In recent years, the regulatory environment for energy companies has become increasingly complex, driven by increased standards on emissions, transparency, crime prevention and environmental responsibility. With supply chains that can span numerous jurisdictions, energy companies, particularly those in the oil, gas and utilities sectors, face a complex task. They must ensure operational efficiency and adhere to evolving regulations that require rigorous oversight of vendors and third-party partners. Failure to comply can result in financial penalties and significant operational and reputational setbacks. Energy companies should consider a unified approach to risk and holistic strategies that help improve supply chain resilience while reducing operational risks and working to ensure compliance.
The regulatory landscape
It is important to note that regulatory requirements differ across the energy sector. Renewable energy companies, for example, operate in a different regulatory environment, with incentives such as tax breaks and streamlined permitting processes, particularly under frameworks such as the European Directive on Renewable Energy. However, they still face compliance requirements around responsible sourcing and supply chain transparency as regulators work to combat both criminal activity and greenwashing in the sector.
Yet regulatory pressures have intensified for almost every company in the sector; it is, in some ways, a response to growing environmental concerns and growing demands for greater due diligence in a world of interconnected businesses and, therefore, interconnected risks.
A key example is the new European Union project Methane regulationintroduced in August 2024. This directive, aimed at reducing methane emissions from fossil fuel production, imposes strict monitoring and reporting requirements for importers of oil, gas and LNG operating within the EU. Failure to comply with these standards can result in heavy penalties, including fines of up to 20% of annual turnover for companies that fail to comply with these standards.
For energy companies across all sectors, integrated compliance platforms that support comprehensive third-party risk management are quickly becoming essential tools for meeting these regulatory requirements and ensuring the smooth functioning of global supply chains.
Non-compliance risks
Failure to comply with regulatory standards presents well-defined risks. On the one hand, financial sanctions can be substantial – as in the case of the European methane regulation. But beyond fines, the risks of non-compliance extend to operational disruptions and reputational damage. A single non-compliant supplier within a chain can expose the entire network to vulnerabilities and lead to regulatory violations that delay project deadlines or, worse, interrupt operations.
Equally concerning for many companies in the industry is the reputational impact of associating with bad actors or negative news. In an era of increased scrutiny, regulatory violations can harm a company’s public image and investor confidence. Building resilience into supply chains is therefore not just about regulatory compliance, it is also about protecting operational stability and maintaining integrity.
Know Your Customer (KYC) processes are a key part of compliance and risk mitigation. Strong KYC practices allow businesses to assess the legitimacy and trustworthiness of third-party stakeholders, providing a view of each vendor’s level of risk, financial stability, and operational integrity. Companies that neglect robust KYC processes risk supply chain disruptions triggered by invisible threats or high-risk partners.
Strategies to reduce risk
Building a resilient supply chain requires a proactive approach to identifying and mitigating risks. This can start with establishing a diverse supplier base. Over-reliance on a single supplier or geographic region can potentially increase vulnerability to disruption, whether due to regulatory changes, natural disasters or geopolitical tensions.
By vetting and establishing relationships with multiple suppliers in different regions, energy companies can reduce their reliance on a single entity and better protect themselves from potential risks.
Advanced technology solutions also play a critical role in monitoring and managing supply chain risks. Data analytics and predictive modeling tools enable companies to map dependencies within their supply chains, identify potential pain points, and simulate disruption scenarios. The “value at risk” method quantifies the potential financial impact of supply chain disruptions, allowing energy companies to prioritize engagement with higher-risk suppliers and allocate resources more efficiently. effectively. Centralized analytics platforms can also provide compliance teams with a unified view of risk, allowing them to closely monitor suppliers and identify red flags before they escalate into operational issues.
Another key method is strategic inventory management. Maintaining inventory reserves, particularly for critical components or raw materials, can help mitigate the impact of short-term disruptions. While stocking additional inventory incurs additional costs, it provides a safety net in situations where supply chains are strained, allowing operations to continue without interruption, even in the face of disruptions.
A thorough approach to third-party risk management is also crucial. Energy companies must conduct rigorous due diligence when onboarding new suppliers, ensuring they fully understand the company’s business practices, financial stability, sanctions exposure and compliance history. each partner. This process should be dynamic, with risk assessments updated regularly based on significant changes to a supplier’s risk profile.
Finally, businesses can also prepare for less predictable risks, such as natural disasters, which require special attention to mitigate operational disruptions. To address this issue, energy companies can leverage climate data and predictive analytics to identify high-risk areas within their supply chains and adjust their sourcing and logistics strategies accordingly. In some cases, this may involve relocating operations away from vulnerable regions or establishing alternative supply routes and backup suppliers to ensure continuity.
Keep in mind that visibility into key suppliers is only one level of risk identification and mitigation. True resilience requires visibility into the vendor network at multiple levels to uncover additional vulnerabilities, as upstream and downstream dependencies may still exist in high-risk areas, even if the primary vendor appears secure.
A holistic approach
Energy companies will no doubt be considering ways to make their supply chains more resilient. From strict compliance requirements to the threat of natural disasters, supply chains face a multitude of factors that can disrupt operations and threaten to erode stakeholder trust.
By taking a holistic approach to risk management, energy companies can adapt their supply chains and processes to manage relationships, understand risks and ensure compliance to withstand expected and unforeseen challenges. For energy companies, investing in predictive analytics, diverse supplier relationships, and robust due diligence processes represents a strategic commitment to long-term resilience. In an ever-changing world, those who proactively manage supply chain risks will be best positioned to thrive.
John Donigian is senior director of supply chain solutions at Moody’s. The opinions expressed in this article are those of the author.