Calculating the risks in making investment decisions
A BG Group case study

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Page 1: Introduction

Investment decisions involve weighing up the risk and the likely rewards of various options. It is often the riskiest alternatives that yield the highest possible gains while the least risky options may yield smaller rewards.

Business decision makers therefore have to weigh up risk so as to provide the most suitable rewards for stakeholders including shareholders and customers. The starting point is a company's overall aim which then filters down into a strategy, creating a balanced portfolio made up of numerous investments.

This case study examines the processes involved in weighing up risks in order to create a balanced portfolio at BG Group, one of the leading energy businesses in the UK. The Case Study illustrates typical stages involved in deciding whether to bid for the right to explore for and develop new gas fields and, importantly, how much to bid.

Before weighing up the risks, ethics are an integral part of BG Group's considerations - i.e. making morally correct decisions, whether these be concerned with environmental issues, health and safety or any other decision involving the difference between 'right and wrong' behaviour. In other words the 'best' investment decision will balance economic, social and environmental considerations.

More than just finance

Ethical decisions are integral in making investment decisions. BG Group's Statement of Business Principles sets out the fundamental values and ethical principles within which the Company operates. BG Group will only enter countries where the Company can operate in accordance with its Business Principles.

The following example gives an outline of the important statistical and financial procedures involved in making an investment decision. However, it is important to emphasise the weight given to non-financial factors involved in decision making. Gas is the cleanest fossil fuel, but any form of energy production involves some form of environmental cost, e.g. the sight of windfarms located in fields, or harmful release of greenhouse gases when burning fossil fuels.

BG Group will only bid to explore if it can operate within its ethical guidelines. The Company always seeks to apply its Business Principles. This can sometimes be difficult since natural gas resources are found in countries at different stages of economic, environmental, political and social development.

BG Group | Calculating the risks in making investment decisions