The Development of Risk Management

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The Development of Risk Management in the GCC Oil and Gas Sector

Dr. Faisal Al-Thani
November 9, 2008

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Contents Why Risk Management is important National Oil Company case study N ti l C t d The Risk Management model Conclusion C l i

1

Characteristics of Oil and gas Industry
Oil and gas industry is prone to uncertainty
– – – – – –

Oil reserve uncertainty Exploration uncertainty Crude price uncertainty Product price uncertainty Demand uncertainty Supply uncertainty

Oil and gas industry is a complex industry affected by
– Global risks (political, legal, commercial and environmental) – Element risks (construction, operation, financing and revenue generation) – Both risks categories affects upstream and downstream phases

Crude oil characteristics significantly affect oil field margin and refining margin – – – – –

API gravity Sulfur content Location of production Transportation Recovery cost

2

Typical Risks in the Oil and Gas Industry
Upstream Exploration and Recovery
► ► ► ► ► ► ► Exploration Risk Design Risk Facility Risk Technology Risk Recovery Risk Environmental Risk Transportation Risk ► ► ► ► ► ► ► ► ►

Refinery & Marketing
Planning Design Risk Construction Risk Commissioning Risk Regulatory Risk Permits and License Risk Availability of Materials Financing Risks (instruments) Delay Risk Decommissioning Risk

Products Offtake

National Oil Company
(Refinery)

Crude Oil Supply: Type/Time/Quality
► ► ► ► ► Delay Risk Price Risk Quality Risk Quantity Risk Transportation Risk

► ► ► ► ►

Gasoline Diesel Heating Oil Propane Other

Operations & Maintenance
► ► ► ► Supply of materials Labour issues Environmental Risk Interruption to Refining Process Risk ► Resource Risk ► Liquidity Risk ► D bt S i Ri k Debt Service Risk

Price and Demand of Derivatives
► Demand Risk ► Marketing Risk ► Commercial Risk

3

GCC National Oil Companies Main Risks Terrorism and criminal activities Availability of oil and gas resources Energy price volatility Infrastructure and development issues Political and regulatory risk issues Risk of natural disaster Recruitment and retention of qualified workforce R it t d t ti f lifi d kf Outbreak of pandemic Environmental issues Financial risk Supply chain risk 4

Why Risk Management is becoming important in the oil and gas industry The risks encountered both upstream and downstream need to be addressed to ensure commercial viability of an oil and g p j y gas project. In the upstream sector, the industry is characterized as “high-risk” industry due to the sizeable investment level, geological uncertainties and other risks related to fiscal and political uncertainties with host producing countries. Downstream sector bears risk which is related to uncertainty of the crude (supply) and the product market (off-take). Risk management can be applied to marginal oil and gas fields (projects) to improve/make them commercially viable.

5

Techniques and Software used for Risk Management in Oil and Gas Industry Qualitative Techniques
– – – – – – – –

Brainstorming Assumptions analysis Interviews Checklists Risk registers Risk mapping Probability impact table Other

Quantitative Techniques
– – – – – – – – –

Decision Trees Monte Carlo Simulation Sensitivity Analysis Probability, Impact Grid (PIG) Analysis @ Risk Crystal Ball Excel Spreadsheet CASPAR (Computer Aided Simulation for Project Appraisal and Review) Other

6

Distribution of Risks before Risk Mitigation Methods (BRM) Upstream Case Study Distribution Range Lower Upper 0 20 0 0 0 0 -10 0 -10 10 0 0 -20 0 0 0 -20 20 20 20 20 20 10 20 20 20 20 15 30 20 20

ID 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Type of Risks Exploration Technical Feasibilities Approval Design g Site Conditions Construction Delay Weather Supply Operation Maintenance Environmental Risks Price Reserve Durability Political Taxation Interest

Affected Activity AA WC, OC, MC WD, OD, EC, OC, MC WC, OC, MC WC,...
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