Kay Rieck: Four factors to keep in mind when looking at oil and gas projects
The challenges that come from operating in the oil and gas sector in a covid-19 economy add to the considerable pressure the sector was already under. There are still attractive opportunities however, if you can work out a way spot them.
As we’ve discussed, some of the pressures on the oil and gas sector are significant. Several regulators have expressed concern about waste and inefficiency, some investors have started to drift away in search of what they define as profits with conscience, and a number of governments are focusing more and more of their efforts on supporting the development of alternatives.
At the same time however, many of the fundamentals that underpin the industry are positive. Covid-19 has made many aspects of activity extraordinarily cheap, and the sector is likely to be fertile ground for innovation as it catches up with changes that have taken place in several parallel industries such as the financial services.
Technology is also poised to make a real difference over the next few years, not just in terms of, for example, the impact of new 3d-printed widgets imbued with artificial intelligence that enhance output or reduce waste at an individual project, but more widely as things like the blockchain make bureaucracy more efficient, make exploration and production easier and generally bring costs down and efficiency up across every aspect of the industry.
Working out whether investing resources in a project is likely to be worthwhile can be a challenge. This article will outline four factors to keep in mind as you work through the decision-making process.
Sometimes, it’s about a mindset
Like most industries, oil and gas has positive and negative aspects, and how you approach these are likely to define how you feel about participating, whether that’s actively in a role with a company or from an investment point of view.
From an active participant perspective, the constantly evolving rules and regulations can seem like a distraction from the actual job of helping deliver the resource that keeps the global economy moving.
All industries are constantly changing though, whether you are working in a school, a restaurant, telecommunications or the oil and gas sector. There is a constant stream of new strategies, technologies, and regulations that all need to be adapted to, and what worked yesterday is less likely to work today and is almost certain not to work tomorrow.
That said, these strategies, technologies and even the regulations have been created for a reason and if you don’t respond to them effectively, you can be certain that one of your competitors, whether they are in the same city, in the neighbouring county or on the other side of the sea will be working out how to use them to their advantage.
Sometimes it’s about adaptability
Equally, while it can feel like change is imposed, it often also represents an opportunity to be able to do more with less. A certain amount of waste has always been tolerated as inevitable within the industry, for example, but when there are technologies, such as drone monitoring, that can be put in place relatively cheaply, it tends to make sense to investigate ways of integrating them into a business.
From the investment perspective meanwhile, no matter how the strategies, technologies and regulations change, fundamentally the decision about where to put your support remains the same: the projects that are likely to provide the best returns are those that are well-managed and adaptive to changing governments, consumers, competitors and economic environments. Investment is always about finding the sweet spot between risk and reward. That doesn’t change no matter how the landscape develops.
It’s always about research
Efficient due diligence and extensive research before committing time or financial resources to a project is likely to pay off. It often unearths information about a project that the prospectus or interview leaves out.
Oil and gas is a complex sector and there are many factors that contribute to a project’s success or failure. Comprehensive research can be difficult, but it always makes a successful outcome more likely.
Sometimes it’s about luck
It’s sometimes said that you make your own luck. As 2020 showed all too starkly however, the unexpected can completely derail the best laid plans of the company that you are interested in working for or investing in. No matter how much research you did into the oil and gas sector, you would have been unlikely to have seen the challenges of covid-19 coming.
With the right mind set, a certain amount of flexibility and plenty of information, you improve your chances of avoiding being swept away by the issues short and long-term that beset the industry.
No matter how the industry changes, no matter what competitors arise and how expectations change, there is always an element of luck involved. Luck about whether the market moves in your favour, luck about whether the leadership team makes the right decisions at the right time, luck about whether the political environment changes before a project has reached an appropriate point.
In the end all of these factors were in place before covid-19 came along and challenged everyone’s plans, and they will still be important long after this particular period is consigned to the economic history books. Participation in a project, whether actively or on the investment side, involves having the right mind set and accepting that change is going to happen whether you like it or not. Successful participation also involves a lot of due diligence and, unfortunately, a certain amount of good luck.
About the author
Kay Rieck has been active on the investment side of the oil and gas sector for more than two decades. Starting his career as a financial adviser and stockbroker on the New York Stock Exchange, he quickly developed an interest in natural resources and associated assets building his expertise with investment banking and asset management roles at the New York Board of Trade and the Chicago Board of Trade. Utilising his exceptional network of global contacts, he started his first exploration and production company in the US in 2008, selecting investments across the Haynesville Shale, Permian basin, Eagle Ford shale, Dimmit county and elsewhere that offered exceptional prospective returns.