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exploration project, a company should have a impairment and review fair value and hedge
process to evaluate investment risks as part of its
screening process – taking into account petroleum
accounting guidance.
potential, operating risks, operators' capability,
clarity of profit sharing, contract adherence,
political stability, geographical conditions and
project types and sizes. These risk factors are
The other risks that are inherent to the exploration
projects are political risks of other countries,
safety, security, health, environmental and
taken into account in profitability analyses.
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litigation risks. Key to effective risk management is
to raise the efficiency of the project management
processes including procurement, subsurface
Exploration projects deal with petroleum reserves evaluation, investment decision-making and
potentially lying kilometers beneath the surface of knowledge management.
the earth, making it difficult to visualize and
understand the petroleum geology at such depths.
The board of directors should be involved at the
Absolute geological confidence is therefore rare,
appropriate time in evaluating risk and reward
and considerable geological uncertainty prevails.
trade-offs to have appropriate tone at the top and
Still, the availability of sufficient data and detailed
embed a risk management culture within the
geological analyses could reduce this uncertainty
organization.
and exploration risks to acceptable levels. The key
factors to be considered are likelihood of finding
The guiding principles in implementing a risk
traps and reservoirs and volume of petroleum
management framework is to understand project
generated, assessment of the sizes of resources or
objectives and deliverables, focus on significant
reserves in each target area, to control finding
risks (risks that matter), evaluate current
costs, (geophysical surveys and drilling) and raise
drilling and exploration efficiency.
competency to manage identified risks, enhance
risk management competency by developing
mitigation plans, define roles, responsibilities and
At an operating level, exploration projects have accountability to manage risks and implement
regulatory, technical, geological and geophysical monitoring and oversight structure.
(G&G), engineering, environmental, health &
safety (EHS), financial, production & marketing
risks.
Key components of any risk management process
are: risk assessment to identify and prioritize risks;
risk competence Scan to evaluate the
The credit risks faced by exploration projects organization's current capability to manage its
relates to key counterparties, lenders, vendors, risks; risk management enhancement for
suppliers and partners. Adequacy of credit risk improvement in the overall level of risk
management and reporting process has to be management competency by identifying the
assessed along with credit and collection policies, initiatives to improve the risk mitigation
approved counterparties, master netting capabilities, institutionalize policies and
agreements and collateral requirements to procedures to establish risk governance
manage credit risk and exposure. Impact of framework in the organization and monitoring
current counterparty credit risk and related process to review the implementation status of
concentrations of risk to derivative valuations and specific plans to address significant risks and
disclosures should also be adequately assessed. finally risk remediation to implement the
initiatives identified to enhance the risk mitigation
capabilities.
From a financial risk perspective, companies
should evaluate liquidity by stress testing cash
flows, working capital needs and assess cash and In the present environment, robust and proactive
cash equivalents for risk of loss and devaluation. project risk management procedures can assist
Companies also have to manage exchange & E&P companies in managing their projects in a
interest rate fluctuation risks and evaluate assets more effective manner in order to deliver on its
such as investments, receivables and goodwill for operational and financial parameters.