestigativepolicyforincidentsandacommonincentivepolicyforefficientandeffectiveriskresponseandpursuingopportunitiesaswell.77(10)EmbedsmartriskculturebyintegratingERMwithstrategyplanningprocess.ExploitthenaturallinksofERMandstrategyplanning.ERMasastrategicbusinessdrivershouldexaminehowwellapetro-strategywillperformunderdifferentscenariosandevents.ERMmustlookcloselyatscenariosandincludeallrisks,wherethepetro-strategycouldperformsopoorlythatitcouldpotentiallyresultinsignificantlosses,destructionofshareholdervalue,orleadtodamagedcorporateintegrityandcorporatereputation.ThisstudyshedslightontheparameterswhichaffecttheefficiencyandeffectivenessoftheERMsystem;approachtoimplementsuchasystemintheGCCoilandgassector;whileexpressingthelocationoftheERMmaturitylevelalongtheriskcontinuum;andrecommendsapracticalbestpracticeapproachtowardsbetterimplementation.Thisstudyshouldprovideananswerforthestakeholderstotheirquestions:whatwentwrong?andhowcanwedoitbetter?withrespecttotheERMimplementationinthecases.TheimmediatecontributionofthestudyistocontributeitsmitetotheexistingbodyofknowledgeinERMsoastosteerthewayforwardforanimprovedunderstandingandimplementationoftheERMsystemwithintheprecinctsoftheoilandgasindustry.Beingastudyaddressingastrategicindustry,thestakeholdersofthisstudyaretheshareholders,managementandtheboardofdirectorsofoilandgasentitiesandregulatorybodies.Thiswillalsobenefitstrategicthinktanks,scholarsinfuturestudies,andcorporateplanningcellimplementinglong-termstrategyforbusinesssustainabilityintheoilindustry,riskmanagers,internalauditors,managementconsultants,andacademia.ThisstudyisperhapsthefirstofitskindtoreporttheresultsofastudyexaminingERMpracticedbytheoilentitiesintheMiddleEast,particularlytheGCCentities.Thisresearchcouldleadtosomeinterestingfuturestudiesandthefuturedirectionsforresearchsuggestedare:.Withabasisofsimilarframeworkofstudy,onecanextendtheempiricaldatafromotheroilandgaseconomies..Therangeofinter-disciplinarysubjectsbeingintertwinedintheERMprocessandERMfunctionperseoffersnewareasofresearch..Furtherresearchgapscanbeaddressedbytakingasimilarapproachforanin-depthanalysiswithauniquetheme..AninterestingpossibilitywouldbetoevaluateiftheforeignpoliciesofacountrymatchwiththeERMstrategyoftheNOC..Thebasicissuesexploredinthestudycouldbeapproachedwiththeaidofalternativeresearchmethodologiesgeneratingnumericaldataamenabletorigorousquantitativeanalysis. IJESMFinally,thisstudyisanattempttopushtheboundariesofknowledgeinthetheoretical4,1areaofERMintheoilandgasindustryandthepracticalareaofthestrategicmanagementofoilandgasindustry.Furthermore,thispaperalsoprovidesusefulandtimelyanalysisoftheGCCoilindustryfromtheperspectiveofimplementationofanERMframeworkwhichisacontemporaneousbusinesspriorityiteminmostentitiesintheGCChydrocarbonsector.786.ConclusionThestudyconcludesthatthelevelofunderstandingofthenatureofERMvariessignificantlybetweenthecasesandacrossthevarioussectionsoftheentity.EffectiveERMrequiresaninterdisciplinaryapproachanditisdominatedbyasingledisciplineinallthecases.ERMrequirescapabilitiesnotonlytobeageneralistintermsofunderstandingthehydrocarbonvaluechain,butalsotobeaspecialistwithafocusonriskstodevelopandmanageaportfolioofrisks.Itrequiresthecollaborationfromtechnical,strategic,finance,legal,IT,EHS,quality,humanresources,marketing,andaswellasplantsecurity;whicharenecessaryfortheparadigmshift,emergingthroughconvergenceoftheshareholdervaluemodelsandtheriskgovernancemodelsleadingtowardscorporatereputationmanagement.AsmuchasERMisessentialtobettermanaginguncertainty(bothriskandopportunity)andoptimizingperformance,itisnotapanacea,butneverthelessbuildsbusinessresilience.Buildingsuchaframeworkrequiresanumberofinterrelatedcomponentsthatworkinharmonyanditeratively,evaluatingtransientconditions,supportcommitment,execution,goalcongruencewiththeappropriatepetro-strategiesandriskstrategy,andsustainabilityofERMasanintegratedriskmanagementframeworkintheoilandgasentities.Ifproperlyimplemented,ERMinitiativeinthecaseswillmatureovertimefromtacticalsolutiontoastrategicimperativewiththeultimategoalofimprovedperformance.Initsongoingsearchforpotential,ERMwillproduceresultsfromriskeliminationtopreparationforpossibleproblemstoopportunityexposure.NOCsintheMiddleEastareevolving,seekinganelusivebalancebetweentheirnationalandcommercialmissions;andERMwhenappliedrightlyasrecommendedinthebestpracticeapproachwhichcomesoutofthisstudywillproducethedesiredresults,enablingthemwiththetechnicalandbusinessskillstodevelopresponsiblytheimmensehydrocarbonresourcesentrustedtothem.ReferencesAabo,T.,Fraser,J.R.S.andSimkins,B.J.(2005),Theriseandevolutionofthechiefriskofficer:enterpriseriskmanagementathydroone,JournalofAppliedCorporateFinance,Vol.17No.3,pp.62-75.Aburish,K.S.(1997),ABrutalFriendship,Indigo,London.Albers,H.H.(1989),SaudiArabia:TechnocratsinaTraditionalSociety,PeterLang,NewYork,NY,September.Angell,N.(2006),AnOverviewofLegalStructuresintheGCCCountries–IssuesofRiskandStrength,WorldServiceGroupTheGlobalProfessionalServicesNetwork,Houston,TX,availableat:www.worldservicesgroup.comAskari,H.(2006),MiddleEastOilExporters:WhatHappenedtoEconomicDevelopment?,EdwardElgar,Cheltenham. 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Appendix1ERMinthe)MiddleEastoilindustry(continued83PetroleumDevelopmentOmanthatholdsmorethan90percentofthecountrysoilreserves,andaccountsformorethan90percentofproductionOmanRefineriesandPetrochemicalsCompanyoperatetworefineriesOmanGasCompanyisthemajorgastransportationanddistributionentityOmanLiquefiedNaturalGasisajointventure(JV)entityengagedinthebusinessofproducingandsellingLNGStrategicdirectionelaboratesthespiritofthebusinessstatements,viabusinesspurpose,mission,vision,andvaluesCompliancetomanagementsystemslikequalityenvironment,healthsafety,andinformationsecurityEmbracesthethreepillarsofsustainabledevelopment,i.e.people,planet,andprofitOverseeingAuthoritybyOmansMinistryofOilandGasregulatorybodyOmanoilindustryishopingforswiftrecoverywithapotentialtoreversetheexistingtrend.Thefollowingupstreampetro-strategieshavebeensetout:UtilizingenhancedoilrecoverytechniquesforexistingblockstoreversedeclineCorporateethosUpstreampetro-strategiesCorporategovernanceframeworkMajorentitiesinthebusinessvaluechainKuwaitPetroleumCorporationcontrolsoilandgasactivities,producing100percentofoilandgasproductionKuwaitNationalPetroleumCompanysubsidiaryhas100percentofnationalrefiningcapacityandthefuelsdistributionsegmentStrategicdirectionelaboratesthespiritofthebusinessstatements,viabusinesspurpose,mission,vision,andvaluesCompliancetomanagementsystemslikequalityenvironment,healthsafety,andinformationsecurityStrongCSRwithapassionforsafety,cleanerworld,andlocalizationinitiativesOverseeingAuthoritybytheSupremePetroleumCouncil(SPC)policybodyKuwaitoilindustryisaimingforambitiousproductiontargetwithlessoptimismfrompoliticalfront.Thefollowingupstreampetro-strategieshavebeensetout:Negotiatingperformance-relatedcontractswithIOCsTableAI.QualitativeinformationaboutthecasesCase1:BahrainBAPCOcateringforupstreamoilandgas,anddownstreamoilBahrainNationalGasCompanycateringfordownstreamgasStrategicdirectionelaboratesthespiritoftheCase2:Kuwaitbusinessstatements,viabusinesspurpose,mission,vision,andvaluesCompliancetomanagementsystemslikequalityenvironment,healthsafety,andinformationsecurityStrongCSRwithapassionforsafety,cleanerworld,andlocalizationinitiativesOverseeingauthoritybytheNationalOil&GasAuthorityregulatorybodyBahrainoilindustryisaimingforearlyrecoveryandalsohopingtoincreaseitsproduction.Thefollowingupstreampetro-strategieshavebeensetCase3:Omanout:SolicitingInternationalOilCompanies(IOCs)foroffshoreblocksandonshoredeepgasblocksthroughexplorationproductionsharingagreements(EPSA) )IJESM4,1(continued84SolicitingIOCsfornewdiscoveriesExtensionstoexistingconcessionsDevelopinggasprojectsinIranandimportingtoOmanOmanoilindustryisalsoengagingwithcostlyexpansionswhiletakingthedownstreamway.Thefollowingdownstreampetro-strategieshavebeensetout:ConstructinganintegratedrefineryandpetrochemicalcomplexFurtherexpansionplansonrecentlyconstructedrefineryinSoharAbuDhabiNationalOilCompany,dominatestheAbuDhabiupstreamoilsectorandUAEingeneralStrategicdirectionelaboratesthespiritofthebusinessstatementsviabusinesspurpose,mission,vision,andvaluesCompliancetomanagementsystemslikequalityenvironment,healthsafety,andinformationsecurityStrongCSRwithapassionforsafety,cleanerworld,andlocalizationinitiativesCorporateethosDownstreampetro-strategiesMajorentitiesinthebusinessvaluechainExpandoverseasforminginternationalsubsidiariesKuwaitoilindustryisalsoaimingforboostingrefiningcapacitywithlessoptimismfrompoliticalfront.Thefollowingdownstreampetro-strategieshavebeensetout:Constructinganewrefinery(615,000b/d)atAl-Zourwhichiscurrentlyunderre-tenderduetoapoliticalstalemateCapacityexpansionsforULSDfuelstocatertonewmarketsegmentsSaudiARAMCOaccountsforvirtuallyalloilandgasproductionandownsrefinerieseitheroutrightorthroughJVswithIOCsStrategicdirectionelaboratesthespiritofthebusinessstatements,viabusinesspurpose,mission,vision,andvaluesCompliancetomanagementsystemslikequalityenvironment,healthsafety,andinformationsecurityStrongCSRwithapassionforsafety,cleanerworld,andlocalizationinitiativesTableAI.SolicitingIOCsforexistingonshoreblocksthroughincrementaldevelopmentproductionsharingagreementsConsideringgasimportoptionfromIranBahrainoilindustryisalsoaimingforpotentialexpansionswhileexploringmarketswithnewproducts.Thefollowingdownstreampetro-strategieshavebeensetout:Constructingtheworldslargesthydrocrackingplant(100,000bpd)forproducingLSD/ULSDspecificationsBuildinglubebaseoilplantthroughJVpartnershipConstructinganewnapthacrackerinthenearfuturePrivatizationofthelocalretailfuelsnetworkCase4:QatarQatarPetroleum,ownsalldownstreamoilinterests,negotiatesE&Pagreements,sharesinupstreamprojectsandisinvolvedinLNGandGTLschemesQatargasandRasGasareresponsiblefortheproductionandmarketingofLNGStrategicdirectionelaboratesthespiritofthebusinessstatements,viabusinesspurpose,mission,vision,andvaluesCompliancetomanagementsystemslikequalityenvironment,healthsafety,andinformationsecurityCase5:SaudiArabiaStrongCSRwithapassionforsafety,cleanerworld,andlocalizationinitiatives ERMintheMiddleEastoilindustry85OverseeingauthoritybytheSPCpolicybodyUAEoilindustryisgatheringpaceinoilproductionamidstvastsourgasreserves.Thefollowingupstreampetro-strategieshavebeensetout:SolicitingIOCsfornewoffshoreandonshoreblocksthroughEPSAimprovingcompetitionamongsttheIOCsDevelopingLNGbusinesssegmentUAEoilindustryisdevelopingonitsupsidepotentialinrefiningcapacityandrefinedproductsexportsThefollowingdownstreampetro-strategieshavebeensetout:ConstructinganintegratedrefineryandpetrochemicalcomplexBoostingrefiningcapacitythroughanewrefineryunderconstructionandexpansionprojectsReformingtheexistingconcessionssystemforUpstreampetro-strategiesDownstreampetro-strategiesCorporategovernanceframeworkOverseeingauthoritybytheSupremeCouncilforPetroleumandMineralsAffairsregulatoryandpolicybodiesSaudiArabianoilindustryisinfactleadingthewayitsvastoilreserves.Thefollowingupstreampetro-strategieshavebeensetout:SolicitingIOCsforanupsideinthevastemptinessortheemptyquarterSolicitingIOCsforpursuinggasdevelopmentprojectsformingconsortiaSaudiArabianoilindustryisthebiggestandisaimingstillhigher.Thefollowingdownstreampetro-strategieshavebeensetout:petrochemicalcomplexBoostingrefiningcapacitythroughanewrefineryunderconstructionCapacityexpansionsforULSDfuelstocatertonewmarketsegmentTableAI.OverseeingauthoritybyMinistryofEnergyandIndustryregulatorybodyQataroilindustryisattractinginterestforrisingoilproductionamidstvastgasreserves.Thefollowingupstreampetro-strategieshavebeensetout:SolicitingIOCsfornewoffshoreandonshoreblocksthroughEPSADebottleneckingprojectsforcapacityexpansionsEmphasisonadvancedLNGcontractingstrategyVastdevelopmentplansandLNGtradingQataroilindustryiscurrentlyfacingapressureduetoconventionaloilproductionamidstvastgasreserves.Thefollowingdownstreampetro-strategieshavebeensetout:ExpansionprojectsonrefinerycapacityEnhancingcondensaterecoverytofeedpetrochemicalsegmentEmphasisonadvancedLNGcontractingstrategyandLNGtradingConstructinganintegratedrefineryand IJESMAppendix24,1StandardizationIntegrationCentralization1PowerisspreadoutacrossthePowerisspreadoutacrossthePowerrestsatasinglesourceriskownersinthebusinessriskownersinthebusinessintheoverallbusinessvalue86valuechainvaluechainchain2ManagementdecisionislessWellcoordinatedmanagementManagementdecisionisproactiveandmoreemphasisisdecisionwithquickerandslowerandhenceslowerriskoncompliancetostandardsefficientriskresponseresponseacrosstheriskspectrum3StandardsmaybeManagementsupervisesMoreinterferencefromtopimplementedinpartandnotinoperationalriskswithleastmanagementinoperationalfullresultinginconflictsandinterferencefromtoprisks,whentheyshouldideallycontradictionsacrossriskmanagement,allowingthemtobeengagedwithlongtermcategoriesreachouttoachieveoverallstrategicriskscorporateobjectives4OneworldlanguagewithEncouragesefficient/betterDoesnotallowefficientriskbetterriskownership;riskcommunicationownershipasmanagersmaystandardizedriskresponsebutnotacquirerequisiteexposurecouldlackcreativityandacceptanceofrisks5RepressionofmanagementBettergoalcongruenceSilomanagementresultingincreativityachievedacrossandthroughconflictsandcontradictionsouttheentity6Unequivocaltop-downBottom-up(3608feedback)Unequivocaltop-downapproachapproach7StandardizeddashboardBetteranalysesandBiasedanalysesandTableAII.indicatorsofKRIsmonitoringofKRIsthroughmonitoringleadingtoRiskgovernanceintegrationunreliableKRIscharacteristicsinthe8FairlymotivatedHighlymotivatedLessmotivatedmanagementcasesmanagementmanagementAbouttheauthorK.MuralidharholdsaPhD(Management)inPetroleumManagementfromtheUniversityofPetroleum&EnergyStudies,India;MBAfromtheUniversityofStrathclyde,Glasgow,UKandaBachelorDegreeinMechanicalEngineeringfromtheBharathidasanUniversity,India.Hehasabout18yearsofindustryexperienceandiscurrentlyworkingatBAPCOasaSeniorInternalAuditor.Hehasworkedinvariousmajorcompaniesandwasinvolvedinprojectdevelopment,projectfinancing,engineering,andcontractsmanagementactivitiesintheenergyandoilandgassectors.Overthepasttenyears,hiscareerengagementsaregenerallyinvolvedwithvariousbusinessdevelopmentinitiativesandavarietyofspecialistrolesincorporateservicesincludingboardassuranceservices.HeisaMemberintheGraduateManagementAssociationofAustraliaandtheAustralianInstituteofCompanyDirectors.K.Muralidharcanbecontactedat:murali@bapco.netTopurchasereprintsofthisarticlepleasee-mail:reprints@emeraldinsight.comOrvisitourwebsiteforfurtherdetails:www.emeraldinsight.com/reprints