Every industry faces unique risks. The oil industry is no different. In this article we’ll explore what is happening in the industry right now, and how this is affecting individual companies and their investors. Then we’ll explore how document management can help mitigate one of the industry’s biggest burdens: operational costs.
The 5 Biggest Risks Faced by Oil and Gas Companies
In order to determine whether it’s a good idea to invest in an industry, it makes sense to take a look at the risk factors companies have to face. In the oil and gas industry, the 5 biggest risk factors are political risk, geological risk, price risk, supply and demand risk, and cost risk.
Political Risk
Obviously, companies are affected by the regulations in place where they’re drilling for oil. But that’s not the only reason why political risk must be assessed. When companies are drilling for oil in their own country, they only have to deal with regulations at the county or state level. But it’s a different ball game when operations move overseas.
Many companies take into consideration the stability of the country they want to operate in. They research whether long-term leases are reinforced and how stable the government is. Other companies just go where the oil is and make the best of it. In either case, there is always the risk for governments to change their mind and change the deal before the company is able to extract all of the oil or gas. This can lead to much lower profits than previously anticipated.
Geological Risks
Geological risk in oil and gas exploration refers to the difficulty of extracting the resources. Most easy-to-extract oil and gas has already been tapped or is being tapped into right now. This means getting oil or gas is going to be more difficult because it has to be done in unfavorable conditions, such as in the middle of the ocean.
Another aspect of geological risk is that companies can never guarantee how much oil or gas is in the reserve they’re tapping. While companies test frequently and rate how confident they are about their findings, there is always a chance that there is not as much oil or gas as the company had anticipated.
Price Risk
Companies have to decide whether it’s economically feasible to extract the oil or gas. When the extraction site is more difficult to access, it becomes more expensive to extract the resources. Companies sometimes wait to start drilling or temporarily stop drilling when the price risk is too great.
Supply and Demand Risks
Oil and gas operations require a lot of capital to get started. It’s difficult to ramp up operations when prices go up, and it’s difficult to slow down when prices go down. Therefore, supply and demand are important risk factors for oil companies. Oil prices are so volatile because of the uneven nature of production.
Cost Risks
The biggest risk of all is the cost risk. Operational costs for oil companies are tremendously high. Complicated regulations and unfavorable geological factors drive operations costs up so much that there are fewer and fewer players participating in this industry. When determining costs, oil companies also need to worry about labor costs.
The Depressed Crude Oil Market
The crude oil market is currently in a downslope. On the positive side for consumers, gas prices are reaching record lows again. On the negative side, countries relying on oil production are facing serious budget deficits due to the slump in oil prices. Production is still going strong. To solve oil nation’s dilemmas, OPEC member nations could curb their spending, issue government bonds, and use their cash reserves. But individual companies in the oil industry may have to take more drastic measures to put their numbers back in the black.
Using Document Management to Reduce Operational Costs
While the biggest operations costs presumably stem from extracting oil and gas and other manufacturing costs, companies in this industry can still stand to benefit from looking at all of their expenses. One way to increase operational efficiency and cut costs at the same time is to take advantage of electronic document management.
Going Paperless
Reducing the dependence on paper can do a lot for players in the oil industry. Having to keep track of test results and reports at the drilling site is tedious and error-prone. With document management, oil companies can use mobile devices to make decisions about where and when to drill for oil.
Operational Savings
The cost of paper isn’t the only reason to switch to document management. You can also increase worksite efficiency by implementing the use of workflows for oil industry employees. Last but not least, there is no need to bring along printers to an oil rig and worry about maintaining them.