Economist and finance professionals are always concerned with risk in variables like NPV, IRR, payback, ROA, ROE and other indicators used by analysts and management team. But, in the day-by-day, discussions about risk in operational availability, loss of production, concern of failure of equipment on production, environmental impacts, damage due to hurricane and storms, among others. Currently, operational risk is not so discussed in the oil industry as financial risk, but it may cost billion to insurers and oil companies in events like Katrina, Ike and others.

In this paper, the operational risk of an oil project, its impacts and ways of protection to reduce exposure are studied. The approach is composed of the following:

  1. Macro-modeling of the reliability and operational risk of the oil production system (platform, pipes etc.);

  2. Simulation of reliability, availability, downing events etc. over a period of interest (usually, 20 years);

  3. Estimation of loss of production and its associated cost with failure of equipments;

  4. Use of financial derivatives to hedge loss due to operational risk.

This model is applied to an oil production project similar to those ones of the Brazilian offshore basins. We find that derivatives could be a direct way to hedge oil companies against loss, using financial instrument already traded in the market at a very competitive price, when compared to a traditional insurance policy.

Keywords:
producer, production control, operational risk, simulation, cumulative production, npv, cumulative oil production, production monitoring, subsystem, cash flow
Subjects:
Well & Reservoir Surveillance and Monitoring, Safety, Asset and Portfolio Management, Operational safety, Project economics/valuation
Copyright 2010, Society of Petroleum Engineers
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