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 Managing Business Risk (M1005) QR Code

Managing Business Risk



Large capital-intensive projects in the oil and gas industries require substantial - and mostly risky - investments in the acquisition, exploration, and subsequent operation and maintenance of new organizational assets.

The decision of whether or not to invest in new capital projects in the oil and gas industry starts with critical decisions during the exploration phase of new development or the expansion of an existing field. The decision-making tools used to analyze project risk under conditions of uncertainty will help companies to determine the probability of success or loss and will drive the decision to develop or abandon the well.

Of paramount importance, therefore, is the systematic and comprehensive evaluation of potential investments, and the development of detailed cash-flow analyses to determine as accurately as possible, the expected returns to the organization under varying conditions of uncertainty over the expected productive life of the project.

This requires the development of sound, realistic, and carefully structured cash-flow projections, reflecting both the initial capital expenditures required for the acquisition of the asset, as well as the operational expenditures required for successful operation and maintenance of the asset over its anticipated productive life.

World-wide an alarming number of large capital projects fail to meet or overrun their planned budgets, failing to realize both the financial and strategic goals of the organization - the very reason for their being undertaken in the first place - often with sizable increases in capital and operational expenditures, and with substantial financial losses to the organization. In the majority of cases, this is the inevitable consequence of failing to apply the tools and techniques of modern project decision-making, evaluation, financial planning, capital management, and cash flow analysis when considering investment into new capital projects.

Course Objectives:

At the end of this course the participants will be able to: 

  • Enhance their understanding of the time value of money, as well as learn how to use the basic tools of financial engineering such as Net Present Value, Internal Rate of Return, and Annual Worth calculations.
  • Learn how to evaluate and compare various alternative solutions over differing time horizons
  • Detailed explanations of the tools and techniques to determine and continuously monitor project feasibility, will enable participants to select projects with the best capital investment potential.
  • Learn how to plan, structure, and manage cash flows on their projects - the single most important forecasting and control element leading to project success.

Targeted Audience:

  • Risk managers
  • Risk owners
  • Project managers
  • Members of the project office
  • Project sponsors
  • Functional managers
  • Senior management and individuals interested in project risk management

Course Outlines:

Unit 1: Fundamentals of Decision Analysis:

  • Introduction to PM Decision Analysis:
    • What is Project Management Decision Analysis?.
    • The need for systematic PM Decision Analysis.
    • Risk and Uncertainty on projects.
    • Identifying all possible outcomes.
    • Identifying key decision-making factors.
  • Measures of Project Profitability.
  • Fundamental tools of engineering economics.
  • Time Value of Money:
    • Simple and Compound Interest.
    • Interest rates.
    • Future value of a present sum.
    • The present value of a future sum.
  • Appraisal Methods - Discounted Cash Flow Projections.
  • Net Present Value Analysis (NPV).
  • Comparing Projects with Equal Lives.
  • Comparing Projects with Unequal Lives.
  • Time Equivalence.

Unit 2: Rate of Return and the Cost of Capital:

  • Rate of Return Computations (IRR).
  • Determining the Internal Rate of Return (IRR).
  • IRR for a Single Project:
    • IRR for a Single Project Using Present Worth.
    • IRR for a Single Project Using Annual Worth.
  • Incremental Analysis.
  • Mutually Exclusive Projects.
  • Using IRR to Analyse Options with Different Lives.
  • Cost of Capital Computations.
  • The Cost of Debt Capital.
  • The Cost of Equity Capital.
  • Weighted Average Cost of Capital (WACC).
  • Financial Gearing (Structuring).
  • Capital Asset Pricing Model (CAPM).
  • Costs, Benefits, and Non-benefits.
  • Estimating the Benefit-Cost Ratio for a Single Project.
  • Comparing Mutually Exclusive Projects Using Incremental Benefit-Cost Ratios.
  • Estimating the Cost of Capital for a Project.
  • Benefit-Cost Ratio (BCR).

Unit 3: Cash-Flow Modelling and Project Decision Analysis:

  • Financial Modelling and Project Evaluation:
    • Fiscal Systems used in the oil and gas industries:
      • Royalty/Tax Contracts.
      • Production-Sharing Contracts.
    • Preparing Cash Flow Projections.
    • Accounting Years and Tax Years.
    • Capital Expenditures (CAPEX).
    • Operating Expenditures (OPEX).
    • Incremental Costs and Benefits.
    • Working Capital Requirements.
    • Forecasting Cash Flows.
    • How to Deal with Inflation.
    • Opportunity Costs and Sunk Costs.
    • Determining the Economic Life of a Project.
    • Relevant Cash Flows over Differing Time Horizons.
    • Tangible and Intangible Property.
    • Straight-Line Method.
    • Declining Balance Method.
    • Depreciation.
    • Amortization and Depletion.
    • Taxable Profit.
    • Capital Allowances.
    • Interest, Insurance, and Tax Costs.
    • Taxation.
    • Assessing the Terminal (Salvage) Value of a Project.
    • Government Share.
    • Contractor Share.
    • Company Cash Flow.
    • Government Cash Flow.

Unit 4: Decision Analysis: Expected Value Concept:

  • Financial Project Risk Analysis:
    • Overview of the Risk Management Process.
    • Detailed Risk Quantification and Prioritisation.
    • Probabilistic Methods.
    • Expected Monetary Value Concepts
    • Risk Quantification and Expected Monetary Value.
    • Scenario Planning:
      • Best case scenario.
      • Base case scenario.
      • Worst case scenario.
    • Decisions Under Conditions of Uncertainty.
    • Multiple Option Decisions.
  • Basic Probability Concepts.
  • Fundamental Probability Concepts.
  • Definition of probability.
  • Observations on the workings of probability.
  • Probability 'rules'.
    • Addition Rules and Multiplication Rules.
  • Detailed Risk Quantification and Prioritisation.
  • Mutually Exclusive, Independent Events.
  • Non-Mutually Exclusive, Independent Events.
  • Summary and Formulation of Equations.
  • Expanding the Data Set.
  • Probability Applications.

Unit 5: Decision Analysis: Decision Trees, Sensitivity Analysis, and Simulation:

  • Decision Tree Analysis:
    • Decision Tree Analysis.
    • Developing Decision Trees.
    • Solving Decision Trees.
    • Software Tools.
  • Practical Application: Sensitivity Analysis and Simulation:
  • Overview.
  • Simulation Process.
  • Defining the Variables
  • Calculating EMV.
  • Detailed Example of Simulation.
  • Modifying the Cashflow Model.

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