The industry is taking those concerns seriously, so it can react to them. National and global economic conditions were the second most highly-cited risk factor foraccompanied by increased supply and demand concerns, cited by 87 percent of companies up from 76 percent last year.
General risks apply to every stock, such as management riskbut there are also more concentrated risks that affect that specific industry. In this article, we'll look at the biggest risks faced by oil and gas companies.
Measuring And Managing Investment Risk Political Risk in Oil and Gas Companies The primary way that politics can affect oil is in the regulatory sense, but it's not necessarily the only way. Typically, an oil and gas company is covered by a range of regulations that limit where, when and how extraction is done.
This interpretation of laws and regulations can also differ from state to state. That said, political risk generally increases when oil and gas companies are working on deposits abroad. Oil and gas companies tend to prefer countries with stable political systems and a history of granting and enforcing long-term leases.
However, some companies simply go where the oil and gas is, even if a particular country doesn't quite match their preferences. Depending on what country the oil is being extracted from, the deal a Risk factors of energy industry starts with is not always the deal it ends up with, as the government may change its mind after the capital is invested, in order to take more profit for itself.
Understanding Oil Industry Terminology Geological Risk in Oil and Gas Companies Many of the easy-to-get oil and gas is already tapped out, or in the process of being tapped out. There is a wide variety of unconventional oil and gas extraction techniques that have helped squeeze out resources in areas where it would have otherwise been impossible.
Geological risk refers to both the difficulty of extraction and the possibility that the accessible reserves in any deposit will be smaller than estimated.
Oil and gas geologists work hard to minimize geological risk by testing frequently, and so it is rare that estimates are way off. In fact, they use the terms "proven," "probable" and "possible" before reserve estimates, to express their level of confidence in the findings.
Price Risk in Oil and Gas Companies Beyond the geological risk, the price of oil and gas is the primary factor in deciding whether a reserve is economically feasible. Basically, the higher the geological barriers to easy extraction, the more price risk a given project faces.
This is because unconventional extraction usually costs more than a vertical drill down to a deposit. This doesn't mean that oil and gas companies automatically cease operations on a project that becomes unprofitable due to a price dip.
Often, these projects can't be quickly shut down and then restarted. Once a project has begun, price risk is a constant companion. The uneven nature of production is part of what makes the price of oil and gas so volatile.
Other economic factors also play into this, as financial crises and macroeconomic factors can dry up capital or otherwise affect the industry independently of the usual price risks.
The more onerous the regulation and the more difficult the drill, the more expensive a project becomes. Couple this with uncertain prices due to worldwide production beyond any one company's control, and you have some real cost concerns.
This is not the end, however, as many oil and gas companies struggle to find and retain the qualified workers that they need during boom times, so payroll can quickly rise to add another cost to the overall picture.
These costs, in turn, have made oil and gas a very capital-intensive industry, with fewer players all the time. The Bottom Line Oil and gas investing does not appear to be going anywhere. Despite the risks, there is still a very real demand for energy, and oil and gas fills part of that demand.
Investors can still find rewards in oil and gas, but it helps to know the potential risks that go along with those potential rewards.Price Risk in Oil and Gas Companies.
Beyond the geological risk, the price of oil and gas is the primary factor in deciding whether a reserve is economically feasible.
Operational risk management in the energy industry. Design and Layout the energy industry 4 6 18 The Risk Function 10 30 Glossary 46 References M A N A G E M E N T S O L U T I O N S O p e r a t i o n a l r i s k m a n a g e m e n t i n t h e e n e r g y i n d u s t r y 4 Introduction.
5 OPERATIONAL RISK MANAGEMENT IN THE ENERGY INDUSTRY. Operational Risk Management in the energy industry The increasing complexity of business processes and the materialization of large risk events have significantly increased the risk management activity in recent years, which has led to many reflections, regulations and recommendations on the subject as well as to much work being carried out to.
For the last three years, BDO consulting firm has surveyed oil and gas industry CFOs for its annual Energy Outlook report; but this year they did something new as well, and rated the top risk factors affecting the top oil and gas companies (by revenue).
Growth: Now in your energy sector Supported by high oil prices and global demand strength, a deleveraged energy industry is returning to growth while keeping capital discipline.
Global capex of growth of +15% y/y is underpinned by +25% average sector cash flow growth, according to Bloomberg consensus. Operational Risk Management in the energy industry The increasing complexity of business processes and the materialization of large risk events have significantly increased the risk management activity in recent years, which has led to many reflections, regulations and recommendations on the subject as well as to much work being carried out to.