Home / papers / Risks in Oil and Gas Companies

Risks in Oil and Gas Companies

According to Stenis and Hogland (2011), there are several risks facing the oil and gas companies due to the nature of its operations. In the context of the oil and gas industry, risks are uncertainties that takes place that threaten the operations of the oil and gas industry. Cordner (2011) explains that a risk in the oil and gas industry is the potential of losing the overall investment needed in the oil and gas industry. In this regard, these risks can potentially result in physical, social, emotional, and financial loss that may negatively impact the whole project. In some instances, the risks in the oil and gas industry can result from intentional interaction with uncertainty with potential negative impact to the oil and gas risk operations (Tayyebi, Chenani, & Kashkooli, 2014). The debacles that have been experienced before has re-composed the agreement hazard administration for the players in the oil and gas industry. Aside from the ecological dangers and the human capital, the lawful aftermath identified with the obligation in undertaking the oil and gas operations has extraordinarily debilitated the whole business. The stakes included in the oil and gas industry are high to the point that all the business players are getting to be quicker in watching the oil and gas contracts.

According to Pongsiri (2004), there are several types of risks in the oil and gas industry. One of the greatest risks in the oil and gas industry is the political and constraints and competition between various parties. It has been established that oil and gas companies. The political risks in the oil and gas industry can be on the regulatory sense on otherwise with the aim of controlling the high stakes involved. In this regard, the regulations in the oil and gas industry differ from state to state and this make complicated for the industry players to operate smoothly across the states without breaking the law. In some countries, there are unstable political systems, and this makes it difficult for these companies to set up their operations there. In addition, the shifting political winds affect the operational system of the oil and gas industry since the governing system changes with time (Aslaksen & Vigerust, 2007). The companies operating in the oil and gas business thus finds their way out of the business. Countries with a long history of dictatorship tend to experience heightened political risks that pose great danger to the operations in the gas and oil industry.

The oil and gas industry are also facing geological risks that are associated with difficulty in extraction and the possibility of smaller oil and gas reserves. The oil and gas operations are quickly moving from friendly environments to less friendly environments that pose great risks to the oil and gas companies. In this regard, the oil and gas companies help to squeeze resources in areas where it is impossible to get such resources. In order to minimize the geological risks, the oil and gas companies tend to test frequently the exact estimates that are speculated in the reserves to avoid possible losses after the drilling process (Enyinda et al, 2011).

The price risks are also other risks that are related to the oil and gas exploration due to supply and demand shock. Since oil and gas operations require a lot of time and capital, the prices may easily change before the completion of the project and this may affect the projected profits. According to Muralinhar (2010), the uneven nature of the price due to global activities makes the price in the oil and gas industry very volatile and unpredictable. The changes in the global economics may also affect the overall costs of the projects, such that the cost of drilling may become more expensive that the one predicted before. In some instances, the oil and gas industry may fail to get the qualified workers that will enable them to successfully achieve their mandate. Due to the nature of their operations, the companies involved in the oil and gas industry are sometimes faced with inadequate access to capital and indebtedness. Another risks related to oil and gas industry is related to operational hazards such as personal injury and oil spills that have resulted into tarnished corporate identity and legal battles (Pies, Beckann, & Hielscher, 2010).

The risks in the oil and gas industry differ from the midstream, upstream, and downstream. Since the midstream sector (processing, transportation, storage) of the oil and gas industry is highly regulated, it is considered to be a low risks zone due to the regulations that are put in place. On the other hand, the upstream sector of oil and gas is a high risks zone since they are concerned with the direct encounters with their operational environment. The downstream is also less risk sector in the oil and gas industry due to the less activities taking place that are mainly confined to refinery of the crude oil. They downstream sector are mainly subjected to the price risks due to global financial forces (Muralidhar, 2010).

The increased obligation related wellbeing, security, and ecological consistence represent a noteworthy danger to oil and gas organizations. In this respect, the dangers identified with wellbeing, security, and ecological consistence ought to be decently dispersed among the partners so the danger does not rest with the foreman alone. A plan can be arrived at, such that the partner’s impart the benefits are they are to impart the dangers as was on account of British Colombia and Alberta-BC in Canada (Pongsiri, 2004). Aside from natural dangers, the legitimate dangers have increased in the oil and gas industry, taking after a progression of occurrences that have brought about exorbitant suit. In this respect, there has been an in number accentuation on the manager administrator imparting danger to builders, suppliers, and field administration organizations to minimize the impact of such dangers on one single element (Muralidhar, 2010). To unravel such dangers, assertions must advance around the agreement forms over the entire venture to seal all the conceivable legitimate escape clauses that may demonstrate expensive at last. Likewise, the contractual understandings must have the capacity to adjust to continually changing business and financial environment so they are in coupled with the everyday substances of the business environment (Rogers & Ethridge, 2013).

Practical means and danger necessities are exceptionally suggested in the gas and oil industry. This infers that members of the two associations are to be assigned danger and liabilities of what they do all together (Tayyebi, Chenani & Kashkooli, 2014). The two associations have created standard operations in the danger and liabilities operations altogether. The contractual danger administration is controlled by the utilization of reimbursement and risk statements, which are exceedingly placed practically speaking for the shirking of danger taking in the business. The generation dangers and penetrating contracts are all dispensed in the repayment condition to guarantee that one gathering is subject of the dangers acquired by the other party; hence, noteworthy measures are placed set up to maintain a strategic distance from that.

Contracts administration in the oil and gas industry obliges constancy and an eye to the point of interest subsequent to the scarcest miswording or oversight can result in a great deal of contentions and conceivable misfortunes (Mark & Dorfman, 2012). In this industry, contractual issue can come about into monetary or logistical bad dream or the end of the organization by and large. The use of the right sort of administration framework can guarantee that the conceivable dangers in the oil and gas contracts are precisely managed. The right kind of administration results into a survey of intensive industriousness that serves to beat any conceivable contractual snag that may wreck the task and danger the organization operations. Advanced contract management allows for rapid allocation for contract knowledge relevant to each other across the enterprise to help spread the possible risk (Stenis & Hogland, 2011). Contract management solution also ensures that contracts age appropriately by minimizing exposure to non-compliance risk with controls around archiving and dispositions. Consistency and accuracy are also encouraged by shortening negotiation cycles with the aim of minimizing legal risks.

Risks related to oil and gas industry can be managed by several methods in order to reduce the possible negative impact to the drilling process. One of the strategies of managing risks in the oil and gas industry is the increased commitment to safety standards among the industry players. The communication and reporting systems within the oil and gas industry should also be improved to reduce the large number of accidents and unsafe conditions within their operational areas (Schroeder & Jackson, 2007). Another method of reducing the risks incidences in the oil and gas industry is the inadequate learning of the previous incidences to get the patterns by which such incidences occur. In this way, the industry players find themselves in a situation whereby they can easily predict and manage the risks as they occur. From the beginning, the project managers can decide to identify and select the right projects that can easily be used to reduce the extent of risks. Risk management within the oil and gas industry can also be done by reducing the complexity of the whole project through interactive dashboards that manages the operation of such system (Sarkar & Sarkar, 2007). In addition, the management of the oil and gas industry should manage their projects such that they are compete in good time to minimize the possible risks that come with staying on the same project for long time. The contract documents can also be controlled such that the legal risks are well dealt with (Stenis & Hogland, 2011). On the other hand, proper training and certification of the persons involved in the oil and gas industry ensures that those involved knows the scope of their duties and the possible means of reducing the risks. Legally, the use of indemnity has been successfully used in managing the oil and gas risks such that liability is borne by the person most capable of meeting the risks.

Risks management policy in the oil and gas industry is not very effective since most companies operating in this area are still facing numerous risks. The risk management policy in the oil and gas industry is mainly targeted at reducing the source of risks. Currently, pieces of legislation concerning the oil and gas exploration are being harmonized in order to have a coherent policy for the entire players in the industry (Sarkar & Sarkar, 2013). However, the aspects of political risks, geological risks, and price risks are difficult to contain since they are beyond policy formulations.

The risk management between IOC and the host country has changed in the recent past since the host states have included a stabilization clause to continue attracting foreign investment into the oil and gas industry (Schroeder & Jackson, 2007).  Since there is a strong relationship between the stability and equity of investments, the stabilization clause strengthens the legal relationship between the foreign investors and the host states. In return, this reduces the risk involves and increases the level of investment in the oil and gas industry of the host state that has passed such a clause.

All in all, the oil and gas business is exceptionally entangled because of the degree and the way of the exercises that are multi-jurisdictional. Dealing with the dangers in oil and gas understandings can be very tricky for the operators who have invested in large sums of money. At the point when not appropriately taken care of, the danger included in the oil and gas operations are enormous to the point that they come about into huge monetary and reputational misfortunes. Viable understanding in the oil and gas industry is end-to-end, incorporated, and sufficiently adaptable to handle the issues that may emerge in the process of task execution. An agreement administration guarantees that the life cycle of the task is proactively dealt with the point of guaranteeing that the investments of every last one of partners are met.  Successful danger administration in the oil and gas industry obliges profundity and expansiveness examination of the entire procedure with the point of resolving all the issues identified in good time. All the business players likewise need to be included in the detailing and arranging of the oil and gas understandings to guarantee that all are fulfilled by the procedure and to lessen the shots of future case. Moreover, it empowers the oil and gas administrators to relieve the dangers and liabilities made by the worldwide monetary powers and working situations to improve security in the way of their operations.



Aslaksen, S.O. & Vigerust, G. 2007, “Schedule and Cost Risk: An Integrated Part of Risk Management Process in the Ormen Lange Project”, AACE International Transactions, pp. RI21-RI29.

Cordner, L. 2011, “Managing regional risk: offshore oil and gas safety and security in the Asia-Pacific region”, Australian Journal of Maritime and Ocean Affairs, vol. 3, no. 1, pp. 15-24.

Enyinda, C.I., Briggs, C., Obuah, E. & Mbah, C. 2011, “Petroleum Supply Chain Risk Analysis in a Multinational Oil Firm in Nigeria”, Journal of Marketing Development and Competitiveness, vol. 5, no. 7, pp. 37-44.

Mark, D.C & Dorfman, M.S. (2012). Introduction to Risk Management and Insurance10th  Edition. Prentice Hall of India

Muralidhar, K. 2010, “Enterprise risk management in the Middle East oil industry”, International Journal of Energy Sector Management, vol. 4, no. 1, pp. 59-86.

Pies, I., Beckmann, M. & Hielscher, S. 2010, “Value Creation, Management Competencies, and Global Corporate Citizenship: An Ordonomic Approach to Business Ethics in the Age of Globalization”, Journal of Business Ethics, vol. 94, no. 2, pp. 265-278.

Pongsiri, N. 2004, “Partnerships in oil and gas production-sharing contracts”, The International Journal of Public Sector Management, vol. 17, no. 4, pp. 431-442.

Rogers, V.C. & Ethridge, J.R. 2013, “Enterprise Risk Management In The Oil And Gas Industry: An Analysis Of Selected Fortune 500 Oil And Gas Companies’ Reaction In 2009 And 2010”, American Journal of Business Education (Online), vol. 6, no. 6, pp. 577.

Sarkar, C.R. & Sarkar, A. 2013, “Impact of Working Capital Management on Corporate Performance: An Empirical Analysis of Selected Public Sector Oil & Gas Companies in India”, International Journal of Financial Management, vol. 3, no. 2, pp. 17-28.

Schroeder, B. & Jackson, J.A. 2007, “Why Traditional Risk Management Fails in the Oil and Gas Sector: Empirical Front-Line Evidence and Effective Solutions”, AACE International Transactions, , pp. RI11-RI16.

Stenis, J. & Hogland, W. 2011, “Fire in waste-fuel stores: risk management and estimation of real cost”, The Journal of Material Cycles and Waste Management, vol. 13, no. 3, pp. 247-258.

Tayyebi, B.M., Chenani, M. & Kashkooli, S.N. 2014, “Oil and Gas Reservoirs Management Principles: Challenges and Strategies for Optimal Preservation of Hydrocarbon Reserves in the Common Fields”, International Journal of Academic Research in Economics and Management Sciences, vol. 3, no. 4, pp. 52-64.