The Development of Risk Management Essay

The Development of Risk Management in the GCC Oil and Gas Sector Dr. Faisal Al-Thani November 9, 2008 0 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.

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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, OC, MC WC, OC, MC WC, OC, MC WC, OC, WC OC MC O&M O&M RR RR RR RR FEC Sample EXP TFB APP DES SCO COD WTH SUP O&M ENV PRI RSD POL TAX INT Changes is the IRR% -1% -12. 5% -15. 9% -12. 3% -10. 5% +6%, -10. 5% -6. 7% +6%, 10 5% +6% -10. 5% -1. 6% -1. 6% +18. 5%, -22% -16. % -34. 9% -0. 4% +2%, -2% , 7 Risk Distributions and Effect of the IRR after risk mitigation (ARM) Distribution Range Lower Upper 0 5 0 0 0 0 -10 0 -10 0 0 -20 0 0 0 -5 5 5 5 5 5 10 5 5 5 10 5 10 5 5 ID 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Type of Risks Exploration Technical Feasibilities Approval Design Site Conditions Construction Delay Weather Supply Operation Maintenance Environmental Risks Price Reserve Durability Political Taxation Interest Affected Activity AA IC, OC, PC ID, OD, IC, OC, PC IC, OC, PC IC, OC IC OC, PC IC, OC, PC IC, OC, PC IC, OC, PC O&M O&M RR RR RR RR FEC

Sample EXP TFB APP DES SCO COD WTH SUP O&M ENV PRI RSD POL TAX INT Changes is the IRR% -1% 1% -3. 5% -5. 8% -3. 5% -2. 8% 2 8% +6%, -5. 5% -3. 5% 2. 9%, -2. 8% -0. 4% 0 4% -0. 4% +9. 6%, -10. 4% -5. 1% -10. 4% -0. 1% +0. 5%, -0. 5% 8 Comparison of Probability Analysis BRM and ARM for GPP 9 Risk assessment for all levels of an organization RISK ASSESSMENT FOR ALL LEVELS START INFORMATION • Processed historica data • Outputs from other planning services • Organisational level speficic knowledge Feedback Loop

PROJECT DEFINITION RISK IDENTIFICATION Risk Identification Techniques Quantitative Risk Analysis RISK ANALYSIS PARTICIPANTS • Relevant stakeholder representatives (internal and external) Qualitative Risk Analysis y Evaluate, Monitor and Control Risk Response Techniques RISK RESPONSE Risk Response Methods RISK MANAGEMENT PLAN RISK REGISTER (Corporate, Strategic Business & Project) 10 The Risk Management Model Shareholders/ Lenders Corporate Risk Assessment Corporate Risk Register Strategic Business Risk Assesment Ri k A t

Strategic Business Risk Register Ri k R i t Risk Officer Project Risk Assessment Project Risk Register 11 Risk Management for Decision-making Effective risk management is as much about looking to make sure that you are not missing opportunities as it is ensuring you are not taking inappropriate risk. Risk management provides a framework to improve decision-making. Risk management involves identifying risks, predicting how probable they are and how serious they might become, deciding what to do about them and implementing these decisions.

The risk analysis and subsequent risk mitigation provides financial information to potential lenders, promoters or equity providers f each project scenario. for Improvement of project or business planning by answering “what if” questions with imaginative scenarios. Provision of alternative plans and appropriate contingencies and consideration concerning their management as part of a risk response. The generation of imaginative response to risks. Decisions are supported by thorough analysis of the data available estimates can be made with greater confidence both technical and financial. ith t fid b th t h i l d fi i l Development of a risk register to cover all elements of the process and the response to identified risks by stakeholders to the project investment. Determines the commercially viability of a project for mean, pessimistic and mean optimistic scenarios. 12 Conclusion The management of risk is one of the most important issues facing oil and gas organizations today. Risk management can be considered as the sustainability of a business in the environment it is in. All risks need to be assessed at all levels (corporate level, strategic business level and project level).

Risk management can be applied effectively to oil and gas project like any other investment project. The results of risks analysis, both sensitivity and probability can identify the quantitative effect on a project economics should such risk occur. Risk management creates confidence in decision making. Potential losses and gains can be identified and managed. No decision can be taken without a comprehensive risk assessment. Effective risk management improves the commercial viability of oil and gas projects. 13 THANK YOU 14