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 arrangements) due to a primitive risk understanding, can unnecessarily expose you to cash flow instability or overall return risks. 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 (e.g. pipeline spill), interest rates, labour and production costs, and asset utilization.

Case study

Simulating uncertainty

Simply plugging in “most-likely” estimates for one or more uncertain factors into a simple 3-scenario model (of low, base, and high commodity price assumption), can lead to a myopic and distorted view of risk and project upside. Demonstrated in the below NPV probability diagram, we helped a client quantify the uncertainty in a Canadian LNG project through MonteCarlo simulations using multiple input assumptions for uncertain factors, most important of which was the uncertain approval date.

Click here to view graph.

Click here to view table.