Summary
Managers of E&P projects and operations are often required to make
decisions on the basis of a variety of factors including, but not limited to,
safety, finance, security, and company reputation. Often these factors
are hard to quantify or may be in direct conflict with each other.
Therefore, it is critical that decision makers use an approach to assess risks
associated with each factor in a consistent and defensible manner. The
selected approach needs to be robust enough to quantify the risk sufficiently,
but simple enough to allow for ease of use and interpretation of results. In
this paper, we present several approaches by which risk criteria can be
defined, and then present resulting risk profiles for E&P operations in
developing nations, thereby increasing the number of tools available to those
faced with making such business decisions.
Introduction
Business risk may be defined as a condition involving exposure to events
that would have an adverse impact on a company’s objectives (Bowden et al.
2001). Risk, in this context, is understood to be determined by a combination
of the likelihood of an event occurring and the magnitude of its consequences.
An oil company’s business-risk portfolio may include events, projects, or
operations with potential for impacts on the company’s capital investments,
physical assets, revenue, worker health and safety, public welfare, natural
environment, company reputation, security, and long-term legal liability. From
the above abbreviated list, the reader should note that a company’s
business-risk portfolio may be influenced by a large number of variables
including whether the company operates on a local, national, or global
scale; the political sensitivities of local communities; precedents in the
company’s operating history that have “sensitized” it to certain risks, and so
on. Given the large range and resulting large number of potential risk factors,
it is important that each risk evaluation first assess what types of risk will
be considered in the evaluation.
The major components of a risk evaluation are shown in Fig. 1.
This basic methodology has been used by many to assess a variety of business
risks. For example, Kulkarni and Conroy (1994) presented a
pipeline-inspection and -maintenance-optimization system on the basis of this
basic risk-evaluation methodology and the principles of decision analysis. The
use of this basic methodology to develop risk-mitigation policies was
demonstrated by Kulkarni and Huntsman (1992) in relation to landslide risks.
Environmental-liability-prevention advocacy in the oil industry has begun to
focus on holistic financial decision-making frameworks that consider the added
value of semi- and nonquantifiable factors such as educational opportunities,
community engagement, biodiversity benefits, and enhanced company reputation.
Aven and Floerenaes (2004) describe a risk methodology used by Statoil that
focused on how to make consistent investment decisions in light of country risk
events whereby project profitability is comparable across countries. Recently,
the development of comprehensive risk-evaluation approaches has been driven by
the Sarbanes-Oxley Act of 2002 in the United States (Wood and Randall 2005a,
2005b). Within the E&P industry, various methodologies have been used for
business-risk evaluation, spanning the gamut of potential exposures including
the evaluation of the probability and consequence of accidental oil releases,
geohazards, pipeline failure, and many other risk scenarios.
© 2006. Society of Petroleum Engineers
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History
- Original manuscript received:
8 May 2006
- Manuscript approved:
18 July 2006
- Version of record:
20 September 2006
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