This paper will provide a broad overview of issues relating to decision analysis and risk management affecting the offshore industry. It is designed to provide context and background for other panelists in the session on Risk Management in the Offshore Energy Industry.
This paper addresses the process for identifying risks, including (i) determining risk-baseline, (ii) addressing uncertainty, and (iii) identifying and assessing risks. This paper also reviews some fundamental concepts in thinking about risk, and analyzes and discusses the types of risk affecting the offshore energy industry, including political risk, expropriation and nationalization, market risk, transportation, operational risk, and legal risk. Finally, the paper provides an overview of methods for managing risk, including common risk management tools.
The word " risk?? comes from the Italian " risicare,?? meaning " to dare.?? (Bernstein 1996) The exploration and production of oil and gas offshore certainly requires daring. It requires the construction and operation of complex facilities in an often harsh environment. In addition, offshore operators face geologic uncertainty beneath the sea floor, and economic and political uncertainty onshore.
Risk can be approached systematically, indeed scientifically, with statistical modeling and sophisticated mathematics. (Koller 1999; Crouhy, et al. 2006) Few businesses make investment or operational decisions based solely on the inevitability of mathematics, however. At the end of the day, a company must exercise its business judgment, based on its experience, and on what is most important to it, and make the hard decisions about how (or whether) to proceed.
There is, of course, a risk associated with not pursuing a project. A company should think about its " risk baseline??—the risks associated with maintaining the status quo. (Project Management Institute 1992) If, for example, a company has nearly exhausted its existing reserves under development, it may be required to undertake a new project (or acquire a company with current production) simply to remain in existence. Similarly, if the major share of a company's reserves are in a single country, the company may find it risky not to develop a project elsewhere in the world, if only to diversify its portfolio of political risk.
A company's ability to identify risk is limited by the certainty or uncertainty of risk. Risks can be loosely grouped into three types: known-knowns, known-unknowns, and unknown-unknowns. (Project Management Institute 1992) Some authors distinguish between " visible?? and " invisible?? risk. (Jarvis & Elkanich 2004) Indeed, our concept of risk is so closely tied to uncertainty that most of us would not consider known-knowns to be risks at all. If we know something is coming, we budget time, attention and resources (including cash) for it. In the United States, for example, we know that royalties paid on the production of offshore oil and gas will be subject to oversight by the United States Mineral Management Service (MMS). There is now relatively little uncertainty about how the core requirements of the MMS will affect the development of an offshore oil and gas lease. We can factor those costs and limitations into our development and operations plans, and determine whether a project is viable in light of likely royalty burdens.