Top 20 Risk Factors Facing the Oil & Gas Industry
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The oil and gas industry still accounts for the majority of the world’s energy generation. While opponents may contest the use of such fossil fuels, the fact remains that without them the lights would go out and our cars would stop running. Most people don’t fully realize the incredible stress the industry is under and the risk factors affecting it. For the last three years, BDO consulting firm has surveyed oil and gas industry CFOs for its annual Energy Outlook report; but this year they did something new as well, and rated the top risk factors affecting the top 100 oil and gas companies (by revenue).
BDO USA, LLP, is a professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO USA serves multinational clients through a global network of 1,082 offices in 119 countries.
Charles Dewhurst leads BDO’s Natural Resources industry practice, which provides assurance, tax and advisory services to emerging and established businesses in both the traditional and alternative energy industries. He will be our guide through BDO’s list of the top 20 risk factors affecting the oil and gas industry (percentages indicate the amount of companies that cited the risk factor).
1. Volatile oil and gas prices-100%
“The spike in oil prices resulting from supply issues and ongoing regulatory battles are the issues weighing heavily on the minds of oil and gas executives,” says Dewhurst. “These issues have long been prevalent in the industry, but are tinged with more urgency as significant tax and environmental regulations come closer to fruition and turmoil in the Middle East continues to drive up prices. We expect these to remain top risks for companies for the foreseeable future.”
2. Regulatory and legislative changes and increased cost of compliance-100%
Following the BP Deepwater Horizon oil spill in the Gulf of Mexico, the moratorium placed on offshore drilling in the region crippled the oil and gas industry. Tighter safety and environmental guidelines are requiring massive investment on the industry’s part.
3. Inability to expand reserves or find replacement reserves-98%
“As we all know the industry is entering a phase where reserves are harder to find. They’re deeper and further offshore, so this comes as no surprise,” says Dewhurst.
4. Operational hazards including blowouts, spills and personal injury-97%
Again, the Deepwater Horizon incident was a game changer for the industry as a whole. 11 men died in the explosion that led to the spill, and the industry is investing heavily in safety precautions to ensure it never happens again.
5. Natural disasters and extreme weather conditions-96%
“As we head further into deepwater areas, concern of the impact of hurricanes and tropical storms become a big concern,” says Dewhurst.
6. Inaccurate reserve estimates-96%
“They bear the responsibility of developing these reserve estimates, but many mid-market E&P oil companies subcontract this work out to independent reserve engineers. There can be surprises along the way as you move from exploration to production and learn more about the reserves,” says Dewhurst.
7. Inadequate liquidity or access to capital, indebtedness-95%
“While many oil and gas companies have seen their own financials improve, the financial stability of partners, customers, vendors and suppliers remain top risk factors,” says Dewhurst.
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8. Environmental restrictions and regulations-94%
Climate change and greenhouse gas emissions legislation, along with concern over the future of hydraulic fracturing, pose major problems to the oil and gas industry.
9. U.S. general economic concerns-91%
With more households and businesses tightening their belts to make every penny count amidst an ongoing recession, oil and gas companies must address many of the same concerns.
10. General industry competition-87%
Competition is the foundation of a free market, but that doesn’t mean that a successful company isn’t worried about being run out of business by the “other guy.”
11. Inadequate or unavailable insurance coverage-87%
12. Reliance upon third party transportation and processing facilities-83%
13. Ability to attract or retain key personnel-78%
14. Decrease in demand for oil or natural gas-76%
15. Credit or financial risk of partners, customers, vendors or suppliers-75%
16. Failure to properly execute corporate strategy-73%
17. Competition from alternative energy sources-72%
18. Shortage of rigs, equipment and personnel-72%
19. Impact of climate change and greenhouse gas legislation-69%
20. Increased operating costs-67%
Ofwat allows retailers to raise prices from April
Retailers can recover a portion of excess bad debt by temporarily increasing prices from April 2022, according to an Ofwat statement.
The regulator confirmed its view that levels of bad debt costs across the business retail market are exceeding 2% of non-household revenue, thereby allowing "a temporary increase" in the maximum prices. Adjustments to price caps will apply for a minimum of two years to reduce the step changes in price that customers might experience.
Measures introduced since March 2020 to contain the spread of Covid-19 could lead to retailers facing higher levels of customer bad debt. Retailers’ abilities to respond to this are expected to be constrained by Ofwat strengthening protections for non-household customers during Covid-19 and the presence of price caps.
In April last year, Ofwat committed to provide additional regulatory protection if bad debt costs across the market exceeded 2% of non-household revenue.
Georgina Mills, Business Retail Market Director at Ofwat said: “These decisions aim to protect the interests of non-household customers in the short and longer term, including from the risk of systemic Retailer failure as the business retail market continues to feel the impacts of COVID-19. By implementing market-wide adjustments to price caps, we aim to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition.”
There are also three areas where Ofwat has not reached definitive conclusions and is seeking further evidence and views from stakeholders:
- Pooling excess bad debt costs – Ofwat proposes that the recovery of excess bad debt costs is pooled across all non-household customers, via a uniform uplift to price caps.
- Keeping open the option of not pursuing a true up – For example if outturn bad debt costs are not materially higher than the 2% threshold.
- Undertaking the true up – If a 'true up' is required, Ofwat has set out how it expects this to work in practice.
Further consultation on the proposed adjustments to REC price caps can be expected by December.
"While it’s great that regulators are helping the industry deal with bad debt in the wake of the pandemic, raising prices only treats the symptoms. Instead, water companies should head upstream, using customer data to identify and rectify the causes of bad debt, stop it at source and help prevent it from occurring in the first place," she said.
"While recouping costs is a must, water companies shouldn’t just rely on the regulator. Data can help companies segment customers, identify and assist customers that are struggling financially, avoiding penalising the entire customer in tackling the cause of the issue."
United Utilities picks up pipeline award
A race-against-time plumbing job to connect four huge water pipes into the large Haweswater Aqueduct in Cumbria saw United Utilities awarded Utility Project of the Year by Pipeline Industries Guild.
The Hallbank project, near Kendal, was completed within a tight eight-day deadline, in a storm and during the second COVID lockdown last November – and with three hours to spare. Principal construction manager John Dawson said the project helped boost the resilience of water supplies across the North West.
“I think what made us stand out was the scale, the use of future technology and the fact that we were really just one team, working collaboratively for a common goal," he said.
Camus Energy secures $16m funding
Camus Energy, which provides advanced grid management technology, has secured $16 million in a Series A round, led by Park West Asset Management and joined by Congruent Ventures, Wave Capital and other investors, including an investor-owned utility. Camus will leverage the operating capital to expand its grid management software platform to meet growing demand from utilities across North America.
As local utilities look to save money and increase their use of clean energy by tapping into low-cost and low-carbon local resources, Camus' grid management platform provides connectivity between the utility's operations team, its grid-connected equipment and customer devices.