5 of the Biggest Risks Faced by Oil and Gas Companies (2024)

Whenever an investor approaches a new industry, it is good to know what the risks are that a company in that sector must face to be successful. General risks apply to every stock, such as management risk, but 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.

Key Takeaways

  • Despite the risks, there is still a very real demand for energy, and oil and gas play a major part in filling that demand.
  • A long-term risk for oil and gas companies is a dwindling natural supply.
  • Short-term risks include political stances and supply-and-demand.
  • Oil and gas companies remain some of the most heavily traded public companies.
  • Natural resource pricing relies heavily on the underlying cost of procuring and refining the resource, as well as the price of the completed commodity itself.

Political Risk

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. Numerous issues may arise from this, including sudden nationalization and/or shifting political winds that change the regulatory environment. Depending on what country the oil is being extracted from, the deal a company 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 make more profit for itself.

Political risk can be obvious (such as developing in countries with an unstable dictatorship and a history of sudden nationalization), or more subtle,(as found in nations that adjust foreign ownership rules to guarantee that domestic corporations gain an interest). An important approach that a company takes in mitigating this risk includescareful analysis and building sustainable relationships withinternational oil and gas partners⁠—if it hopes to remain in business for the long run.

Geological Risk

Many of the easy-to-get oil and gas is already tapped out, or in the process of being tapped out. Exploration has moved on to areas that involve drilling in less friendly environments,such as on a platform in the middle of an undulating ocean. 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 substantially "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

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. Instead, O&G companies attempt to forecast the likely prices over the term of the project in order to decide whether to begin. Once a project has begun, price risk is a constant companion.

Supply and Demand Risks

Supply and demand shocks are a very real risk for oil and gas companies. As mentioned above, operations take a lot of capital and time to get going, and they are not easy to shut down when prices go southor ramp up when they go north. 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 with the 2008 financial crises, and macroeconomic factors can dry up capital or otherwise affect the industry independently of the usual price risks.

Cost Risks

All of these preceding risks feed into the biggest of them all:operational costs. 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.

5 of the Biggest Risks Faced by Oil and Gas Companies (2024)

FAQs

What is the biggest risk for oil and gas companies? ›

A long-term risk for oil and gas companies is a dwindling natural supply. Short-term risks include political stances and supply-and-demand. Oil and gas companies remain some of the most heavily traded public companies.

What are the main challenges faced by the oil and gas industry? ›

Oil and gas companies often operate in a challenging risk environment. Financial risks, such as higher costs and fluctuating energy prices, together with safety concerns and other ongoing factors have the potential to impact a company's bottom line.

What are the risks of oil and gas production? ›

Safety Hazards Associated with Oil and Gas Extraction Activities
  • Vehicle Collisions.
  • Struck-By/ Caught-In/ Caught-Between.
  • Explosions and Fires.
  • Falls.
  • Confined Spaces.
  • Ergonomic Hazards.
  • High Pressure Lines and Equipment.
  • Electrical and Other Hazardous Energy.

What are the threats of the oil and gas industry? ›

Pollution. Oil and gas operations could release many tons of harmful pollutants into the air and discharge dangerous chemicals into the water, thereby degrading the clean air and water that polar bears, whales, walrus—and humans—depend on for survival.

Why is the oil and gas industry high risk? ›

Environmental Risks

Energy industry operations directly affect the environment, including greenhouse gas emissions, climate change, oil spills, and solid and hazardous waste. For this reason, oil companies are under heavy pressure to protect the natural environment as much as possible.

What is operational risk in oil and gas industry? ›

Extraction risk typically involves hard-to-access oil and gas. Operational risk involves potential problems that may arise throughout an operation, such as labor strikes, increased wages, and the overall cost of operation.

What are 5 negative effects of the oil industry on the environment? ›

7 ways oil and gas drilling is bad for the environment
  • Pollution impacts communities. ...
  • Dangerous emissions fuel climate change. ...
  • Oil and gas development can ruin wildlands. ...
  • Fossil fuel extraction turns visitors away. ...
  • Drilling disrupts wildlife habitat. ...
  • Oil spills can be deadly to animals.
Jul 9, 2021

What are 4 factors that affect oil and gas production? ›

The commodity prices of oil and gas impact the magnitude of the development of oilfields and active new well development. The supply of oil is affected by external factors, such as exploration and production, weather patterns, investments, innovations, as well as costs.

What are the challenges of the oil and gas industry in 2024? ›

In 2024, several key trends are expected to impact the industry, including shifting global energy trade dynamics, rising M&A activity, a greater focus on decarbonization initiatives, and the rise of generative AI and other disruptive technologies.

What is risk management in the oil and gas industry? ›

Risk management in oil and gas is basically the identification, evaluation, and prioritization of risks in the oil and gas sector. This may be on the drilling rigs, semi-submersibles, engineering equipment, refineries, etc.

What is market risk in oil and gas? ›

Examples of oil and gas industry-specific risk factors include: Regulation (see Sample Risks Related to Regulation). Volatility of crude oil, natural gas and other commodity prices (see Sample Risks Related to Volatility of Crude Oil, Natural Gas and other Commodity Prices). Operational (see Sample Operational Risks).

What is the environmental risk in oil and gas industry? ›

Climate change impact

Gas is flared during the oil drilling and refining process. Gas flaring introduces toxic pollutants into the atmosphere, such as sulfur dioxide, which can lead to environmental issues such as acid rain and the generation of greenhouse gases that contribute to global climate change.

What is the biggest challenge facing the oil industry? ›

The Top Challenges Facing the Oil and Gas Industry
  • The Effects of COVID-19. As the COVID-19 pandemic made its way across the world, it left a major impact on the oil and gas industry. ...
  • Prioritizing Infrastructure. ...
  • More Focus on Sustainability. ...
  • A Resurgence for Natural Gas.
Sep 11, 2023

What is the biggest problem with oil? ›

2. Carbon Dioxide Emissions and Climate Change. The extraction, transportation, refinement, and burning of crude oil (and other fossil fuels) have a direct impact on global climate change thanks to increased release of greenhouse gases such as carbon dioxide and methane.

What are the challenges of big data in oil and gas industry? ›

Other technical challenges facing the application of Big Data are: ➢ related to the limitations associated with the data recording sensors. ➢ the frequency of data recording ➢ the quality of the recorded data. ➢ the thorough understanding of the physics of the problem.

What is the biggest oil and gas incident? ›

Piper Alpha

The North Sea disaster on Piper Alpha remains the worst oil rig disaster ever. The tragic event claimed the lives of 167 people on 6 July 1988. A communication error between shift changes resulted in a gas leakage which triggered multiple explosions on the platform. Of the 226 workers, only 61 survived.

What are the unsafe conditions in the oil and gas industry? ›

The ignition of flammable gases or vapours can also result in explosions or fires, which can wreak damage on a large scale in such a hazardous environment. Some causes include electrical energy sources, open flames, and frictional heat. High-pressure lines may also leak or burst if not properly maintained.

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