Risk and Uncertainty Modeling in the Oil and Gas Industry

Abstract

Proposal The management of risk is one of the most important issues facing the oil and gas industry today. This paper will focus on the need for risk management in the oil and gas industry. A typical project from a major oil and gas producer has been selected and its typical risks identified. The risks are analysed and modelled in the CASPAR (Computer Aided Simulation for Project Appraisal and Review) program. The paper distinguishes between pure risk and spread risk for forecasting the economic parameters of different risk scenarios. Introduction The increasing pace of change, customer demands and market globalisation all put risk management high on the agenda for forward thinking companies. It is necessary today to have a comprehensive risk management strategy. Having a process in place to identify, analyse and manage risks is paramount. The oil and gas industry is fraught with risk and it is necessary for these risks to be assessed continuously. In this paper, the authors examine the downstream risks inherent in the oil and gas industry and differentiate between the more manageable/quantifiable pure risks such as construction, health and safety and project management and the less manageable spread risks associated with war, terrorism and market demand which affect the price of oil and gas. Risk Management Merna, T, (2002) summarises risk management as: "Risk management deals both with insurable as well as uninsurable risks and is an approach which involves a formal orderly process for systematically identifying, analysing, and responding to risk events throughout the life of a project to obtain the optimum or acceptable degree of risk elimination or control". Figure 1 below illustrates the risk management cycle. Figure 1 Risk Management Cycle (Merna, A, & Merna, T [2004]). Performing risk management requires the use of tools and techniques. These tools and techniques allow identification and analysis of risks as part of the investment appraisal (Al Thani [2002]). Figure 1 illustrates the risk management cycle which includes the identification, analysis and response to risks. The risk management cycle is dynamic and must be continuous over the project investment lifecycle. Merna, T, (2002) suggests risk can be predicted whilst uncertainty can only be prophesied. Lamb & Merna (2004) distinguish between risk and uncertainty through pure and spread risks: