When an investor breaks into a new field, they should know the risks faced by companies in that sector. Every stock carries some general risk, but certain industries face specific risks. Here, we will look at some of the biggest risks faced by gas and oil companies.
Political risks: Politics can affect the oil and gas industry in a regulatory way, but it can have other effects as well. Gas and oil companies are covered under rules that limit how, when and where extraction can occur. The interpretation of these rules varies by state, and political risk greatly increases when companies work abroad.
Most gas and oil companies want to work in countries with a record of long-term leases and stable politics, but others go wherever the deposits are. Many issues can arise here, including political changes that can change the way regulations are enforced. Depending on the extraction country, deals can change from start to finish as governments change their minds.
Some political risks are obvious (such as extracting in nationalistic or unstable countries), or subtle (such as nations which change ownership regulations to favor domestic companies). To mitigate the risk, companies should carefully build and analyze relationships with international partners.
Geological risks: Most easy-to-acquire gas and oil deposits are already being used or are depleted. Exploration is now occurring in less-friendly environments, such as the middle of the ocean. New, unconventional drilling techniques are helping to remove resources in otherwise inaccessible areas.
Geological risk encompasses extraction difficulties and the chance that accessible reserves won’t match up with estimates. Geologists work to mitigate the risks through frequent testing, and use terms such as “probable”, “proven” and “possible” before offering estimates. Metro Allied Insurance can help investors assess the geological risks of a particular project.
Price risks: Other than geological risks, gas and oil prices are the main factor in determining the economic feasibility of a reserve. The more extraction barriers there are, the more costly a project will be. Companies don’t scrap projects automatically because of price risks; rather, they forecast long-term prices.
Investment in gas and oil is growing more difficult, but it isn’t impossible. Despite the many risks, energy demands continue to rise, and gas and oil partly fill that demand. Savvy investors can still find money, but knowing the risks and having oil and gas insurance in Houston is an absolute must.
