Biggest Risk for oil and gas companies

At whatever point a speculator methodologies to a industry, it regards comprehend what the

dangers are that an organization in that area must face to be fruitful. General risks occurred to
every stock, such as management risk, but there are also more concentrated risks that affect that
specific industry. In this case, we'll look at the biggest risks that oil and gas companies face.

1. Economic Risk :

Beside the geological obstacles the factor which play a vital role in deciding whether a
reserve is economically feasible is the commodity price of oil and gas is the primary.
Basically, the higher the geological barriers to easy extraction, the more price risk a given
project faces. This is because unconventional extraction usually costs more than a vertical
drill down to a deposit. This doesn't imply that oil and gas organizations consequently
mothball a venture that ends up noticeably unrewarding because of a value plunge.
Regularly, these undertakings can't be rapidly closed down and after that restarted. Rather,
oil and gas organizations endeavor to estimate the possible costs over the term of the venture
keeping in mind the end goal to choose whether to start. Once a venture has started, value
hazard is a steady sidekick. Volatility and decreases in oil and natural gas prices leading to
worsened operating results and future prospects.

2. Environmental:

When the environmental issue occurred, at first the natural disaster will come first. From the
past decade, geopolitical fears sent gas prices to their highest levels in the last five years but
more recently the prices have been on a downward path as demand has been crimped. From a
number of natural disasters like – Middle East unrest, tornadoes, wildfires, pipeline spill etc.
Generally natural catastrophe leading to interrupted and reduce production and industrial
accident.
3. Political Instability :

Generally, an oil and gas company is covered by a range of regulations that limit where,
when and how extraction is done. This translation of laws and directions can likewise
contrast from state to state. This is the main reason that political risk generally increases
when oil and gas companies are working on deposits abroad. Political instability like
disruption or supply due to war, civil war, guerrilla attack, terrorism or other political
instability. Most companies prefer countries with stable politics and a history of granting
long-term leases.

4. Supply and demand risk :

Supply and demand shocks are a very crucial risk for oil and gas companies. As we know,
operations take a lot of capital and time to get going and they are not easy to mothball when
prices go south or ramp up when they go north. The uneven way of creation is a piece of
what makes the cost of oil and gas so unpredictable. Other monetary figures additionally play
this as money related emergencies and macroeconomic components can go away capital or
generally influence the business autonomously of the typical value dangers.

5. Operational risk :

Operation risk mainly refer to the industrial accidents where infrastructure failures or certain
human activities, which may cause the loss of life or injury, property damage, social and
economic disruption or environmental degradation. The oil and gas industry is openly
admitted as one of the most dangerous work sectors. Some name of the industrial accident of
oil and Gas Company is given below –

 Spill of Synthetic-Based Drilling Fluid

 Blowout and Fire
 Crane Accident and Injury
 Drillship Draw works Failure
 Equipment Failure
 Fall and Fatality
 Fatal Accident Lift Boat-Coil Tubing
 Fatal Accident, V-Door Guide Post Failure
 Fatal Fall from Rig Pollution Pan
 Fatal Rental Crane Support Brace Failure
 Fatality from Falling Load
 Fatality and Loss of Well Controls.
How risk factors would influenced composition of audit team?

After identifying the risk factors the audit team must also manage this risk. Risk management is
the distinguishing proof, appraisal, and prioritization of dangers taken after by facilitated and
practical use of assets to limit, screen, and control the likelihood and effect of lamentable
occasions or to augment the acknowledgment of chances. Audit team’s objective is to assure
uncertainty does not deflect the endeavor from the business goal.

1. Material misstatement :

Where the financial statements are not presented fairly in conformity with the applicable
financial reporting framework. Material misstatement like Unrealistic assumptions and
improper assessment of projected returns on investment, manipulation of production cut-off
amounts to meet performance targets, Creative compliance with environmental regulations
by manipulating vague reclamation and rehabilitation provisions etc. In this case, they need
the auditor with sufficient knowledge, skills and experience to avoid material misstatements.

2. External factors :

Outside influences that can impact a business. Various external factors can impact the ability
of oil and gas business or investment to achieve its strategic goals and objectives. These
external factors might include competition, social, legal and technological changes, and the
macroeconomic and political environment. So the audit team need to be very precise and
particular on the specific risk factors occurring in the company.
3. Accounting litigation :

A typical investigative accounting assignment would be an investigation of employee

theft. Some examples include securities fraud, insurance fraud, kickbacks and proceeds of
crime investigations. Audit tem need to identify, evaluate and investigate for any
litigation claims if they can expose for the oil and gas company.

4. Government law, regulations and policy :

Basically its government's political activities, plans and intentions relating to a concrete
cause or an entire legislative session. In certain countries they are announced by the head
of government or a minister of the parliament. There are some specific laws and
regulations for each country that govern the oil and gas industry which will affect the
foreign exchange rate, tariff and trade restrictions. So the audit team must be aware of it
and also need to update the amounts and disclosure on the financial statement.

Conclusion
In this case, we modelled the risk of an Oil and Gas company, where the financial impact
of the risk events can be estimated. We are aware of the increasing demand from oil and
gas industry on risk management and believe that actuaries can be of assistance to
industries other than our traditional areas of business.
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