Third-Party Risk Management Best Practices for the Energy Industry

Energy organizations face the global challenge of complying with diverse regulations. These regulations extend not just to them but also to their third parties. Prioritizing third-party risk management (TPRM) is crucial for the energy industry to maintain compliance. With effective TPRM practices, energy organizations can actively monitor and evaluate vendor compliance, reducing the risk of potential violations. A proactive approach to third-party risk management safeguards operations, finances, and reputation, while building trust with stakeholders and maintaining a strong position in the energy industry.

Regulatory Framework of the Energy Industry and Its Vendors

The energy industry is subject to a wide range of laws and regulations. Regulations span interstate energy transmission, environmental conservation, cybersecurity, and anti-bribery. To avoid financial and legal risks, energy organizations should ensure third parties adhere strictly to these legal frameworks.

Below are just some of the general laws and regulations governing the energy sector. Further laws and regulations may exist depending on the state, municipality, country, and energy product. It's essential to stay up to date, as they're often subject to change.

1. Federal Energy Regulatory Commission (FERC) – FERC’s vast regulatory spectrum encompasses interstate transmission of electricity, oil, and natural gas. Vendor noncompliance could lead to heavy penalties for energy organizations. 
2. Sarbanes-Oxley Act (SOX) – Requires external and internal control assessments that often extend to third parties. This law is particularly relevant if a third party provides significant operational services. The regulation applies to all U.S. publicly traded companies. 
3. Dodd-Frank Wall Street Reform and Consumer Protection Act – Under this law, the 'Swap Dealer Rule' mandates that energy organizations involved in significant swap trading activities must register as Swap Dealers. This law extends to third-party vendors involved in swap transactions.
4. Environmental Protection Agency (EPA) – Regulations laid out by the EPA around air and water quality, waste management, and pollution prevention apply to energy organizations and their third-party vendors.
5. Cybersecurity regulations – The North American Electric Reliability Corporation Critical Infrastructure Protection (NERC CIP) standards mandate requirements for cybersecurity. Energy organizations and vendors that manage critical infrastructure must adhere to these regulations.
6. Foreign Corrupt Practices Act (FCPA) and UK Bribery Act – These acts prohibit bribing foreign officials and necessitate that organizations maintain accurate books and records. Energy organizations must ensure that third-party vendors fully comply.

Third-Party Risk Management Best Practices for the Energy Industry  

It’s imperative for energy organizations to enhance their third-party risk management strategies to adhere to the constantly evolving regulations and best practices. These strategies should meet the latest regulatory and legislative requirements and they must also take into consideration the changing risk and threat landscape. It's crucial to regularly assess and update TPRM strategies to remain compliant and secure.

Here are some third-party risk management best practices energy organizations should consider:

• Perform in-depth third-party risk assessments – It’s important to conduct thorough risk assessments for all external vendors. These Assessments should include detailed background checks, financial stability evaluation, capacity audits, and scrutiny of regulatory compliance. For example, a vendor that provides drilling equipment should provide evidence that it complies with environmental regulations. 
• Understand geopolitical risks – Given the global nature of the energy industry, it's vital to assess the geopolitical risks of third-party vendors. Vendors located in regions with political instability or stringent regulatory regimes may have higher risks. This includes risks related to sanctions, import/export restrictions, or unstable political situations.
• Measure environmental impact and sustainability practices – Ensure vendors align with your organization's environmental and sustainability commitments. Renewable energy production, oil extraction, or waste disposal vendors should demonstrate sustainable practices and follow environmental regulations.
• Mandate compliance in the contract – Vendor contracts should include specific clauses mandating full compliance with all relevant laws and regulations. There should be clearly defined penalties for non-compliance. For example, contracts with renewable energy components suppliers could incorporate a clause that includes penalties for labor law violations.
• Monitor vendors and suppliers continuously – Establish a regular pattern of monitoring vendor performance and compliance. Monitoring enables early identification and control of potential risks. Ongoing monitoring ensures that energy organizations initiate prompt corrective actions when necessary. 
• Conduct frequent compliance audits – Ensure vendors follow laws and regulations with regular compliance audits. These should verify vendors' self-reported compliance statuses and validate the effectiveness of their internal controls. For example, an audit could verify whether a pipeline maintenance servicer follows all safety and quality standards.
• Evaluate business continuity and disaster recovery plans – Vendors should have robust business continuity and disaster recovery plans in place. For example, a natural disaster could disrupt an oil transportation vendor’s operation, affecting the energy organization's supply chain. Robust recovery plans help minimize such disruptions.
• Review incident reporting and management – It's crucial for vendors to have effective incident reporting and management. They should notify energy organizations promptly when they experience a data breach and have a response plan in place. 
• Require insurance coverage – Vendors need insurance coverage to manage risks related to their services or products. The energy industry often involves high-risk operations and adequate insurance coverage protects both the vendor and the energy organization from potential liabilities.
• Review TPRM policies regularly – The energy industry continuously evolves, with changing regulations, emerging technologies, and new risks. Regularly review and update third-party risk management policies to ensure they remain effective and relevant.
• Provide comprehensive employee training in TPRM – Energy employees at all levels should receive regular training in third-party risk management. Employees can contribute to risk management when they understand the risks and recognize the significance of vendor compliance.
• Foster collaborative vendor relationships – It's important to build vendor relationships that have open communication. This can help anticipate compliance issues and mitigate risks. For instance, working closely with an electrical component supplier would address conflict mineral sourcing compliance.

Managing risks associated with third-party operations is crucial for the energy industry. Adopting best practices for third-party risk management can help organizations reduce risks and ensure smooth operations. Maintaining strong and compliant relationships with vendors can help energy organizations remain financially stable and protect their reputation.