Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Workshop on Petroleum
Risk & Decision Analysis

Dr Ebenezer Sholarin, PMP

1
Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Questions for self-assessment

1.
2.
3.
4.
5.
6.

What are the four risk questions to ask when planning a project or
making an investment decision?
Distinguish between Risk and Hazard. How do you perform a Risk
assessment matrix (RAM)?
Mention four basic statistical concepts used for developing probability
distribution function. What does PERT means? What are the level
estimates used for calculating PERT? How is EV calculated in PERT?
Mention two tools that are used for performing sensitivity analysis in oil
and gas risk assessment.
Define decision tree. What are the three nodes you require to perform a
decision tree analysis? How do you distinguish the nodes from one
another?
Mention four common types of probability density distributions used for
performing Monte Carlo simulations in the oil and gas industry.

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Class discussion
What is Risk?
Is Risk = Uncertainty?
if yes, why?
If no, why not

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Definition of Risk
Risk is uncertain event or condition that, if it
occurs, has a positive or negative effect on an
objective PMBoK (2013).

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Exercise 1: Qualitative Risk Analysis

Key Risk Question 1
What can happen?
Develop a Risk Register for your group project.
Develop an Ishikawa/fishbone/cause-effect
diagram for your group project, showing the list of
causes and their causal relationship to a specific
effect.
An example is shown on the next slide. Notice that
the diagram has a cause side and an effect side.
This example can be applied to your group project.
Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

An example of Risk Register

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

An Ishikawa Diagram showing causes and

effect of Energy Production
CAUSES: What can happen (negative/positive)?
Project
Management
Methodology

External
Environment

Lack of interest in PMBOK

Unsound set-up

Resistance to change

ISO 9001: PDCA Circle

not applied
Burning
Fossil fuels

PMI PMBOK Guide

isnt applied in practice

Non renewable energy

Global
Warming

Temperate forest
destruction
SOX, NOX,
Large forest
CO
emissions
2
Methane produced
fires
Tropical forest
by Cattle raising
destruction
Transportation:
Cars, Airplanes, etc.

Scrap items

Radiation
Landuse

Pollutants

Lack of effective
Environmental policy

EPM processes does

not correspond to Activities
ISO 14001: EMS not applied
Incompetent managers

Exogenous causes

Release of methane by
mining and drilling
activities

Management

DMAIC System not applied

Endogenous natural causes

EFFECT: Impact

Population

Deforestation

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Risks we are tracking

Project Name: Bonaparte LNG Project, Timor Sea, Australia
What can happen?

How likely? What are the effects?

WBS ID

RISK NAME

LIKELIHOOD

IMPACT

What we can do about it?

RISK RESPONSE APPROACH

1 THRU 5

1 THRU 10

FATAL
(Y/N)

MITIGATION
PLAN?
(Y/N; LOCATION)

CONTINGENCY
PLAN?
(Y/N; LOCATION)

Hydrate formation

1.3.2

10

Pump failure

2.4.3

Etc.

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Key Risk Question 2 & 3

How likely is it to happen?

What are the effects (consequences)?
Develop a risk assessment matrix for your group
project, showing the likelihood and the
consequences, if the identified risks do happen.
An example is shown on the next slide. Notice that
the diagram has the list of consequences, likelihood
and the severity of the consequences.
Colours are indicative of level of risk.
The risks with the highest likelihood and most severe
consequences are the ones to monitor closely and
manage.
Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

An Example of Risk Assessment Matrix

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Key Risk Question 4

What can we do about it?

Accept/capture the risk.

Mitigate/exploit the risk.
Transfer/own the risk
Avoid/maximize the risk

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Risk Assessment Matrix

for opportunities and threats

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

RISK EVALUATION & RESPONSE

LIKELIHOOD factored with
IMPACT equals
Risk Level
A (2)
B (4)
C (6)
D (8)
E (10)

Likelihood
Not Likely
Uncertain
Likely
Highly Likely
Nearly Certain

LIKELIHOOD

LIKELIHOOD

a 3

12

b 4

16

20

c 7

10

12

20

32

d 11
e 18

16

21

27

40

26

36

42

50

RISK EVALUATION
Value

Rating

< 12
12 - 20
> 20

LOW RISK
MEDIUM RISK
HIGH RISK

IMPACT

IMPACT
Risk
Level

Impact on Scope/
Quality/technical performance

Impact on Time/
Schedule

Impact on
Cost/Budget

1
2
3
4
5

Minimal or no impact
Minor performance shortfall
Moderate delivery shortfall
Unacceptable, with alternative
Unacceptable, no alternative

Minimal or no impact
Additional tasks required to meet key dates.
Minor schedule slip; will miss critical milestone
Impact to critical path.
Impact on project delivery date > 10%

Minimal or no impact
< 1 % of budget
< 5% of budget
< 10% of budget
>10% of budget.

13
Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Risk Response Technique

Top Event

Likelihood

Bow-tie Model
Hazard

Threats

BARRIERS

Effect
RECOVERY
PREPAREDNESS
MEASURES

Consequences

Top event
21,26,27,32,
36,40,42,50,

Develop a Contingency Plan

Avoid Lessen
The
The
Hazard Threats

Proactive measures
- Prevent
- Mitigate
- Transfer
(take preventive measures to reduce
Chance of top events occurring

Re-active measures
- Remediate
-Recover (put remediation in
place to control the damage)

You can use same template for your group project.

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Exercise 2: Expected Value Analysis

Calculate the EV of an exploration well prospect
with the following outcomes:
Well outcomes

Probability

Value of Outcome
($MM)

Dry hole

70%

-5

200 MMbbl

15%

100

500 MMbbl

10%

250

800 MMbbl

5%

400

Total

100%

What is the EMV of the prospect?

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Solution to Exercise 2
Well outcomes

Probability
(%)

Value of
Outcome
($MM)

Expected
Value
$MM

Dry hole

70%

-5

-3.5

200 MMbbl

15%

100

15.0

500 MMbbl

10%

250

25.0

800 MMbbl

5%

400

20.0

100%

EMV

56.5

Total

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Exercise 3: Uncertainty Analysis

You are drilling a well with a POS of 40%. The
dry hole cost is $2 million. There is an NPV of
$6.5 million to be realised and 500,000 barrels
of oil to be recovered, If the well is successful.
a) Calculate the risked (expected value) reserve.
b) What is the risked investment?

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Solution to Exercise 3:
a)

Outcome
Dry hole
Success

b)

Value
(barrels)
0

Probability
0.6

EV
(barrels)
0

500,000

0.4

200,000

EMV

200,000

Risked Reserve = 0.4 500,000 + (0.6 0) = 200,000

Outcome

Dry hole
Success

Value
($million)
-2.0

Probability
0.6

EV
($million)
-1.2

6.5

0.4

2.6

EMV

1.4

Risked Investment = 0.4 6.5 0.6 2 = $1.4

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Exercise 4: Decision Tree Analysis

Your company, Apache Petroleum, is trying to decide whether to bid for a
certain contract or not. You estimate that merely preparing the bid will cost
$10,000. If your company bid then you estimate that there is a 50% chance that
the bid will be put on the "short-list", otherwise the bid will be rejected.
Once "short-listed" your company will have to supply further detailed
information (entailing costs estimated at $5,000). After this stage the bid will
either be accepted or rejected.
The company estimate that the labour and material costs associated with the
contract are $127,000. They are considering three possible bid prices, namely
$155,000, $170,000 and $190,000. They estimate that the probability of these
bids being accepted (once they have been short-listed) is 0.90, 0.75 and 0.35
respectively.
What should the company do and what is the expected monetary value of your
suggested course of action?
TASK:
1. Work out the solution by using a Decision Tree, showing clearly the decision nodes,
Chance and outcome nodes.
2. Calculate the EMV for the bid option.
Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

Solution to Exercise 4

Prepared by Dr Ebenezer A. Sholarin, PMP

Hydrocarbon Economics & Project Management (PEEN4001/Econ 6007)

OUTCOME NODES

EMV Calculations:

Node 7 = SUNK COST = $0

Node 8 = SUNK COST = -$10,000
Node 9 = REVENUE ($155,000) COST ($10,000 + $5,000 + $127,000) = $13,000
Node 10 = SUNK COST ($10,000 + $5,000) = -$15000
Node 11 = REVENUE ($170,000) COST ($10,000 + $5,000 + $127,000) = $28,000
Node 12 = SUNK COST = -$15,000
Node 13 = REVENUE ($190,000 COST ($10,000 + $5,000 + $127,000) = $48,000
Node 14 = SUNK COST = - $15,000
Node 15 = SUNK COST = -$15,000
CHANCE NODES
Node 2 = EMV = (0.50 x $17,250 + (0.50 x -$10,000 = $3,625
Node 4 = EMV = (0.90 x $13,000 + (0.10 x -$15,000) = $10,200
Node 5 = EMV = (0.75 x $28,000 + (0.25 x -$15,000) = $17,250
Node 6 = EMV = (0.35 x $48,000) + (0.65 x -$15,000 = $7,050
OPTION NODE
DECISION NODE
Node 3: Bid for $155,000 Contract; EMV = $10,200; or
Node 1:
Bid for $170,000 Contract; EMV = $17,250; or
Prepare bid; (EMV = $3,625); or
Bid for $190,000 Contract; EMV = $7,050; or
Abandon = Sunk Cost = $10,000 + $5,000 = $15,000 Do nothing;.(EMV = $0)
DECISION: Prepare bid, since the EMV of Node 1 = $3,625.
Prepared by Dr Ebenezer A. Sholarin, PMP