In the world of business, it’s essential to understand the potential hazards that a company in the industry must overcome in order to be successful. Every stock possesses inherent dangers, such as risk management, but there are also more industry-specific risks. In this post, we apply that principle to the oil and gas industry to see what kind of risks their practice faces daily.
A petroleum company is usually subject to a number of regulations that restrict where, when, and how extraction may be carried out. In some jurisdictions, the same laws and regulations can be interpreted differently. At the end of the day, such activities add more uncertainty.
Oil and gas firms pick stable political systems with a track record of long-term lease concessions, according to experts. Some businesses, on the other hand, simply move to locations where oil and gas are plentiful, regardless of whether they fulfill their requirements. Many issues can arise as a result of this, including state takeovers and political winds shifting the regulatory environment. Because the government may change its mind once the money is invested depending on where the oil comes from, a firm’s contract isn’t always what it ends up with.
Insolvency risk can be clear or more subtle, depending on the situation, as in countries that change foreign ownership rules to ensure that domestic firms get a stake. This risk may be reduced by conducting thorough research and developing long-term business relationships with international oil and gas partners—if a firm wishes to survive in the future.
Because of geological factors, more difficult-to-find oil and gas resources are becoming increasingly important. Many of the simple-to-gain oil and gas have already been extracted or are presently being tapped. Drilling in less welcoming settings, such as on a platform in the middle of an undulating sea, is now part of exploration. Unconventional oil and gas extraction techniques have helped to extract resources in regions where it would otherwise be impossible.
The difficulty of extraction and the potential of smaller reserves than originally estimated are examples of geologic risk. Geologists with a background in oil and gas work hard to reduce geological risk by testing on a regular basis.
Beyond the geological risk, the costs of oil and gas are the most significant aspect to consider. In other words, the higher the geophysical obstacles are for extraction, the greater the price risk. Because unconventional extraction generally costs more than a vertical drill, it’s not unusual for unconventional operators to lose money.
This does not imply that oil and gas firms immediately cease operations on a project that becomes unprofitable as a result of price drops. Rather, oil and gas firms attempt to predict the projected costs over the life of the project in order to decide whether or not to start. Price risk is a constant companion once a project has begun since it can’t be started and stopped whenever is convenient.
Supply And Demand
Oil and gas firms face a very real danger from supply and demand shocks. As previously mentioned, getting started with operations takes a lot of cash and time, and shutting them down when prices fall or increasing production when they rise is not simple. One of the reasons why oil and gas prices are so unpredictable is due to sporadic production. This is a typical situation. The stock market, for example, might be going through a prolonged period of flatness or have seen substantial volatility in the recent past. This can put certain businesses at a disadvantage because they cannot provide high-quality products and services at low prices while others can do so profitably.
Finally, operational costs are the greatest risks because they are directly impacted by the other factors. The costlier a project is the more stringent the legislation and the more difficult the drill. With the unpredictability of price owing to global manufacturing beyond any one company’s control, you have genuine cost concerns.
However, the worst is yet to come. Many oil and gas firms struggle to find and keep skilled employees during boom periods. Thus payroll can rapidly grow to add another expense to the total picture. The cost of training employees in the oil and gas sector has increased, reducing the number of firms in the industry. As a result, oil and gas have become a very capital-intensive business with fewer participants each year.
After reading all that, you may wonder how gas and oil companies handle these risks. The answer is the same way as we do -with insurance. Below are the coverages which these companies often purchase.
Oil and gas professionals require comprehensive liability coverage. Due to the industry’s high risk, this is one of the most important coverages you can get. This is also known as your “catch-all” coverage because it will cover damages related to injury and property damage.
Products And Completed Operations Liability
Despite this being usually included in the overall liability insurance policy, we felt it was important enough to be broken out separately. Businesses in the fuel industry may construct, operate, or produce equipment used to drill, transport, and produce oil and gas. Let’s assume the project is completed and the product has been sold. The policy covers damages (up to the limit) and your legal defense team if you are sued in the event a product or operation fails and causes injury or damage.
Workers’ compensation can be expensive, depending on the services you provide for the oil and gas sector. Regardless of where you reside, almost every state has a similar requirement. Workers’ compensation insurance protects your workers while they are on the job. Workers’ compensation insurance protects employees who are injured at work. It covers medical costs, missed income, and other perks if they are harmed while doing their job.
This policy is required if you are involved in the supply of fuels or if your products or labor might result in an oil/gas spill or leak. Even firms with strong balance sheets may incur significant EPA penalties, cleanup expenses, and legal actions following a little pollution incident.
Oil and gas operations are commonly found in remote locations far from company headquarters. Now, it's possible to monitor pump operations, collate and analyze seismic data, and track employees around the world from almost anywhere. Whether employees are in the office or in the field, the internet and related applications enable a greater multidirectional flow of information – and control – than ever before.