If you are an investor, you need to know the challenges you would face in a given industry. Only when you know the risks and how to mitigate them that you can become successful. Remember that general risks apply to stocks, and there are some risks that are industry-specific as those detailed in Lundin’s report on Sudan. The following are the top risks faced by companies in the oil and gas sector.
The truth is that politics, whether at the local, national, or international level, have a huge impact on the oil and gas industry. Ideally, regulations in this industry are due to politics. As you know, there are many regulations that oil and gas companies must abide by, and these can vary from one territory to another. You should note that political risks increase when the oil and gas forms work on crude oil deposits in foreign countries.
That explains why oil and gas investors like investing in countries that have stable political climates and can provide long-term leases. You may be surprised to learn that some countries go to any country as long as there are oil and gas. Unfortunately, different issues can arise, like changes in regulations.
Most of the areas with easy to get oil may have been tapped out. Exploration is now done in areas that do not involve a lot of drilling. Such areas are found in oceans. You can think of the geological risk as both the possibility that the estimated amount of reserves may be smaller than anticipated and the difficulty of extraction.
Other than the geological risk, you have to factor the cost of oil and gas in determining whether the reserves are economically viable. Geological barriers make the price of oil to increase. That does not mean that oil and gas companies cease operations on projects with geological barriers. Remember that oil projects cannot be quickly shut down and restarted.
Supply and Demand Risk
As you know, supply and demand are quite important in any given industry. There are shocks on both supply and demand in the oil industry. Remember that operations can take a lot of time and a lot of capital. Moreover, these are not easy to shut down. The uneven nature of production makes the cost of oil and gas to become volatile. Also, there are other factors, such as macroeconomic factors and financial crises that can affect this industry.