March 9, 2009

Sample Research Proposal on Project Risk Management

Introduction

Oil, natural gas and coal are the chief sources of energy and are expected to remain so for the foreseeable future. The demand is expected to grow faster than for any source of energy. Today, the world consumes over 82 million barrels of oil per day. A further global growth is assumed at an average of 3 percent per annum over the period of 2000-2030. From this, the International Energy Agency (IEA) projected global oil demand to increase at around one percent annually. In fact it is estimated that consumption will double by 2030.The largest increase is seen in North America with demands from China and other Asian countries also increasing. ('OECD', 2004). With the increasing demand for these sources, it is expected that further exploration and production in the oil and gas industry will take place. It then becomes necessary to study the issues involving the production of oil and gas particularly in the upstream level. This paper will look at the aspects of oil and gas exploration and production. The specific objectives will include the following:

  • To identify the problems related to exploration and production processes
  • To identify  the risks  associated with the process of exploring and producing these sources of energy

Exploration and Production

            The oil and gas industry comprise of two parts: 'upstream'-the exploration and production sector of the industry; and the 'downstream' – the sector which deals with the refining and processing of crude oil and gas products, their distribution and marketing. Companies that operate in this industry may be regarded as integrated (i.e. have both upstream and downstream interest) or may concentrate in a particular sector such as exploration and production commonly known as E&P company. Many large companies operate globally such as multinationals while smaller companies may concentrate on specific areas and are often independent.

            In the upstream sector companies rely on the service and contractors to provide specialists services to the industry which ranges from geophysical surveys, drilling and cementing to other catering services that support the operations. The relationship between the contractors and oil companies fostered close partnerships ('United Nations Environment Programme, 1997').  E & P companies are not involved in refining and marketing activities but are active in downstream power and gas projects. Given the limited activities, leading firms have taken action to improve their returns that have met some success in the last couple of years. Despite this, there remains to be problems in earning adequate returns by the shift in the industry structure.

Risks and Challenges  

Costs

            The only time that the total recoverable reserves in oil and gas field will be known for the company will be once the field ahs been abandoned and the last drop of hydrocarbons are produced. Until that time there will be uncertainty surrounding the volume of reserves that will be produced. With an estimate of recoverable reserves and production forecasts it is possible to derive costs estimates that vary during the lifetime of the project depending on the timing, location and the quality of the asset. The cost will also vary with time due to inflation and local market conditions. The development costs will also vary between locations because of the differences in the costs of wages, transportation in the site of construction, climactic conditions and whether the development is offshore or onshore (Antill & Arnott, 2000,  p.127).

            Additionally, the annual operating costs need to be considered. These costs will differ from the development costs of the field because they have to be paid throughout the lifetime of the project. Operating costs will consist of production costs (lifting costs, treatment, workover costs, etc), maintenance costs (inspections, remedial work, etc) as well as administrative and general overheads (Antill & Arnott, 2000, p.129). Also off these will vary on the project and the company.

Macroeconomic factors such as oil price, inflation and exchange rates are also important in the cash flow of the company. The prices of crude oil as well as the raw materials used for petroleum products are established in consideration of the supply and demand in the global market. The prices of oil are a result of the transactions occurring in all levels of the distribution chain from the producer to the end consumer. Oil markets are global auctions where the highest bidder gets the supply. When the market is strong the bidder must be willing to pay higher to win the supplier. Conversely, when the market is weak the bidder may not outbid its competitors and wait for lower prices ('Energy Information Administration', 2007).

            Rise in prices indicate that more supply is needed while falling prices indicate the excess in supply in comparison to the demand. Moreover, the price differs in spot markets since the flow of oil are mostly under contracts. Future markets also give important information as to the balance of the supply and demand including the market expectations. Additionally, the supply and demand balance is also affected by the seasonal swings. The crude oil market becomes stronger by the fourth quarter and weaker towards late winter.

Price patterns may also differ in every region depending on the existing supply and demand conditions. For instance, the refinery outages in a certain area may cause rapid price increases.  Unusual increases in demand and the reduction of supply also influences the price response in the market. This price response is crucial in the redistribution of products so that it is rebalanced after an upheaval. Cost differences are also important factor in terms of regional prices ('Energy Information Administration',2007). Prices can also be higher than the market can bear which leads to downsizing and product substitution.

            Typically, the prices of petroleum products are determined through the prices of crude oil. The prices of crude oil reflect the general balance in the oil market. When the crude oil prices are low which signifies oversupply then the product prices tends to become low. Conversely, when the prices of crude oil are high which signifies high demand then the product prices tends to become high('Energy Information Administration',2007). However, when the crude oil prices increases and decreases on a sustained basis then the change is reflected in the markets, all other things being equal. 

Technical

Oil platforms are technically difficult but they typically face few institutional risks because they are often built far from the public attention. The project can be regarded as socially desired because of the high revenues it could bring (Manseau & Shields, p. 102). However, there are risks associated with the building of oil platforms. Risk is the possibility that events, their resulting impacts and dynamic interactions may turn put differently than expected.

During the early period of a project the risks that may be faced by the manager include technical risks and environmental risks. Technical risks that may be faced by the project reflects its engineering difficulties and novelty. Some of these risks are inherent in the design or the technologies utilized. Construction risks are difficulties that concerns sponsors, prime contractors and contractors may face during the actual building of the project which may include the lack of adequate competencies on the part of the contractor or potential inter organizational conflicts. Operational risks are the possibility that the operation of the project will be deficient. Thus, the project will forego potential revenues and making it work will cost more than what is anticipated. Such risks can be reduced by selecting an operator with economic interest in enhancing revenues and controlling costs (Manseau & Shields, 2005, p. 105).

Environment

Environmental risks are part of any oil platform project. The potential for disaster and the need for efficient crisis management is illustrated by the many platform disasters. Because of this, considerable effort must be made to analyze the environmental conditions and technical specifications for each installation. A formal risk assessment is required which includes the identification of all major hazards related to the installation and their consequences and the details of emergency response procedures (Smith et al, 2004, p.126).

Aside from this, the production activities itself also pose environmental risks. Intense public scrutiny and the felt obligations of employees and even stockholders have been causing producers to become more sensitive tot eh impact of their activities upon environmental assets. In instances where the voluntary compliance is unlikely, public authorities around the world have promulgated a vas array of regulatory schemes intended to lessen the environmental consequences of petroleum exploration, production and extraction (Shojai, 1995, p.184).

Results and Discussion

            The increasing demand for oil and gas will paved the way for further exploration and production from oil reserves. This process though will continue to be a difficult undertaking especially for E&P companies. First, the exploration and development entails significant spending that sometimes generate less returns.  Aside from these, companies will be chasing opportunities in the same places which limits their future profits streams, driving up their operating costs and encouraging national authorities to set even more demanding terms.  Long time player with the unique knowledge, strong asset positions and deep relationships with the government are likely to be in an advantage position. New areas of explorations are likely to be sought out as oil companies shift their focus from mature areas to new sites.

            In terms of technical issues, innovation will enable the oil companies to increase exploration success, reduce development costs, boost recoveries, cut downtime and improve access to new exploration areas. Oil companies must continue to lower their costs, manage their assets and focus exploration programs. Environmental risks must be of great consideration since the exploitation of gas and oil has not always been without ecological effects. Oils spills, accidents and fires and other incidents of pollution have been recorded at various places and such incidences may continue in the exploration and production of oil and gas.

Conclusions

            Exploration and production companies involved in upstream activities will need to consider the important aspects of their operation if they are to succeed in the oil and gas industry. The most important of which is the costs risk associated in the development of an exploration project. Along with this are the macroeconomic factors particularly the changes in the prices of oil both in the local and global market. This will determine the returns that the company is likely to generate from the investment. Technical and environmental concerns are also of great relevance. Advancement in technology allows for more successful explorations but the use of such technologies must be ensured and the environmental risks are minimized if not avoided.


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