Risk and Decision Analysis in Petroleum

Introduction:

The petroleum industry is recognized as a dominant, strategically defensive sector that requires significant capital investment and carries inherent risks. According to 2013 surveys and marketing research reports, global exploration and production expenditures rose to over $644 billion.

In 2014, the exploration budget further increased to $654 billion, but this upward trend was curtailed in 2015, with spending dropping to $521 billion, followed by a 27% decline in 2016. However, by this year, global spending on exploration and production rose by 7% once again.

Factors such as rising costs associated with developing new reserves and diminishing oil and gas output per drilling foot have placed considerable strain on the profit margins of the upstream sector. Additional causes, including high inflation, global oversupply, and perpetual price fluctuations, further contribute to declining profits.

Moreover, the depletion of older fields and advancements in unconventional production technologies have intensified competition for investments, exploration licenses, land, and production-sharing agreements, exacerbating the challenging business environment. Consequently, investments in and projects within the petroleum sector are characteristically high-risk.

The organized assessment, management, and mitigation of these risks remain the primary challenge. At the initial stages of capital project planning, professionals must accurately estimate costs, potential returns, and strategies for oil and gas risk management. Inaccurate estimates of these critical parameters can lead to significant financial losses. This module focuses on Petroleum Risk and Decision Analysis, highlighting its importance and equipping participants with methods and tools to manage petroleum risks effectively.

Objectives:

At the end of the Risk and Decision Analysis in Petroleum course, participants will be able to:

• Identify and articulate the steps in the decision analysis process and develop a project cash flow model with built-in sensitivity analysis.
• Conduct impact analysis of investment and design options using decision tree analysis.
• Utilize software such as @Risk in the decision-making process and implementation.
• Identify key risks and uncertainties in petroleum projects.
• Enhance their understanding of the most critical factors affecting oil and gas field development projects.

Training Methodology:

• Case studies
• Focus groups
• Simulations
• Computer workshops
• Role-playing
• Lectures
• Data manipulation exercises

Course Outline:

Unit 1: Development Economics

• A Synopsis of the Consumption of Energy Throughout History
• Core Concepts of Development Economics
• Understanding Economic Vocabulary
• Inflation and Its Effect on Net and Real Cash Flow
• Different Aspects of Project Funding

Unit 2: Uncertainty in Investments

• Managing Uncertainty in Capital Projects
• Understanding Concepts of Probability
• Benefits and Drawbacks of Expected Value Concept
• Expected Monetary Value
• Expected Profitability Index
• Expected Opportunity Loss

Unit 3: Risks and Uncertainties

• Identifying Risks and Uncertainties
• Risk Aversion and Risk Premium
• Investigating Project Threats and Opportunities
• Economic Decision-Making Principles
• Decision Trees
• Probability Distribution
• MCCA

Unit 4: Organizing Excel Worksheets for Spreadsheet Computations

• Excel Calculations
• Cash Flow Analysis
• Sensitivity Analysis
• Tornado Diagrams
• Basic Understanding of Monte Carlo Simulations Over Risk
• Cutting-Edge Developments of an Oil Field Project

Unit 5: Practical Use of @Risk Add-On: Oil Field Development Model

• Establishing a Joint Economic Model of Oil Field Development
• Formulating and Applying @Risk Model in Analysis
• Understanding Project Sensitivity Through @Risk Model Results
• Final Presentation