What is diversification and how do petroleum companies use it as a means to reduce commercial risk? What pitfalls are associated with this practice?
Oil companies try to diversify by buying investments that prosper when oil demand is low. Unfortunately it is very difficult to do. They have massive amounts of cash and they don't really know how to manage other types of businesses very well.
Diversification, is, in fact, a best practice of well managed oil companies in bad and good times. As our grandma said, "Do not put all your eggs in one basket".
I understand diversification as the construction of a diverse portfolio of investments regarding: 1. the stage of the development of assets 2. the environment of assets 3. the risk class of assets and; more recently 4. the energy source of assets.
Regarding 1, a diverse portfolio will have exploratory assets, assets under development and producing assets, which will provide cashflow. Regarding 2, a diverse portfolio will present oil assets, gas assets and the location of the assets should not be concentrated. Regarding 3, a good portfolio will combine low exploratory risk with high polytical or regulatory risk; to invest in high/high risk assets is too dangerous and finally, an oil company with the yes in the future will have part of its assets in clean energy enterprises.
Please see this answer as a conjecture to be discussed instead of a definitive answer. Please contest to improve our knowledge of the matter.