Understanding Uncertainty and Risk in Capital Projects

Photo courtesy of Arrow Energy.
A wellsite generator from one of Arrow Energy’s coalbed methane development projects in the Surat Basin in Queensland. The high cost of conventional logging methods have forced the company to consider less expensive options that may limit the project’s economic value or increase risks in the operation. 

The SPE Asia Pacific Unconventional Resources Conference and Exhibition held in Brisbane last November featured a special session, “Megaprojects: Past, Present, and Future,” that focused on some of the key issues facing megaprojects in the Asia Pacific region. Panel speakers discussed the main impediments to megaprojects, resource acquisition and management, and the project management skills and business climate in the region.

Another topic the speakers addressed was the role of uncertainty and risk in sanctioning megaprojects. In an environment where more than half of all projects are facing cost overruns, schedule delays, or both, the need to recognize problem areas prior to sanction is as great as ever (Ernst and Young 2014).

One way to improve decision making for megaprojects is to understand, quantify, and mitigate risk and uncertainty. To do that, exploration and production companies are spending money to gather and analyze the necessary data.

Steve Begg, a professor of petroleum engineering and management at the University of Adelaide and a panelist at the megaproject special session, said a company that is biased toward risk aversion or risk-seeking behaviors faces a worse long-term outcome than companies that take a risk-neutral, or an expected-value, approach to decision making.

“If you’ve got large degrees of uncertainty but you’re unbiased, then one project might fail but another one might be brilliant, and if you look at a collection of decision outcomes in a corporation, you’ll be well ahead. So uncertainty isn’t the problem. It’s bias,” he said.

This article is reserved for SPE members and JPT subscribers.
If you would like to continue reading,
please Sign In, JOIN SPE or Subscribe to JPT

Understanding Uncertainty and Risk in Capital Projects

Stephen Whitfield

28 January 2016

Volume: 68 | Issue: 2


Don't miss the latest content delivered to your email box weekly. Sign up for the JPT newsletter.