Credit to Associate Professor Dr Ismail M Saaid

• Lesson Outcomes
• Risk and Uncertainty
• Geological Risk
• Facilities Risk
• Political Risk
• Economic Risk
• Partner Risk
• Summary
• At the end of this lesson, learners should be able to
• Define the terms “risk” and “uncertainty”
• Identify the sources of risk and uncertainty
• Recognise the impact of risk and uncertainty on the petroleum investment
• The term risk and uncertainty are commonly used interchangeable.
• Uncertainty describes our imperfect knowledge of the future.
• Risk infers that the uncertainty has financial or material implications.
• According to the International Organization of Standard, Risk can be defined as the effect of
uncertainty on objectives.
• Our focus for this lesson is to recognize the impact of uncertainty on petroleum
investment.
• The financial outcome (revenue or loss) of the investment that may differ from
the expectation.
The Sources of Uncertainty and Risk
1. Geological Risk
2. Facilities Risk
3. Political Risk
4. Economic Risk
5. Partner Risk
• Oil and gas can be found beneath the earth surface.
• In general, for the conventional hydrocarbon resources, the depths could be
greater than 10,000 ft.
• The assessments of the geological risk depend on available data set.
• These data subject to uncertainty and associated risk.
• The geological risk can be encountered during the petroleum exploration and
production. In general, geological risk can be associated to the different stages
of E&P
• Exploration
• Appraisal
• Field Development
• Factors influencing the geological risk associated to the exploration stage
• Probability of generation and migration of hydrocarbon fluid(s), P[fluid]
• Probability of the occurrence of reservoir rock, P[Lithology]
• Probability of the existence of sealing mechanism, P[Seal]
• Probability of the existence the trapping geometry, P[Trap]
• Probability of the suitable sequence of geological events, P[Timing]
• The probability of existence of petroleum accumulation, P Success can be
expressed as
P Success = P[fluid] × P[Lithology] × P[Seal] × P[Trap] × P[Timing]
• What is the P Success if one of the factors is missing?
• The appraisal stage
• Stage to determine the commercial value the prospect; process of converting the
geological success into commercial success.
• This stage involves the “gathering” of available information that will decide between
making a commercial investment and walking away
• Range of issues are involved in making the fundamental decision during
appraisal stage
• Existing dataset
• The interesting data will be highly favored – more likely the appraisal expenditure to be authorized
• Reserve potential
• STOOIP = GRV × NTG × 𝜙 × 1 − 𝑆𝑤𝑖 ÷ 𝐵𝑜𝑖
• The greater the potential, the more likely the expenditure to extended
• Range of issues are involved in making the fundamental decision during appraisal
stage (continued)
• Geological complexity
• The more complex is the basin and the trapping structure, the more difficult it will be to build a coherent
model → the more expensive it is likely to be, greater risk
• Drilling program and cost
• The more complex the subsurface, the more wells required,
• The deeper the target, the more complex the geological environment
• As a result → the more expensive the individual wells
• Data collection and cost
• Include logging, coring and well testing
• These add significant cost
• Insufficient of these data → increase uncertainty
• Development economics
• To demonstrate commercial viability
• Provide geological model and technical development plan
• It will justify further expenditure → decrease risk
• Field Development
• A successful appraisal program delivers a geological model of the reservoir to be
developed.
• The geological model should include the volume, and fluid distribution (static model).
• Once a coherent static model is built, the recoverable hydrocarbon in place and
production profile are estimated/forecasted.
• Incoherent static model will lead to unacceptable recoverable hydrocarbon estimates
and production profile.
• Also, it may lead to inappropriate surface design.
• The design of facilities should result in the entities that are performing as
expected or else it will impact the capital expenditure (CAPEX) and operating
expenditure (OPEX)
• The issues associated with the facilities could be from any of the following
• Produced fluids
• Subsurface interaction
• Surface facilities
• Environmental issues
• Human involvement
• Produced fluids
• Fluids contain toxic and corrosive components such as Hg, H2S, CO2. These components
can damage the environment
• Highly flammable produced fluids have high potential of explosion.
• Produced fluids come with sand particles (from unconsolidated sand formation) that can
cause erosion to the surface facility
• Hydrocarbon fluids that form gas hydrate and cause flow assurance issue (block
pipeline). The gas hydrates tend to form at high pressure and low temperature
conditions.
• Heavy oil with high viscosity.
• Subsurface Interaction
• High Pressure High Temperature environment (require special way of execution)
• Drilling is subject to uncertainty
• It penetrating the unknown
• Possibility of stuck pipe
• Prevent lost control (blowout)
• Design of Surface Facilities
• Well control unit
• Fluids separation unit (separators)
• Export facilities
• Accommodation and transportation
• Power generation unit
• Corrosion protection schemes
• Environmental Issues - To protect the environment by considering the
following practices
• Knowing the seismic impact on marine mammals
• Design of the schemes/ facilities for the disposal of drilling fluids, cuttings, oily water
• Practice of Flaring of uneconomic gas – PETRONAS policy, towards zero percent flaring
• Avoid the leaks from valves and pipelines
• Methods of disposal of general industrial and human detritus
• Human Involvement
• Facilities are designed, constructed and maintained by the human (Under/over
designed, ignorance, mismanagement and greed)
• Oil and gas industry is a very attractive business for countries around the world
• Petroleum industry become an important target for taxes by host countries
• The legal framework must be carefully operated
• Any changes to the legal framework leads to political risk
• Area of political risks
• Ownership and Licensing
• Health and Safety
• Environmental Standard
• Taxation
• Ownership and Licensing
• By licensing, it has a right to produce petroleum from a designated area
• It acknowledge the right of company to operate under the terms of their licenses
without interference
• Uncertainty might arise political change
• In that case, the company might lose its production completely of partly
• Health and Safety
• Accidents cost time and money and reduce profits
• Regulation about health and safety reflect perception and experience
• The more difficult the regulation, the higher the cost (even it does not reflect the
investment risk)
• Problem arises when changes in standards
• Environmental standard
• Government may regulate company activity for the protection of the natural
environment
• Many of these constrains are in place prior to an investment decision
• However, standard may change as a result of knowledge experience gained
• The changes may be also due to political changes or international agreement global
warming
• This has a cost implication in term of technology development
• Taxation
• Most taxation regimes afford the opportunity for change
• This create an important sources of uncertainty
• Changing tax structure may reduce the profit
• Normally, company taking investment risk may have reasonable profit, represented by
stability
• Petroleum investment takes place within an economic system
• Many important parameters are subject to change within economic system
• Many of these are outside the control of the investors, including:
• Oil market
• Oil demand
• Cost of labor
• Exchange rates
• Inflation
• Oil Market
(13 April 2020) OPEC+ countries agreed to cut their overall oil production by 9.7 million barrels per day at the 10th
extraordinary meeting held on April 12. This is the largest oil production cut ever negotiated aimed at stabilizing oil
prices. The agreed 9.7 million b/d production cut is planned for the two months starting on 1 May 2020. In the
following 6 months, OPEC+ countries will cut production by 7.7 mb/d more and in the subsequent 16 months, the
adjustment will constitute 5.8 mb/d.
Oil prices started to rise as early as ahead of emergency OPEC+ meeting held on April 9 - the first meeting after
Russia and Saudi Arabia failed in early March to reach an agreement on oil production cuts, sending oil prices to
historic lows.
The oil market is currently dramatically oversupplied due to the price war between Russia and Saudi Arabia and
contracting demand caused by the Coronavirus pandemic.
According to the latest estimate by the US Energy Information Administration (EIA), oil supply exceeded demand
by around 6 million barrels per day in the first quarter of 2020 and the gap is expected to extend to 11.4 million
barrels per day in the second quarter
• Factors affecting the oil price and demand:
• Geographical location of the source
• Hydrocarbon composition
• Inorganic impurities
• Security of supply
• Political intervention
• Exchange Rate
• The exchange rate at different countries should change
• After decision has been taken, the outcome may be worse, or better
• The value of specific currency is set by international currency markets
• Companies may prefer to define a contract in terms of a stable currency if they perceive
political uncertainty
• Holding a rate constant requires the intervention of government to buy or sell currency
to or from reserves
• Inflation
• Business carried out in an environment of changing prices over the relevant time period
• Risk results from rates of changes, which were not anticipated
• The further into the future the greater the uncertainty
• The following are some of the area, where problems may arise:
• Fixed price contracts a contract with fixed price to buy or to sell. With less
sophisticated and less information , this type of contract provide stability for both
parties.
• Taxation Higher inflation often implies higher incidence of tax.
• Rate divergence some cash flows are not subject to the average rate of inflation and
distortion can arise (i.e. Oil price is independent if RPI, so a shift in the rate of inflation
almost inevitably implies a shift in the real price of oil)
• Most companies enter partnerships as a means of spreading risk during
exploration
• The partnership may extend into field development and production
• Increasingly, operator companies are also entering into forms of partnership
with oilfield service providers to drill wells, operate production services, etc.
• When two or more organizations come together in partnership, there will be
differences in opinion and decision.
• If the partners fail to work effectively, the operation may be less than optimum
• There are some issues may be arising:
• Technical preference
• each company have their technical service provider with respect to equipment, software and
procedures. It is difficult to abandon such investment and trusty of time and effort.
• Conflict of interest
• One of the companies may have part ownership of a pipeline or other facilities, which might be useful
to the partnership. It is difficult to be fully objective in such circumstances.
• Analysis and perception
• Company engineers, scientists and economists may have differing views as to the quality of an
investment opportunity.
• Corporate issues
• The perception of a project is partly influenced by issues of corporate status and policy. As a result, an
investment opportunity may look attractive to one partner and economically marginal to another.
• Human relationships
• Partnership requires staff to cooperate and to work together, at various levels. If the senior managers
are unable to trust one another, it is likely that the relationship will not survive.
• In this lesson, we
• Defined the terms “risk” and “uncertainty”
• Identified the sources of risk and uncertainty
• Recognised the impact of risk and uncertainty on the petroleum investment