Global consulting firm Ernst and Young has said oil and gas companies in India face unstable policy regime on top of business risk arising from volatile crude oil prices.
Instability in policy regime makes the business scenario uncertain for both national oil companies and international oil firms, Ernst and Young said in its business risk report.
"A fragmented energy policy creates ambiguity, forcing oil and gas companies to repeatedly make decisions in uncertain environment and deters long-term planning. The policy requires review in order to balance competing goals of security of supply, affordability, meeting demand growth and climate change considerations," it said.
The oil and gas sector has been impacted globally by the economic downturn, which has created new risks for the industry threatening the near-term survival and prospects of a number of oil and gas companies, according to The 2009 Ernst & Young business risk report.
On key risks faced by Indian oil and gas majors, it said: "Crude oil price volatility is among the largest business risk that oil and gas companies in India face. This is followed by unstable policy regime, managing costs and risks emerging from technological advancements."
The 2009 global report, based on interviews with some of the sectors' leading CEOs, analysts, commentators and academics, identified access to reserves as the number one business risk for the oil and gas sector, up from fourth place in 2008.
While uncertainty around energy policy moved up from sixth to second position, followed by a new entrant in third place — price volatility.
At sixth place was human capital deficit, identified as the number one business risk for the sector in 2008, reflecting the easing of hiring pressures in a downturn, Ernst and Young said.
Anjani K Agrawal, Partner, Oil and Gas practice, Ernst and Young said volatility around oil prices and exchange rate fluctuations should be built into companies’ risk management framework. "Strengthening internal risk management processes to protect margins is key concern facing Indian players."
The current economic slowdown has brought greater emphasis on managing costs for companies to secure their present, E&Y said. Also, managing costs poses a big challenge for Indian companies as squeezing costs was critical in the face of fluctuating demand and cyclical pricing, it added.
Increasing impetus on environmental issues and stringent fuel quality norms have accentuated the technological risks refiners face, it said, adding investments in infrastructure—pipelines and railway network— necessitate significant push to improve the supply chain capabilities of the country.