Are you thinking of starting a business that involves oil and gas? Perhaps you are wondering how you can maximize your profits in this type of business. You need to know the basics before you even get started. There are many aspects to consider, including accounting.
Proper accounting in the oil and gas sector is essential because it helps companies charge prices to obtain assets versus revenues as they use the reserves. If your business involves the exploration and development of natural gas and crude oil, reading this guide will benefit you a lot.
Three Key Areas in Oil and Gas Sectors
1. Upstream entails finding underground or underwater natural gas or crude oil deposits. It also includes the drilling of exploration wells to acquire oil and gas.
2. Midstream demands the transporting, storing, and dispensing of gas and oil. The transported resources are brought to the refineries situated in separate locations from the gas and oil reserves site. The resources are transported by tanker ships and trucking fleets for storage.
3. Downstream is the process of refining the raw resources gathered from the reserve sites. The crude oil and natural gas are being purified for commercial distribution.
The Essence of Petroleum Products
Oil and gas industries invest a lot in petroleum products because these resources are integral to almost all countries in producing chemical products, particularly fertilizers, solvents, plastics, pharmaceuticals, etc.
Top 5 Risks That Oil and Gas Companies Experience
1. Political Risk
Politics can affect oil and gas business through regulatory movements. The regulations vary from state to state. Political risk rises when oil and gas companies are functioning on deposits overseas. If you plan to manage an oil and gas business abroad, it’s ideal to choose the country with stable political systems. Careful analysis and building a strong relationship with international oil and gas partners can guarantee long-term agreements that your business needs.
2. Geological Risk
The probe and production of oil and natural gas are subject to natural hazards and other fears, depending on the physical attributes of oil and gas fields. The probability of the discovery must be determined during proper evaluation to inhibit pressure or heterogeneities in formations and accidents. A comprehensive geological risk assessment is critical. Experts make sure that shortages or delays in delivery of equipment are avoided to protect the capital expenditures.
For environmental safety, experts’ considerations include:
- Measuring reservoir
- Quantity of traps
- Determining hydrocarbon charge
- Chance of retention of hydrocarbon after collection
3. Price Risk
Oil and gas prices are known for their volatility. Price risk arises when there’s a heightened geological barrier during the extraction of the resources. Professionals do oil hedging to decrease their business exposure to fluctuating oil prices. With this, they can fix or cap an oil cost at a certain level or timeframe.
4. Supply and Demand Risk
The law of supply and demand influences the oil and gas industries. As people obtain more products and equipment that depend on gas and oil, the demands upsurge. To increase supply, oil companies are innovating new techniques and invest in more drilling projects.
5. Operational Cost Risk
When these oil and gas producers spend more money on collecting resources to meet the demand, expect that the costs of oil and gas also increase. Here’s a list of what you can take to decrease operational cost risk:
- Educate your staff and maintain standards
- Invest in automation
- Be smart in dealing with vendors
Managing an oil and gas business is a serious undertaking. Aside from careful planning, you need to be vigilant. With a reliable operations team and accountant, all your financial statements will be taken care of.