The Oil & Gas Industry’s Largest Exposures

All businesses deal with varying degrees of risk exposures, and oil and gas companies are no different. Many of the risks faced by these firms are unique to their industries, which makes things more challenging from an insurance standpoint. And while oil and gas insurance can mitigate some of the potential damage and losses, it won’t necessarily help oil and gas companies avoid them in the first place.

What could help is knowing what to look out for. In the face of so many risk exposures that could put oil and gas companies in jeopardy, being forewarned is forearmed. Here then are the most common risk exposures faced by firms in the oil and gas industries:

Environmental risks

Environmental risks pose a significant threat to oil and gas firms due to the nature of their business. Companies in this industry must comply with the laws and restrictions imposed by the government and regulatory organizations. Failure to do so could result in hefty fines or, worse, a “cease-and-desist” order that would essentially halt operations.

Political risk

This is another significant risk that is often associated with changes in government policies or state laws. Government bans or drilling restrictions in certain jurisdictions may affect oil and gas companies operating in foreign countries.

Operational hazards

Oil and gas companies may be subject to lawsuits from customers, suppliers, and third parties due to their failure to meet pre-agreed contract terms or requirements. Companies may also be held liable if their employees violate existing laws or regulatory codes. Depending on the circumstances, the owners may be required to pay the cost of damages even if they aren’t directly responsible for causing them.

Price risk

Price risk is another factor that oil and gas companies should be on guard against. The global price of oil and gas ultimately determines the economic viability of a particular reserve. As obstacles to extraction increase, companies face more significant price risks.

Of course, oil and gas companies can’t just shut down operations even when it becomes unprofitable. Project managers typically forecast oil and gas prices throughout the project duration to determine its feasibility. Even so, price risk is a constant factor once the venture is underway.

International operation risks

International operation risk becomes more of a crucial factor as the business grows and expands its operations overseas. While oil and gas companies may benefit from less stringent government regulations or more attractive incentives from other countries, they may face fickle government officials and unfamiliar policies. With globalization now standard in most industries, companies should always account for risks related to international operations.

Financial risks

The oil and gas industries have traditionally been very vulnerable to price fluctuations. If the company isn’t financially stable, it could face upheavals that may lead to non-payment of loans and other financial lapses and shortcomings. Economic trends such as interest rates hikes and inflation could also affect the business adversely.

Market risk

Any shift or change in the economic environment of the oil and gas industry could affect a company significantly. The most common risk faced by oil and gas companies is the volatility of the foreign exchange market.

Brand reputation risks

Many factors can affect a company’s brand reputation, and the effects can be devastating and far-reaching. Many of the risk exposures that companies face in the oil and gas industries stem from poor marketing decisions, which often lead to negative reviews and even public condemnation. To mitigate these risks, many companies hire marketing experts that help build and maintain the company’s image and brand reputation.

Geological risk

All oil and gas companies depend on reserve estimates to varying degrees. If these estimates turn out to be inaccurate due to geological factors beyond control, businesses may have to halt operations sooner than anticipated. This, in turn, could lead to mass lay-offs and non-payment of obligations, which could be disastrous for any company. Factors such as earthquakes and other environmental catastrophes could also affect the firm’s ability to continue operations.

Legal risks

Many oil and gas companies labor under the constant threat of litigation. Lawsuits resulting from accidents or injury are commonplace, which is why most firms get insurance coverage for such risks as part of standard operational policy.

Risk management is essential for any company, particularly firms in the oil and gas industries. By being aware of the risks and knowing what to do to mitigate them, oil and gas companies can hopefully minimize the potential damage they could cause.

About Daniels Insurance, Inc.

At Daniels Insurance, Inc., we have a unique understanding of the risks that businesses like yours face on a regular basis. With the backing of our comprehensive coverages and our dedication to customer service and quick claims resolution, your business will be fully protected. For more information, contact us today at (855) 565-7616.