The second challenge is for the oil and gas industry to collectively invest approximately $500 billion each year just to keep up with demand. The trend since 2015 is one of remarkable achievement in lowering the cost base of the entire industry. While companies cannot control the price of their product, they can control the amount of money they spend annually. Investors are demanding better returns on their investment in oil and gas companies. Oil and gas companies need to continue their good work at lowering costs. It will take time, but the trajectory is clear to get to net zero emissions by 2050 or sooner. Just look at the work being done by industry, universities and governments to lower emissions, and you will see that a very large effort is being made to produce cleaner energy. This is a tough task, but many groups are rising to the occasion. At the same time, the world is demanding cleaner energy so oil and gas companies must supply this energy with less emissions. The global population is increasing, and energy demand post COVID-19 will not only recover, but also increase. The first is to produce more energy at lower cost with less emissions.
To built up such distribution channels is costly and require time to establish.There are three primary challenges facing the oil and gas industry today. For example, TOTAL has established over 1.000 gas stations in Germany to distribute their oil products.
Lastly only big oil companies possess access to distribution channels like oil pipelines, gas stations and distribution stores. Therefore, a company who wants to entrant in the oil and gas industry and wants to reduce this risk should careful analyze the government policies and building sustainable relationships with its international oil and gas associates. Especially in unstable political systems, the condition of a projects in the beginning may change over time, as the government may change their perspective, after the capital is invested. To lower this risk a company should prefer projects in countries with stable political systems. So, this risk of government policies increases when companies are working abroad. In addition, the regulation limit where, how and when extraction is possible. Most of the time oil and gas are state owned resources and the government prefers to give national companies access to raw materials or they allow exploitation of oil fields just with a partnership with a national company. In addition to that a potential entrant could have disadvantages from different government policies that favors national companies. That’s why oil companies again must invest in expensive oil exploration projects which could explore oil at low costs, to minimize the risk of falling oil prices.
For example, Rosneft had to repay almost 30 bn in loans by the end of 2015. This could lead to that companies shift from being big distributors of capital to companies which have to do a lot of refinancing. This events threaten the profitability and even the survival of oil and gas companies which need minimum prices to finance their planned expenditures. The oil price decline in June 2014 from 110 USD per barrel to 55 USD per barrel in the end of 2014 happened due to the growth in supply, especially from shale, lower demand from Asia and OPEC couldn’t cut the output of oil to regulate the price. Before the company decides to start a project, they forecast the oil price to assess the feasibility of it and if they start they must bear the risk of the oi price volatility. These projects, mostly can’t be quickly interrupted and then restarted again when the oil price starts to hike. This doesn’t mean that oil projects are instantly cancelled due to an unexpected collapse of the oil price. Especially unconventional extraction methods can lead to higher costs.
Beyond the huge capital requirements, the oil price is one major factor for the assessment if an investment is worth.
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