Investment structures in oil and gas take on different forms and the success of any project rests with multiple variables. But with investments associated with changing variables, one thing is clear – they often
bring a certain level of inherent uncertainty. When evaluating investments, it’s important to build a quantitative perspective on key financial and operational risks (as well as upsides), and the impact they have on a project’s feasibility.
Managing these uncertainties can act as a key differentiator in the competition for investment. Conversely, overlooking
mitigation opportunities (such as hedging
It can even cause unnecessary deal rejection.
Oil, gas, and NGL price volatility derives from both regional and global factors like economic growth, consumption
behaviour, egress availability, geopolitics, and production technology; just to name a few. Having to predict inherently uncertain commodity pricing is just one of the major assumptions investors and operators need to make when confronting major decisions.
Executives and investors are forced to deal with uncertainty around construction and approval delays, reservoir performance, exchange rates, regulatory costs (including carbon pricing), operating incidents
arrangements) due to a primitive risk
understanding, can unnecessarily expose you to cash flow instability or overall return risks.
(e.g. pipeline spill), interest rates, labour and production costs, and asset utilization.
Sample risk considerations
-400 -200 0 200 400 600 800 1,000 1,200 1,400
in making strategic inbound-investments into Canada’s energy industry. As a trusted advisor they have guided us on several significant steps regarding our company’s recent Canadian investments. This includes assisting us in tackling a variety of issues we have faced related to our energy investments, navigating its
How can we protect ourselves through hedging from downside exposure to fluctuating prices?
Do various reserves scenarios impact our investment decision?
What is the impact of capital expenditure overruns and project delays?
- Internal rate of return
- Net present value of project
How does interest rate volatility impact our financing structure?
Can our capital structure withstand volatile prices?
What is the impact of future fluctuations in exchange rates?
- Covenants and capacity to repay debt
- Project timing and life
What role does egress uncertainty play in the business case for investment?
Is an asset likely to have a high-cost operating incident?
What effect could royalty scheme and carbon pricing changes have on investmenteconomics?
- Free cash flow
- Enterprise risk
complex accounting, and understanding
Canadian tax compliance requirements.
Answer these questions…
PwC is focused on supporting us with
prudent advice for these investments, and our engagements with PwC provide us with confidence that we’ll continue to
succeed with the execution of our strategy into the future.”
– Shinya Miyazaki, CEO, Diamond Gas Management
What is the probability of
achieving an IRR less than my hurdle rate?
How can hedging impact my downside valuation risk?
What is the probability of
breaching project financing covenants?
What are the required “break-even” forecast prices and reserves?
What is the likelihood that
we’ll need to make a future equity injection?
How does a major “black-swan” economic or operating incident undermine cash flow?
How we can help
Modelling and simulation
Our specialized team of Business Modelling advisors can help you assess the short- and long-term financial risk and provide the necessary insight for better decision making. We combine leading modelling practices and simulation techniques to develop robust project evaluation models and identify how fluctuations in critical forecast variables (pricing, reserves, operating and capital expenditures, regulations and others) are likely to affect your project.
Accurate and insightful modelling of oil and gas projects requires proper pre- planning, a robust model structure and complexity management. Our team is comfortable working with a wide range of factors that drive complexity like reservoir modelling outputs, multilayered drilling plans, capital project schedules (such as LNG terminal construction), advanced commodity price simulations, and utilization uncertainty scenarios.
In addition, our simulation analysis tools can work in conjunction with your existing financial models, to provide an objective review. The added simulation
capability gives senior executives easy-to- implement tools and outputs needed to make informed decisions and proactively mitigate potential risks.
Consider the volatility of critical variables...
Price (as % of base price)
Average wage (per hour basis)
WTI Brent NYMEX NG
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
... and how they impact critical decision factors
Sample forecast distribution of brent crude benchmark Probability ($)
Sample probability distribution for project IRR
NPV sensitivity to volatility in various factors
5% 90% 5%
Actual price data
Price probability mean forecast 7
5% distribution tails
90% conﬁdence level 6
oil price (280)
2009 2011 2013 2015
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%
403 509 7550
403 509 7307
403 509 7520
403 509 6653
403 509 7940
403 509 7353
416 815 5093