Whenever an investor approaches a new industry, it is good to know what the risks are that a company in that sector must face to be successful. General risks apply to every stock, such as management risk, but there are also more concentrated risks that affect that specific industry. In this article, we’ll look at the biggest risks faced by oil and gas companies.
Political Risk in Oil and Gas Companies
The primary way that politics can affect oil is in the regulatory sense, but it’s not necessarily the only way. Typically, an oil and gas company is covered by a range of regulations that limit where, when and how extraction is done. This interpretation of laws and regulations can also differ from state to state. That said, political risk generally increases when oil and gas companies are working on deposits abroad.
Oil and gas companies tend to prefer countries with stable political systems and a history of granting and enforcing long-term leases. However, some companies simply go where the oil and gas is, even if a particular country doesn’t quite match their preferences. Numerous issues may arise from this, including sudden nationalization and/or shifting political winds that change the regulatory environment. Depending on what country the oil is being extracted from, the deal a company starts with is not always the deal it ends up with, as the government may change its mind after the capital is invested, in order to take more profit for itself.
Political risk can be obvious, such as developing in countries with an unstable dictatorship and a history of sudden nationalization, or more subtle, as found in nations that adjust foreign ownership rules to guarantee that domestic corporations gain an interest. An important approach that a company takes in mitigating this risk includes careful analysis and building sustainable relationships with international oil and gas partners – if it hopes to remain in business for the long run.