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

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...
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Page 2: BG Group

The gas industry is today in the private and public sector and there are a number of companies competing in the industry. Some of these companies are government owned. Others are owned by private shareholders who appoint directors to represent their interest. The directors appoint professional managers to run the business. Like electricity and telecommunications, gas is a 'network industry'. In...
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Page 3: Field development

The gas business has a number of characteristics that are particularly important in relation to investment decision making: It is very capital intensive so that decisions may typically involve a spend of several hundred million pounds. There are long lead times between the start of a project and the receipt of earnings from that project, typically over five years from first investment to first...
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Page 4: Investment appraisal

Discounted cash flowis an important technique for investment appraisal. The discounted cash flow approach is a way of valuing the future returns on investment by assessing the values of these returns in terms of their value today. It places emphasis on the cost of funds tied up in a project by considering the timing of cash flows. For example, we all instinctively know that £1 in the hand...
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Page 5: Portfolio considerations

At this phase of the investment decision a number of factors must be considered. The overriding goal of the company is to create shareholder value. In order to achieve the optimal growth for an acceptable level of risk the company invests on a portfolio basis. This means that it will invest in a number of different wells and at times share the costs and working interest with partners in order...
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Page 6: Conclusion

The gas market is an exciting one to be involved in. The world's demand for energy is growing rapidly and it is imperative that it is supplied with clean energy reserves by principled companies. BG Group is a major world player in this market and it constantly needs to make the right sorts of investment decisions which balance the needs of global consumers, its shareholders, the communities...
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