The Power of Third-Party Risk Management in the Energy Industry

Third-party vendors play an important role in supporting the energy industry, but these vendors also increase the risk of data breaches, operational weaknesses, and other external threats. To alleviate the risks, it's vital for energy companies to adopt a well-rounded third-party risk management program. By identifying and managing third-party vendor risks, energy companies can strengthen their operations.

Here’s an overview of the third parties that provide services for the energy industry:

• Equipment suppliers – Provide critical machinery and components necessary for various stages of energy production. That includes drilling rigs for oil extraction or providing parts for wind turbines in the renewable energy sector.
• Technology service providers – Offer specialized software solutions tailored to energy needs, from reservoir simulation to supply chain management. They also ensure the protection of critical infrastructure by providing cybersecurity services.
• Environmental and safety consultants – Play a crucial role in ensuring compliance with environmental regulations and maintaining a safe workplace.
• Legal and financial services providers – Give regulatory compliance advice, negotiate contracts, and resolve disputes. Banks and investment firms provide vital financing, insurance, and risk management solutions.
• Logistics and infrastructure providers – Ensure the smooth transportation of raw materials and finished products. They might offer pipeline construction and maintenance services, shipping services, or storage facilities.
• Outsourced labor providers – Offer specialized labor and deliver training and certification services to ensure that workers meet industry standards.
• Energy traders and marketing companies – Help navigate energy markets, manage price risks, and sell and distribute energy commodities.

Third-Party Vendor Risks in the Energy Industry

Third-party vendors are all crucial to keeping energy companies running smoothly. However, they also present many risks that energy companies must be prepared to manage.

Here's a glance at some specific vendor-related risks that impact the energy industry:

1. Regulatory noncompliance: The energy industry is subject to many laws and regulations that set cybersecurity, supply chain, and privacy requirements. Noncompliant vendors can result in penalties, legal action, and damage to the company's standing in the energy sector.
2. Operational interruptions: If a third-party vendor fails to deliver vital equipment, software, or services, then energy production or distribution can be disrupted.
3. Cybersecurity: Third-party vendors with inadequate cybersecurity protections can leave energy companies exposed to cyber threats. This puts sensitive data and operational integrity at risk.
4. Financial: A financially unstable vendor may struggle to fulfill obligations and expectations. They could go out of business altogether, leaving your energy company scrambling. Financial issues can also cause disruptions providing key goods and services for energy operations. You could even end up incurring additional costs.
5. Supply chain disruptions: Vendor-related issues can lead to significant supply chain disruptions, resulting in delays in energy production and increased costs.
6. Reputational damage: Regulatory violations and data breaches can damage an energy company's reputation. Unethical third-party vendor practices, like violating environmental standards and labor laws, reflect poorly on energy companies.
7. Geopolitical instability: Many third-party vendors in the energy industry operate in politically unstable countries. This can impact the flow of energy commodities or equipment. That can then impact your ability to comply with import and export regulations or tariffs.
8. Environmental impact: Regulators have placed increasing scrutiny on the energy industry's environmental impact. If a vendor fails to comply, your company can face penalties and cleanup costs. In some cases, you can even lose an operational license – a critical factor for the energy industry.

How Third-Party Risk Management Empowers the Energy Industry

With all the risks, it's crucial for the energy industry to monitor and manage their third-party vendors. That's where third-party risk management comes in.

A robust third-party risk management framework offers several benefits to energy companies including:

• Regulatory compliance: In the energy sector, third-party vendors must adhere to a range of regulations, including environmental standards, safety protocols, and energy market rules. TPRM programs monitor and audit vendors' compliance, preventing legal disputes, fines, and reputational damage that could arise from noncompliance with specific industry standards like those set by the Environmental Protection Agency (EPA) or the Federal Energy Regulatory Commission (FERC).
• Operational efficiency: Energy companies rely heavily on their third-party vendors to maintain optimal productivity. With TPRM, regular audits and performance assessments ensure that vendors fulfill their contractual obligations. You can oversee the timely delivery of crucial drilling equipment or the seamless integration of a new software system. Third-party risk management helps prevent operational bottlenecks and enhances overall efficiency.
• Improved cybersecurity: Data sharing and digital interactions between energy companies and third-party vendors is increasingly common. Cybersecurity is now a critical vendor requirement. A TPRM program evaluates vendors' cybersecurity measures, assessing potential vulnerabilities and implementing mitigation strategies. This protects critical infrastructure and sensitive information from cyber threats and ensures the continuity of digital operations.
• Financial stability: Financial instability of a third-party vendor could lead to supply disruptions, delivery delays, or even bankruptcy. Third-party risk management evaluates vendors' financial health and mitigates the risks. This could involve analyzing the vendors' financial statements, credit ratings, and market indicators.
• Supply chain resilience: Energy supply chains are intricate and often geographically dispersed. TPRM enables energy companies to evaluate each third-party vendor's operational capacity, geopolitical context, and resilience plans. This helps build robust supply chains that can withstand disruptions like political unrest in a region or a natural disaster impacting a critical vendor's operations.
• Reputational protection: The energy industry is under intense scrutiny for its environmental and social impact along the supply chain. Third-party risk management ensures vendors adhere to ethical business practices and meet corporate social responsibility commitments, protecting an energy company's reputation.
• Strategic decision making: TPRM equips energy companies with detailed, up-to-date information about their third-party vendors. This data can range from the vendor's market position to their innovation capabilities. This helps with vendor selection, contract negotiations, and risk management planning.
• Cost management: Efficient TPRM can contribute to cost management by identifying underperforming or high-risk third-party vendors. Third-party risk management helps renegotiate contracts and seek competitive alternatives. It can also enhance performance with existing vendors, leading to potential cost savings.

A properly implemented third-party risk management program can be immensely valuable for energy companies, as it enables energy companies to navigate third-party vendor risks and improve operations. Energy companies can remain compliant, stay competitive, and safeguard their reputation with TPRM.