Page 383 - Hydrocarbon Exploration and Production Second Edition

370 Risk Analysis for Major Capital Investments in Projects

EMV of decisionvs Appraisal cost
130
Appraise Develop
120
($mln) 110

Decision 100

of 90
EMV 80

70

60
0 10 20 30 40 50 60
Appraisal cost ($mln)
Figure 15.4 Sensitivity analysis to determine the maximum value of appraisal information.

risk or opportunity is identified, the more potential there is to create value, and
similarly the later it is identified the more erosion of project value will typically
occur (Figure 15.5).
The following table briefly indicates the activities which occur at each stage.

Stage Activity
Identify Identify the opportunity for investment.
Assess Consider options for development and demonstrate that at least one is
economically feasible. Determine whether further appraisal activity is
required to improve the project value.
Select Choose between the options generated, based on economic,
environmental and safety criteria.
Define Perform detailed design of the chosen concept for development.
Execute Procure suppliers and agree the contracts for constructing the facilities,
processing equipment and drilling. Fabricate, install and commission
the plant.
Operate Operate the facility.

The Assess stage can also be called the Appraise stage in some companies, and the
stage-gate process clearly has its roots in the traditional planning and control
approach discussed in Section 13.2, Chapter 13.
There are useful risk analysis tools which can be applied at the above stages, and
these will now be introduced.