=Paper=
{{Paper
|id=Vol-2422/paper13
|storemode=property
|title=Emergent Properties Manifestation in the Risk Assessment of Oil and Gas Companies
|pdfUrl=https://ceur-ws.org/Vol-2422/paper13.pdf
|volume=Vol-2422
|authors=Inesa Khvostina,Nataliia Havadzyn,Liliana Horal,Nataliia Yurchenko
|dblpUrl=https://dblp.org/rec/conf/m3e2/KhvostinaHHY19
}}
==Emergent Properties Manifestation in the Risk Assessment of Oil and Gas Companies==
https://ceur-ws.org/Vol-2422/paper13.pdf
157
Emergent Properties Manifestation in the
Risk Assessment of Oil and Gas Companies
Inesa Khvostina[0000-0002-8739-2670], Nataliia Havadzyn[0000-0002-5662-2939],
Liliana Horal[0000-0001-6066-5619]
Ivano-Frankivsk National Technical University of Oil and Gas, 15, Karpatska Str., Ivano-
Frankivsk, 76000, Ukraine
inesa.hvostina@gmail.com, n_havadzyn@ukr.net,
liliana.goral@gmail.com
Nataliia Yurchenko
Ivano-Frankivsk National Medical University, 2, Halytska Str., Ivano-Frankivsk, 76000,
Ukraine
yurchenko.n.b@gmail.com
Abstract. The article presents a study on risks in oil and gas industry and reveals
their causes investigating enterprises activity as a result of emergent properties
of systems. The original algorithm of risk assessment process based on emergent
properties study is offered. A taxonomy approach and factor analysis are used for
purposes of risk evaluation. The risk assessment consists of risks taxonomy,
database structure development, identification of risks through impact factors
evaluation; economic system emergent properties risks prediction, an integral
risk level indicator calculation using taxonomy approach, correlation analysis of
integral indicators of risk assessment, preventive measures for minimizing of
negative impacts and reducing risks.
Keywords: emergent properties, taxonomic procedures, risk assestment, oil and
gas companies.
1 Inroduction
Oil and gas industry enterprises have a multi-layer organizational and production
structure and a complex technological and production process. Making changes to
structural and functional relationships, sharing of responsibilities and resources inside
the enterprise and structural changes in the state economics are accompanied by a
significant number of risks.
The process of risk assessment requires large amounts of information involving
complex methodological approaches, adaptation of economic and mathematical models
to software.
158
The problem areas of this study are: identification of the properties of the risks in oil
and gas enterprises, modeling of emergent properties of these risks; taking into account
the potential of endangered properties in risk assessment.
The essence of risk as a parameter was discussed in works of Ukrainian and foreign
scientists [1, 2, 3, 4]. Oil and gas enterprises risks exposure was revealed in publications
[5, 6, 7, 8, 9]. The studies mentioned above present the process of risk assessment using
alternative and improved methodological approaches.
The overview of scientific publications shows insignificant differences in the views
on the economic nature of the “risk” parameter. In the works [1, 2, 3, 4, 10, 11] the
emphasis is on the probable negative consequences if a risk situation occurs and
preventive measures to reduce them.
Some other authors [12] consider the process of business administration, taking into
account the influence of various internal and external factors, including risks. The
methods of dynamic optimization aimed at risk reducing were offered.
The following studies [5, 6, 7, 8] present the classification of risks in oil and gas
companies' activity and suggest methodological approaches to their assessment.
2 Risks in Oil and Gas Industry
It was figured out that the main risks inherent for functioning of oil and gas companies
are (Fig. 1):
─ internal (financial, investment, property, human resource, management, innovation,
information, production, operational, technical, technological, liquidity);
─ external (political, legal, socio-demographic, ecological, market, exchange,
repayment, geological, weather, globalization).
The cause of financial risk is the lack of access to capital, high inflation, fluctuations in
exchange rates, an unstable financial business model and weak financial capabilities of
oil and gas companies.
Low level of attraction of investment projects (involving international financial
markets as well), causes investment risk. A low level of liquidity, solvency and business
activity reflects property risk. Personnel risk arises as a result of the impossibility of
attracting third parties in delimitation of activities (transportation of natural gas,
underground storages, gas extraction as a separate activity).
Unfortunately, the oil and gas business management system in Ukraine is obsolete,
inefficient and does not meet up to date international standards (management risks).
The problems in acquiring experience of managerial innovations and innovations in
the oil and gas production is considered to be innovative risk.
Gaps in information systems and security, large amounts of information, the
complexity of their distribution and usage make up the essence of information risk.
The complexity of the production processes of the oil and gas companies from the
exploration of the deposit through exploration and exploitation drilling, the
development of oil and gas fields, transportation of hydrocarbons till the processing and
marketing define the production risk. Technical risk is considered to be the result of
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worn-out or obsolete equipment and tools used in the production process. Management
and production technologies used do not match international standards, ignore scientific
and technological progress and cause technological risk.
The unstable political situation, the annexation of the Crimea and military actions in
the Eastern regions of Ukraine characterize the political risk. Participation in
international litigation, absence of an approved mechanism of compensation if gas is
sold at regulated prices, controversial provisions in the current legislation give rise to
regulatory legal risk. Socio-demographic risk is the result of low purchasing power of
the population, a decrease in the birth rate and an increase in mortality, mass migration
of population of working age. The impact of environmental risk appears due to the
usage of obsolete equipment and production technology, improper organization and
technology faults.
EXTERNAL RISKS
Political
Legal
Socio-Demographic
Ecological
Market
Exchange
Repayment
Geological
Weather
Globalization
INTERNAL RISKS
Property
Informational
Investment
Operational
Production
Human Resource
Innovative
Liquidity
Managerial
Technological
Technical
Financial
Fig. 1. Types of risks influencing oil and gas enterprises (Generalization made by authors).
160
Geological risks affect oil and gas extraction process, resulting in uncertainty about the
productivity of deposits and associated with licensed areas where development and
extraction are in the process. The situation in Ukraine has become more complicated
due to the relatively low quality of geological information and obsolete equipment and
technologies that can lead to increased drilling costs and reduced production rates [9].
Globalization risks can cause the disappearance of not only a particular enterprise,
but also the whole industry or its separate components. Standardization of goods and
the unification of consumer preferences can be both an opportunity for market
expansion and a threat to an individual enterprise. It depends on its possibility to operate
according to world standards or find a niche to avoid global competition. Oil and gas
enterprises might face the risk of loss if global society switches to alternative energy
sources.
3 Some Aspects of Risks Emergent Properties Manifestation
Any of the identified risks can cause the crisis for business entities, including oil and
gas companies. Prediction of the risks caused by the emergent properties should be a
prerequisite for adverse events monitoring. It allows to select and systematize factors
by the field of their occurrence.
It should be mentioned, that the emergent properties manifestation arises when the
risks are combined, since none of them can be considered separately from each other.
In the meantime, each risk can be characterized by a wide range of indicative factors
and the links between them.
The concept of emergence according to authors [13, 14] reflects such a situation,
when an unexpected overall positive effect occurs as a result of the strategic interaction
of selfish individuals.
Emergence of the system is characterized by the fact, that, one hand, its properties
arise unexpectedly and, on the other hand, they exceed the additive properties of its
separate elements. State differently, the properties of separate elements being connected
to the system become the cause and the result of the sudden appearance of distinctive
properties of this system. These elements had never characterized by these properties
until they joined the system.
The difference between emergent properties and synergy is that the synergy effect
does not exist out of bounds of properties of the elements of the system, although the
overall effect exceeds the effect of each individual element. While the sign of
emergence is the emergence of new properties that are not distinctive for each
individual element.
Emergence is a consequence of the manifestation of at least three factors:
1. a sharp nonlinear gain of previously unnoticed property;
2. unpredictable bifurcation of any subsystem;
3. recombination of links between elements [16].
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On the flip side of the coin, re-emergent property is explained as the repeated returns
of negative factors, previously either unoccupied or uncontrolled. These factors usually
appear over unpredictable consequences, significant financial losses or new risks.
It is important that if the risk assessment involves emergent properties evaluation, it
aids identifying both future hazards and new opportunities in the development of
enterprises. It becomes easier to see the emergence of new interconnections both
internally and externally, and form a new approach of risk management aimed at
identifying risks, reducing them and supporting self-organized tendencies. Excessive
formalization in risk assessment has a very negative effect on the results of the
assessment and makes it impossible to obtain a real picture for prediction the risks of
enterprises.
For example to manage legal and environmental risks it is necessary to adopt
international environmental quality standards in Ukraine to reduce the risk of
environmental pollution and degradation.
A characteristic feature of the innovation risk of oil and gas enterprises in Ukraine
is slow implementation of scientific and technological innovations. Also there is
managerial risk, which is the complexity and affects several layers of the organizational
and production structure of oil and gas enterprises. In combination we will get an
emergent property – managerial innovation (optimization of organizational structure),
which will reduce the level of risk. If we consider the combination of managerial and
technological risks, then manifestations of emergent properties will result in improved
management technology or more efficient management of the technological process.
The phenomenon of combining legal risk with innovation is manifested in changes to
the law; with management – in the implementation of international rules of law
concerning oil and gas enterprises management; with technological – in the
simplification of implementation (environmental norms as an example) in the
technology of oil and gas production. One group of emergent risk properties can reduce
the level of other. They can be the result of a combination of any risks, not just those
been examined in the study.
Nowadays risk management properties change. The negative point is if we focus on
the of direct-feedback system only, we will have no chance to see evolution of emergent
properties. As a result, we will lose the opportunity to identify new dangers and benefits
for oil and gas companies. Therefore, the risk assessment taking into account emergent
properties of the management system, and not only its components (units, management
decisions, resources, factors, etc.) is the result of the development and evolution of the
entire risk management system.
Underestimation of the emergent or re-emergent properties can lead to major
miscalculations in planning the activities in oil and gas companies, building
relationships with groups of stakeholders, corporate governance, building a portfolio of
projects to achieve their goals.
162
4 Modifying Risk Assessment Process Using Taxonomic
Procedures, Factor Analysis and Taking into Account the
Emergent Properties of a System
Any of the identified risks might result in the signs of a crisis at the economic activity
of business entity, including oil and gas ones. Prediction of the risks caused by the
emergent properties is a prerequisite for monitoring of unfavorable events. Such
prediction makes it possible to choose and to systematize factors by their origin.
Manifestation of emergent properties occurs when the risks are combined. The main
reason of it is that none of those risks can be considered separately from each other. On
the flip side of the coin, each of the risks is characterized by a wide range of indicative
factors followed the wide variety of the links between them.
Taking into account the emergent and re-emergent properties is expedient in the
process of risk assessment, whereas it makes possible to foretell and predict risks which
oil and gas companies might be facing.
Modern qualitative and quantitative risk assessment methods allow us to identify the
causes of hazards before they have influenced the oil and gas company. As a result, it
becomes possible to implement the system of preventive management. Existing
methods and recommendations, alone or in combination, enhance the prognostic
capabilities of risk assessment approaches. However, each of these methods still
ignores both emergent and re-emergent properties in risk assessment and specifics of
oil and gas companies.
Within the context of that problem, the authors offer to emphasize taxonomic
procedures and methods of factor analysis taking into account the emergent properties
of risks.
Using such an approach enables oil and gas companies to carry out a comprehensive
risk assessment which lays the groundwork for both their further assessment and
forecast of their dynamics.
In accordance with the algorithm (Fig. 2), the first stage is defined as “Generating of
risk taxonomy”. This stage includes:
─ identifying possible causes of risk;
─ definition and formation of a variety of internal and external risks affecting the
economic activity of oil and gas companies.
Afterwards, the specific areas of oil and gas companies’ activity are considered. The
most important of them are:
─ the occurrence depth of productive formation of minerals exploration,
─ drilling of oil and gas wells,
─ exploration of oil and gas fields,
─ extraction of hydrocarbon raw materials,
─ transportation,
─ processing,
─ storage.
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These spheres act as subjects of risk. That is why it provides insight into the process of
their type identifying.
Stage 1
Generating of risk taxonomy
Risks affecting
different aspects of business
Statistical data analysis
Impact factors determination
Stage 2
Database structure developing
Expert draft study
Indicators for each risk source
Stage 3
Identification of risks through influence factors
evaluation
Depending on research scope
Depending on research aim
Stage 4
Economic system emergent properties risks
prediction for oil and gas companies
Stage 5
The integral risk level indicator calculation
(a taxonomy approach)
A standardized observation matrix
developing
Selection of a reference risk vector
depending on multi-vector parameters
study
Calculation of deviations of individual
elements from the reference vector
The modified risk level indicator
calculation
Stage 6
Correlation analysis of integral indicators of
risk assessment
Matrix completion
Indicators limits calculation
Stage 7
Preventive measures for minimizing of negative
impacts and reducing risks
Fig. 2. Modified risk assessment process with account to emergent properties. The taxonomy
method and factorial analysis are applied (authors’ original development).
164
Further risks for different fields of activity of oil and gas enterprises are singled out.
Before it the statistical sources analysis should be done and main selection indicators
have to be reasoned.
At this stage a statistical database is being formed. This process involves labor-
intensive work with large masses of information.
The second stage involves the database structure developing process, which can take
place in two main aspects:
─ based on an expert draft study. It is called “the pragmatic method” and characterized
as rather subjective one;
─ based on a system of indicators suitable for risk level assessing for any part the oil
and gas enterprises activity or for the whole company.
An expert method refers to qualitative ones, nevertheless there are certain procedures
that allow to quantify the level of risk.
As far as the indicators system is concerned, it is expedient to combine them in
blocks, each of which corresponds to the sphere and specifics of the enterprise activity.
That’s mean we offer to group them by the subjects of risk.
The third stage, named “Identification of risks through influence factors evaluation”
also has its specific features for oil and gas companies. It depends on:
─ type of business;
─ the scale of the study;
─ the purpose of the study.
Identification of risks makes possible to classify them in detail according to the
influence factors. For that purpose, we separate stimulants and disintegrators.
On the other hand, the classification will ensure duplication avoidance. That means
that we won’t have any double consideration of the properties in the evaluation system.
For the purpose of the factors selection, both those having a significant impact on
the oil and gas companies and insignificant ones, it is necessary to construct a planning
matrix and conduct a preliminary experiment. According to its results, the influence of
factors on the production process is estimated. Properly planned experiment produces
significantly more information, provides key factors identification and assessment of
their impact on the output integral indicator.
For instance, taking into account the specifics of oil companies, it is important to
consider such factors as the risk of production processes continuity violation,
malfunction on the hardware, a significant amount of fields with hardly extractable and
depleted reserves, change of wells exploitation technologies and conditions as a result
of the onset of the final stage of mining and other factors causing emerging
technological risks.
Emergence here (in the process of oil and gas enterprises risks assessing) is
characterized by the emergence of new risks that were not foreseen in determining the
causes of occurrence at the first stage.
The fourth stage is “Economic system emergent properties risks prediction for oil
and gas companies”. The description of the properties of identified risks is a
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prerequisite for emergent and re-emergent risk properties forecasting by the type of oil
and gas companies’ business activity.
The fifths stage, mentioned as “The integral risk level indicator calculation (a
taxonomy approach)”, includes:
─ developing a standardized observation matrix; normalization procedure is performed
according to the formula:
= , (1)
where Zif – standardized value;
xif – value of initial factor xf for the i-th period;
is average by factor xf ;
Sf is standard deviation by factor xf ;
─ selection of a reference risk vector depending on multi-vector parameters study;
reference selection af for the factor Zf is performed by the formula:
max , if is the stimulant;
= , (2)
min , if is the disintegrator;
─ convolution of standardized indicators into the integral indicator I(d) using the
distance method:
( )
=1− ∑ ( − ) , (3)
where Ii(d) – values of integral indicator, i=1, 2, ..., m ;
wf – weights of indicators Zf, f=1, 2, ..., n ;
∑ =1 (4)
The distance method is quite common in various problems solving. The following
studies [18, 19, 20] were conducted on the construction of the integral index within the
group by the distance method. A closer look to the literature on the risk assessment
process of oil and gas companies, however, reveals a number of gaps and shortcomings.
─ the identification of risk level.
An expert scoring method is offered for the purpose of weight risk assessment. In this
case the following rating scale is used for Рі:
from 0 to 0.5 – low risk level;
equal to 0.5 – medium risk level;
from 0.5 to 1.0 – high risk level.
166
Choice of weight coefficients wf becomes usually a separate non-trivial task which
could be solved through the expert assessment. The solution we offer to satisfy the
needs of oil and gas companies risk assessment is to use the hierarchy coefficients
allowing an expert to determine weights of indicators Zf.
Estimated values of hierarchy coefficients could be determined on the basis of
critical distancesthe that is the largest distance d* between the nearest adjacent factors
(Zi, Zj). This will determine the importance of the role of each factor in the entire
research:
∗
= max min , (5)
To calculate the coefficient of the hierarchy all distances, which do not exceed the
critical limit for each matrix factor, should be investigated according to the formula:
∗
= (, ) , ≤ , = 1,2, … , (6)
Next step is connected with summing up the received distances. For each of the
elements it is chosen the factor with the biggest amount of distances:
= max (7)
= ∑( , )∈ , (8)
Thus, to determine the role, significance and position of each factor in ongoing
research, we calculate the weight coefficient as the coefficient of the hierarchy
according to the following formula:
= (9)
The complexity of business processes at oil and gas companies’ management requires
systematization of statistical data array, factors, indicators, the risks as they are and
their properties.
Taxonomic methods involve powerful but simple mathematical apparatus, do not
require comparability of factors and properties and, on the top of that, are helpful when
we need to considerate different levels of impact factors detail in the risk assessment.
The standardized observation matrix is constructed on the basis of the formed matrix
of observations with adjustment to the coefficients of the hierarchy.
The standard risk vector is chosen in the variation between the maximum stimulant
value and the minimum value of the disintegrator.
After it we calculate the deviation level. We have to know how much the individual
elements differ from the reference vector.
The identification of the risk level reflects the trend of changes in stimulants and
disintegrators, and consequently shows the resulting changes.
The matrix completion has to be done to implement of the sixth stage, mentioned as
“Correlation analysis of integral indicators of risk assessment”. Also here we calculate
main indicators limits.
167
The density analysis is carried out by determining the coefficient of pair correlation.
Correlation analysis provides determination of the influence degree of stimulants and
disintegrators on the final result. The degree of dependence between the integral
indicators is characterized by ties between them.
The final stage in the emergent properties-based risk assessment is “Preventive
measures for minimizing of negative impacts and reducing risks”.
Its peculiarity is that emergent property is described both as the emergence of new
properties of the risks of the oil and gas enterprises, and the disappearance of some
separate risks properties after their integration into the system [17].
The approach proposed has the disadvantage – the reference values depend on the
sample. It means that for different samples we may have different reference values, and,
therefore, different risk level assessments.
A way out of this situation is to determine as reference values the limit values of
influencing factors that identify the maximum permissible risk degree. These values
can be determined either from experience or through expert assessment of factors.
Taking into account the specifics of the oil and gas enterprises of the complex, we
believe that the risk assessment method focused on emergent properties of system and
based on taxonomy approach and factor analysis is applicable in modern economic
situation. The advisability of its application for assessing risks in oil and gas industry
depends on:
1. the level of complexity, adequacy and reliability of information about activities of
oil and gas enterprises;
2. different levels of detailing of factors that characterize economic activity;
3. the procedure of risk assessment explained in the article involves the construction of
economic and mathematical models that take into account the qualitative,
quantitative and structural characteristics of identified risks.
Prospects for further research in this direction include, on one hand, the problem of
input factors choice and on the other hand, an approbation of the offered risk level
assessment methodology depending on the features of the oil and gas enterprises, in
particular on their specialization. Therefore, there are objective prerequisites for further
research in this direction.
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