Top 20 Risk Factors Facing the Oil & Gas Industry
To enhance your experience, read this article in our interactive virtual reader! Click Here
The oil and gas industry still accounts for the majority of the world’s energy generation. While opponents may contest the use of such fossil fuels, the fact remains that without them the lights would go out and our cars would stop running. Most people don’t fully realize the incredible stress the industry is under and the risk factors affecting it. 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 100 oil and gas companies (by revenue).
BDO USA, LLP, is a professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO USA serves multinational clients through a global network of 1,082 offices in 119 countries.
Charles Dewhurst leads BDO’s Natural Resources industry practice, which provides assurance, tax and advisory services to emerging and established businesses in both the traditional and alternative energy industries. He will be our guide through BDO’s list of the top 20 risk factors affecting the oil and gas industry (percentages indicate the amount of companies that cited the risk factor).
1. Volatile oil and gas prices-100%
“The spike in oil prices resulting from supply issues and ongoing regulatory battles are the issues weighing heavily on the minds of oil and gas executives,” says Dewhurst. “These issues have long been prevalent in the industry, but are tinged with more urgency as significant tax and environmental regulations come closer to fruition and turmoil in the Middle East continues to drive up prices. We expect these to remain top risks for companies for the foreseeable future.”
2. Regulatory and legislative changes and increased cost of compliance-100%
Following the BP Deepwater Horizon oil spill in the Gulf of Mexico, the moratorium placed on offshore drilling in the region crippled the oil and gas industry. Tighter safety and environmental guidelines are requiring massive investment on the industry’s part.
3. Inability to expand reserves or find replacement reserves-98%
“As we all know the industry is entering a phase where reserves are harder to find. They’re deeper and further offshore, so this comes as no surprise,” says Dewhurst.
4. Operational hazards including blowouts, spills and personal injury-97%
Again, the Deepwater Horizon incident was a game changer for the industry as a whole. 11 men died in the explosion that led to the spill, and the industry is investing heavily in safety precautions to ensure it never happens again.
5. Natural disasters and extreme weather conditions-96%
“As we head further into deepwater areas, concern of the impact of hurricanes and tropical storms become a big concern,” says Dewhurst.
6. Inaccurate reserve estimates-96%
“They bear the responsibility of developing these reserve estimates, but many mid-market E&P oil companies subcontract this work out to independent reserve engineers. There can be surprises along the way as you move from exploration to production and learn more about the reserves,” says Dewhurst.
7. Inadequate liquidity or access to capital, indebtedness-95%
“While many oil and gas companies have seen their own financials improve, the financial stability of partners, customers, vendors and suppliers remain top risk factors,” says Dewhurst.
SEE OTHER TOP STORIES IN THE WDM CONTENT NETWORK
8. Environmental restrictions and regulations-94%
Climate change and greenhouse gas emissions legislation, along with concern over the future of hydraulic fracturing, pose major problems to the oil and gas industry.
9. U.S. general economic concerns-91%
With more households and businesses tightening their belts to make every penny count amidst an ongoing recession, oil and gas companies must address many of the same concerns.
10. General industry competition-87%
Competition is the foundation of a free market, but that doesn’t mean that a successful company isn’t worried about being run out of business by the “other guy.”
11. Inadequate or unavailable insurance coverage-87%
12. Reliance upon third party transportation and processing facilities-83%
13. Ability to attract or retain key personnel-78%
14. Decrease in demand for oil or natural gas-76%
15. Credit or financial risk of partners, customers, vendors or suppliers-75%
16. Failure to properly execute corporate strategy-73%
17. Competition from alternative energy sources-72%
18. Shortage of rigs, equipment and personnel-72%
19. Impact of climate change and greenhouse gas legislation-69%
20. Increased operating costs-67%