A new report from WTW found that supply chain risks in the energy sector are increasingly an issue for risk managers, beset by numerous other challenges stemming from different factors.
The lengthy report details several of these challenges, including the ongoing efforts for net-zero transition, dramatic price fluctuations due to severe economic trends, immature alternative development and adoption strategies, and a fluctuating regulatory backdrop. All these challenges combined result in the continued insurance price increase across the sector.
WTW Asia head of construction and natural resources Nicki Tilney said in the full report that the fallout from the Russia-Ukraine conflict, combined with inflationary pressure and more volatility in the prices of oil and gas, meant that needing to maintain energy supplies today and transitioning to clean, renewable energy tomorrow are more critical now than ever before.
“Our 2023 Energy Supply Chain Risk survey has shown that companies recognise the need to overcome these challenges and improve supply chain resilience, but they are hampered by an inability to get hold of enough accurate data to manage their risks. It is therefore key for energy companies, including those in Asia, to work closely with their suppliers to better understand their supply chains,” Tilney said.
Identifying, understanding, and addressing supply chain risks
The report indicated several of the most interesting findings regarding the supply chain, including:
83% of those surveyed cited a lack of insurance solutions to be among the greatest challenges in addressing their supply chain risks
67% of surveyed businesses said that losses related to the supply chain had been higher than expected over the last two years
39% named the shortage of raw materials as one of the biggest supply chain factors expected to impact their respective industries over the next two years
84% of those surveyed said that they have made some improvements in their approach to supply chain management as a direct response to the pandemic
65% said that developing a detailed understanding of their supply chain would be the biggest impact in supply chain challenges impeding energy transition
WTW named several risks that are associated with mismanagement of the supply chain. As the energy sector continues to be in a crisis due to various challenges, it’s imperative, the report said, that risk managers are aware of these leading concerns.
Critical shortages – almost four in 10 named the shortage of raw materials as the biggest supply chain factor expected to impact businesses over the next two years. Shortages can lead to construction delays, the former of which is also near the top of the list.
Economic risks – three in 10 cited the uncertainty emerging with the effects of inflation and rising costs as among their top concerns for supply chain risks. The report said that escalating project costs have in some cases exceeded the project budget by 40% before work even began.
Geopolitical risk – two in 10 cited this risk as high impact, while nearly six in 10 placed it on medium. The ongoing conflict in Ukraine, for instance, has led to a deprivation of a major source of lithium needed for energy transition.
Cyber risk – with the continued digitalization and automation of processes, certain risks are bound to rise. Major projects that share the same systems, as the report cited, are extremely vulnerable to malware or cyberattacks.
Climate change – more than half of those surveyed put climate change and risks to the environment among the top global trends affecting supply chain. Concerns range from impact of extreme weather and drought to resilience of energy infrastructure and supply chain.
ESG – the energy sector is not exempted from mounting regulatory and public pressure to be more socially and ecologically responsible. More than eight of the 10 polled in the report said that ESG is a specific selection criterion when selecting new supply chain vendors.
Pandemics – despite the disruptive impact of COVID behind us, risks regarding new strains or a future, unforeseen pandemic still cause plenty of concern, with more than half of respondents putting it at the top of the global trends list with greatest influence on supply chain risks.
Addressing these risks to build resilience should be a top priority for those in the energy sector, and WTW offered these companies six steps to cover the holes in their supply chains.
Make resilience a boardroom priority
Reduce reliance on single suppliers and locations
Develop closer working relationships
Reconsider just-in-time models
Aim for end-to-end visibility and transparency
Stress-test your response
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