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Clarity Insights Blog

What you need to know about stress testing in the energy sector

Posted by Mark Lewis | Jul 17, 2017 6:30:00 AM

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When properly conducted, stress testing offers unparalleled insight into the potential threats facing business operability. While stress testing is most commonly associated with the financial service community, the energy sector has leaned on the technique for decades to get a better understanding of where vulnerabilities lie and where more resources should be allocated.

Stress testing allows energy companies to adequately plan for the most damaging threats to their business.
Stress testing allows energy companies to adequately plan for the most damaging threats to their business.

One of the challenges companies face with their stress testing efforts is the sheer scale of it all. Where do they begin? What should be covered? There's a lot of potential ground to cover, and any misstep could be detrimental to businesses operating in this volatile industry. Here's what you need to know about stress testing in the energy sector today.

Why stress testing is essential

In essence, stress testing involves running through a series of simulations and what-if scenarios, measuring the impact on your organization's assets and seeing if your business' systems, processes and infrastructure will hold up.

"Stress testing may be taken for granted in the energy sector."

Unfortunately, stress testing may be taken for granted in this industry, as it is sometimes dealt with as a perfunctory checklist to satisfy internal review audits rather than to bring about real insights and organizational change.

If companies simply go through the motions with stress testing or fall into one of the several common pitfalls associated with it, they're putting themselves at risk for significant operational disruption and loss of revenue. The Deepwater Horizon spill in the Gulf of Mexico ultimately cost BP $54 billion in associated costs and expenses, to say nothing of the massive hit to their brand reputation. Stress testing can help companies determine how vulnerable they are to these types of catastrophic events and plan accordingly.

Don't be too conservative

The BP oil spill may be an extreme occurrence, but that's exactly the kind of infrastructure-related event that proper stress testing can help companies prepare for, if not prevent altogether. When planning stress testing, it's important that teams contemplate every scenario, regardless of how outlandish they may seem. Events like the Deepwater Horizon incident have far-reaching, devastating effects, so even if your engineers feel confident about the stability of your infrastructure and equipment, there's no guarantee that your competitors are in the same position. Such events can adversely affect the entire industry, meaning you have to plan for your competition's negligence and other factors that are completely out of your control.

McKinsey & Company analysts recommend considering "extreme" events that initially seem unlikely to occur in energy sector risk modeling practices. Some examples include market disruptions, such as a new energy provider entering the industry, a corporate scandal that draws the attention of federal regulators, or even a cyber attack launched against the nation's energy infrastructure.

If the idea of an extensive and debilitating cyber attack sounds far-fetched, consider that the U.S. Energy Department recently aired concerns over the vulnerability of the country's electrical grid. Even the most seemingly unlikely scenario could befall your organization or your industry, so it's best to be prepared.

Stress testing can help energy companies prepare for the worst.Stress testing can help energy companies prepare for the worst.

Let stress testing be your guiding light

Obviously, it's extremely difficult - if not impossible - to account for every conceivable outcome, but the important thing is to identify which scenarios you should be planning for and building in operational resilience. McKinsey & Company urged energy companies to implement extensive stress testing across the board to determine where resources should be allocated in order to steel themselves against specific risks. In particular, the consulting firm recommended keeping an eye on developments outside your organization that might affect the status quo. For instance, a change in battery costs could have major ramifications for the energy sector as a whole, and running stress tests on such an occurrence would help your company position itself for success.

Just as important is making stress testing a more integral part of all operational decision-making processes. It's sometimes advisable to create a dedicated team to handle stress testing and ensure that the technique is being implemented correctly. If reassigning current employees or hiring analytics experts is unfeasible, energy companies can always look outside the organization for assistance. Given the stakes of stress testing in the energy sector, there's no reason to go it alone if you have any doubts about your current capabilities. Speak with one of our energy sector analysts today to discover how Clarity can bolster your risk modeling strategies.

Topics: Industrial, Risk Management, stress testing

Written by Mark Lewis

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