Decision-making in an uncertain world
A Chevron case study

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Page 6: Conclusion

Assessing risk

Risk assessment is a key to effective business decision-making for any large business organisation. In assessing risks associated with oil production, there are a number of variables that are controllable and therefore ranges of outcomes are easier to estimate.

For example, the controllable risks of enhancing an oil production platform include:
l Technical risks - such as the calculations of the percentage of oil recovery of a particular
discovery, the extent of the field etc. Of course, problems are bound to occur in oil extraction
which make 100% accurate predictions impossible.

  • Financial risks - such as the cost of borrowing money, the range in size of investments, the time taken to pay back etc. are also relatively predictable although factors such as interest rates and exchange rates fluctuate over time. Setting clear budget targets allows for a degree of risk management to be implemented.
  • Schedule risks - it is essential in developing new projects to keep to schedule. Delays lead to many additional costs and problems.

Large international organisations minimise controllable risks by employing top quality engineers, financial experts, project planners and economists. There are, however, a number of risks that are uncontrollable and these require careful monitoring. One such risk is the oil price set by the global market which can fluctuate dramatically. As we have seen, the market price is one of the most important factors in Decision Risk Analysis. Low prices will mean that marginal development projects become unviable. Oil companies therefore engage in careful scenario planning, which sets out a number of scenarios for different possible oil prices in the future. On the basis of these predictions, they are able to decide whether it is worth proceeding with new projects.

In developing the Alba field, it has been essential to consider the distinctive features of the oil itself. Alba oil has a high specific gravity (i.e. heavy) and acidity and therefore costs more to refine. As a result, its market price is lower. In summary, the interdisciplinary team found a more economical approach to producing Alba’s oil than installing a second, fully equipped platform. By successfully identifying and minimising the risks associated with developing the field, production has been accelerated and costs reduced, enhancing the overall value of the field.

Chevron | Decision-making in an uncertain world