4 Key Risks and Strategies for Oil and Gas Risk Management

The Oil and Gas sector is facing a pivotal moment.  
 
New projections from the World Bank show that global oil production is expected to exceed demand by an average of 1.2 million barrels per day. This supply-demand mismatch has rarely been exceeded. 
With so much oil available, oil prices will dramatically plummet. Hence, companies may have to compete harder to sell their products, and oil might be disposed improperly harming the environment.  
 
That’s why good risk management is essential. 
The downstream sector (oil refining and selling) in particular, struggles with unique challenges. Such challenges include supply chain delays, operational risks, problems with regulatory compliance, and the pressure to adopt cleaner energy solutions. 
 
Thus, this article dives into:  

• 4 key risks facing the oil and gas sector  
• Strategies for effective risk management  
• How Cedar Rose helps mitigate risks and ensure profitability  

4 Key Risks Facing the Oil and Gas Sector

The oil and gas sector is struggling with complex risks. Here are 4 key risks facing the sector:  

1. Geopolitical Tensions and Business Interruptions

Geopolitical tension is still one of the major disruptors for the oil and gas sector.  
Examples of this include war conflicts and trade wars. Political unrest can disrupt operations, supply chains and induce regulatory changes. 
 
Naming a few are the war in Ukraine, the Israeli-Hamas conflict, trade disputes between the US and China, and tensions in the South China Sea. All these lead to supply chain disruptions which impact oil prices and increase business risks. These along with the effects of Brexit and the historical conflicts in the Middle East are forcing companies to adapt their operations to changing regulations, find new ways to source materials, and re-assess their global strategies to ensure business continuity. 

In fact, according to Allianz Risk Barometer, business interruption is the premier risk for the oil and gas sector in 2024. This risk is extremely acute for the downstream sector (oil refining and selling) for it leads to production delays and financial losses.  

 2. Economic Obstacles, Energy Crisis and Market Volatility

Market volatility, the energy crisis, and economic challenges are significant issues for oil and gas companies, impacting both upstream and downstream operations. Price fluctuations, economic uncertainty, and supply-demand imbalances shorten planning timelines, delay investments, and increase resource costs. Global events, geopolitical tensions, inflation, and interest rate shifts further complicate capital access, reduce demand, and drive-up operating expenses. 

In such a weak economy, demand for refined goods drops, causing refineries to be underused or strained. Rapid demand shifts make inventory management difficult, with some goods rising over 30% in price annually, complicating storage and delivery. Moreover, refineries that are heavily capital dependent require investments in maintenance, upgrades, and environmental compliance. However, securing funding has become harder. Regulatory changes add expenses, and volatility disrupts operations that rely on intricate supply chains. Evolving consumer preferences also fuel demand for alternative energy, challenging the future of traditional refined products. 

3. Energy Transitions and Regulatory and Environmental Pressures

With the world moving towards “greener” solutions, there is a rise in demand for low-carbon energy sources, increasing adoption of electric vehicles, solar installations and renewable technologies. Hence, governments worldwide are enforcing stricter regulations to reduce emissions. In the US, the EPA has issued new rules to target methane and VOC (Volatile organic compound) emissions, while Canada has proposed a GHG (greenhouse gas) emissions cap for the sector. 

This is particularly apparent in the downstream oil and gas sector where refineries must balance reducing emissions with maintaining profitability amid volatile oil prices. With declining demand for oil, companies risk obsolescence unless they invest in carbon capture, biofuels, clean hydrogen, and costly refinery upgrades. Thus, to remain competitive, they need to innovate, adopt cleaner technologies, and align with evolving regulatory standards. 

4. Technological Disruption and Digitisation Challenges

Technologies like Smart Engineering Technology (SET), the industrial internet of things (IIOT) and big data bring numerous advantages to the oil and gas sector but also introduce several risks. Though they lower operating costs, and enhance product quality, they introduce new risks and challenges.  

Cybersecurity is a primary one, so is integrating new digital technology with legacy systems. It is both complex and costly. Furthermore, implementation may lead to operational disruptions, and companies may have to comply with evolving regulations regarding these technologies. 

Strategies for Effective Risk Management 

Therefore, to enhance their resilience against geopolitical, operational, financial, and environmental risks, oil and gas companies should: 

• Implement comprehensive geopolitical risk assessment frameworks and continuously monitor political events especially in oil-producing regions. They should also develop robust backup or contingency plans that address multiple scenarios and seek to diversify and regionalise their operations. This means spread their operations over several geographic regions to reduce over-reliance on one market or supplier. Moreover, investing in real-time monitoring systems for production facilities, and using AI to optimise supply chain and demand forecast can help. 
   
• Employ sophisticated hedging strategies to mitigate price volatility, diversify their product portfolios, and explore alternative revenue streams like renewable energy ventures (e.g. integrating CCS (carbon capture and storage). This reduces reliance on traditional markets.  
  They should also adopt agile business models, invest in market intelligence tools for better forecasting, and maintain strong finances all while collaborating with others and engaging in scenario planning for success.  
   
• Embrace low-carbon technologies and sustainable practices. Develop strong ESG (environmental, social and governance) strategies with clear sustainability goals. This includes reducing emissions, improving energy efficiency and conducting regular environmental assessments. Proactively engaging with policymakers, transparent reporting, stakeholder engagement, and collaboration with clean tech innovators are also key. 
   
• Invest in technologies like IoT, AI, and blockchain while also prioritising cybersecurity. Reskill and upskill the workforce with strong digital skills. Focus on effective data management and analytics to extract valuable insights. Additionally, collaborating with technology companies and implementing agile project methodologies can accelerate execution.  

How Cedar Rose Helps Mitigate Risks and Ensure Profitability  

At Cedar Rose, we understand the complexities of managing supply chains in uncertain geopolitical environments. 

With over 25 years of global experience and strong expertise in the MENA region, we offer tailored solutions to help you mitigate risks, ensure compliance, and make informed decisions. 

Our all-in-one risk management platform, CRiS Intelligence, provides real-time access to a vast corporate and legal entity database, covering over 456 million companies in 250+ jurisdictions. Whether you need in-depth due diligence reports on potential partners or credit reports to assess financial health, CRiS Intelligence empowers you to navigate economic uncertainty with confidence.  
 
Contact us today to learn how we can help you achieve success in the oil and gas sector. 

Sources 

1. https://maritimefairtrade.org/geopolitical-shifts-impacting-the-oil-and-gas-industry/ 
2. https://www2.deloitte.com/us/en/insights/industry/oil-and-gas/oil-and-gas-industry-outlook.html?id=us%3A2sm%3A3pt%3A4dcom_share%3A5awa%3A6dcom%3Aenergy_and_resources 
3. https://www.mckinsey.com/capabilities/operations/our-insights/harnessing-volatility-technology-transformation-in-oil-and-gas 
4. https://whatfix.com/blog/oil-gas-digital-transformation/ 
   
5. https://www.esimtech.com/a-comprehensive-guide-to-oil-and-gas-risk-management%EF%BC%9A-what-are-effective-risk-mitigation-strategies-and-how-simulation-used-for-it.html