Mitigating third-party risk amid weak commodity prices and COVID-19

Compounding impacts to oil, gas, and mining

Weakening commodity prices and bankruptcy are hard-to-forget terms for organizations in the oil and gas industry. Liquidity issues for specific customers or suppliers in the industry can have significant and potentially unforeseen strategic, financial, and operational consequences, which could include disruption to capital projects because of supply chain volatility, lost cash flow from important customers or lost hedges from counterparties. But better due diligence, risk assessment plus continuous monitoring can alert companies to financial risk and give them more time to develop feasible options.

The current scenario amid COVID-19

At this point, no one can predict the continuing impact of COVID-19 or how deeply global business might be impacted or for how long. Some businesses have suspended operations across industries and geographies.

Even for companies that are able to avoid the cash crunch, other financial hardships washing over the oil, gas, and mining industries pose a significant risk. Liquidity issues for customers or suppliers can have significant―and potentially unforeseen―strategic, financial, and operational consequences, including disruption to capital projects.

The costs of these disruptions can pose significant outcomes to the typical business scenario via:

  • Opportunity cost or the loss of potential revenue from inadequate negotiations with high-risk business partners
  • Cost of nonpayment associated with default from a customer or counterparty
  • Cost of nonperformance associated with a supplier default

Imagine this: Government imposed stay-at-home orders negate the ability of contractors to get to a refiner’s expansion project. Or companies face force majeure, slowing production due to reductions in demand which can have corresponding implications on storage. The domino effect of these issues can extend to local communities and collective suppliers and customers.

How Deloitte Risk & Financial Advisory can help companies mitigate third-party risk

The importance of assessing risk among customers and counterparties, including third-party suppliers, requires better due diligence and risk assessment to alert companies to potential financial risk and give more time to develop options. That’s where Deloitte Risk & Financial Advisory can help.

We can assist companies with mitigating third-party risk during times of market uncertainty by applying our analytics and financial modeling capabilities to help identify the risk posed by suppliers, customers, and business partners.

Our Business Disruption Risk Analytics tools collect a wide range of potential supplier and customer internal and external data that is monitored to consider financial stability across a portfolio of vendors, customers, and counterparties. This approach includes:

  • Proprietary tools for assessing private companies, including modeling to project potential risks and a timeline for possible disruptions related to suppliers and counterparties whose financial information is not publicly available
  • Publicly-available data assessment, including text analytics and modeling to review publicly-reported data
  • Risk rating methodologies to rank suppliers, customers, and counterparties based on patterns of distress or potential bankruptcy
  • Stress test trigger event scenarios that use public information to estimate the likelihood of an entity’s financial distress in the near future
  • Continuous results via an automatic refresh process that incorporates public and non-public data and periodically recalibrates the model
  • Ranking of strategic suppliers and customers which can help identify potential future disruptions and identify the more immediate concerns using risk ranking

This is accomplished via an intuitive interface that prioritizes the entities by potential risk and identifies early warning indicators; periodically updates and monitors data; and trends changes to obtain a current and more precise understanding of patterns and identifiable trends. The risk engine is adjusted, as more information becomes known through the analysis, to reduce false positives.

Once the analysis is complete, we can also help you develop risk mitigation strategies. Using our proprietary scenario analysis tool, we can provide a pragmatic approach to managing uncertainty and anticipating future risks.

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