Page 378 - Hydrocarbon Exploration and Production Second Edition

CHA P T E R 1 5

Risk Analysis

Introduction and Commercial Application: We have established that the oil and gas
business involves major investments in all stages of the field life cycle. During the
gaining access, exploration and appraisal stages, the expenditure does not guarantee a
return, and at the development stage major investments are made in the anticipation
of returns over a long period of time. Payback periods are typically long, and the
project is subject to large fluctuations in key variables such as oil and gas price and
cost of services during the producing life of the asset. For these reasons, it is
important that careful technical and commercial risk analysis is performed when
making decisions on investment in the industry. In addition, the nature of oil and gas
production is intrinsically hazardous, and the potential impact on the people
involved is carefully analysed and reduced to acceptable levels by design of plant and
operating procedures.
This section will summarise the risk analysis techniques already introduced in
the areas of exploration and appraisal and HSE, and will cover some methods used
in managing risk in development projects.

15.1. Risk Definition and Unit of Measure

Whereas project uncertainties refer to the range of possible values for project
variables, project risk can conveniently be defined as the impact of the outcomes on
the stakeholders. For example, oil price is an input in project economic analysis, and
the risk of price variation will be measured in terms of project NPV. Of course the
actual outcome may be better or worse than the base case, so risk can have a positive
side as well as a negative side. We usually think of risk in terms of a negative impact,
but we should remember that there is often a positive element of risk (we may call it
opportunity) and this upside may be worth pursuing.
The dimensions of risk in the above example are clearly in monetary terms, say
dollars. However it is not just the investment which is at risk in a project – the
company also places its reputation, its people and the environment at risk. Although a
somewhat contentious statement, the risks in these other aspects can also be measured
in terms of dollars; actuaries provide estimates of the value of injury to people,
environmental damage often incurs fines and remediation costs and loss of good
reputation can limit the company’s ability to gain access to new regions. Of course,
positive performance in safety and environment can enhance reputation, reduce costs
and add value. In general, monetary terms is a convenient measure of risk, allowing
comparisons to be made, and justifying expenditure to reduce risks with a potential
negative impact.

365