Uncertainty and Risk in the Oil Industry



K.S Endeavor jackup drilling rig burning off Nigeria’s coast on January 16, 2012. Culled from http://skytruth-alerts.blogspot.com



 

Uncertainty refers to little or imperfect knowledge of the future or project, while risk refers to when an uncertainty comes with some financial implications.

There are many ways in which oil companies reduce risk:

1.  Transfer to another party (Farm-out; project finance contract; insurance policy; construction contract; lease finance contract; commodity trading)

 

2.  Acquisition of information (e.g. drilling more appraisal wells or running better tools to know more! )

 

3.  Diversification of activity (Increasing your geographical presence; doing different businesses like a conglomerate; joint ventures; vertical integration of a particular product – you explore, produce, transport, refine, distribute, and market oil all by your subsidiary companies)