Abstract
Today&s petroleum engineers and economists are very comfortable incorporating technical and economic risk into project net present value calculations. These same individuals are often not as comfortable incorporating political uncertainties into project evaluation and few have had any training in this area. The goal of this paper is to provide the project evaluator with a method to analyze those political uncertainties that may impact the project.
There is no consistent, industry-wide definition for uncertainty, risk and politics. Therefore, this paper provides definitions for all.
A political uncertainty cross-plot is used to evaluate possible political threats that could impact project economics. The cross plot spans the legal to the extra-legal in the x-direction and the microeconomic to the macroeconomic in the y-direction. For example, regulatory changes appear in the first quadrant and consider legal and macroeconomic factors. Depending on the type of regulatory change, revenues could be reduced or costs increased. Personnel safety threats appear in quadrant four where extra-legal and microeconomic factors overlap. Kidnapping of company personnel is a type of personnel safety threat and the cost of insurance or extra-security staffing is considered in this quadrant.
A data collection method is given to provide the analyst with enough knowledge to estimate the subjective probabilities of potential risks to project profitability. The data needed to evaluate the likelihood of potential threats can be found from a variety of sources. Five areas are analyzed - government & politics, business - oil & gas, global linkages & interdependence, macroeconomics, and social, cultural, and human development.
The information developed using this method can be updated regularly to estimate if the threats are increasing or decreasing. Appropriate action to manage the risk, estimate the cost of managing the risk, and/or estimate the financial impact if the threat becomes a reality can be determined.
