RISK MANAGEMENT IN INTERNATIONAL PETROLEUM VENTURES - IDEAS FROM A HEDBERG CONFERENCE

The purpose of this paper is to review the ideas presented at the Octo ber 1995 Hedberg Conference concerning decision and risk analysis (DRA ) With respect to petroleum exploration in both domestic and internati onal arenas. Many types of analyses were discussed. AU methods are app licable in some circumstances, and many are applicable in most circums tances. What was particularly surprising was how frequently most prese nters addressed risk management in terms of the same basic elements: t he geologic probability of success; the commercial probability of succ ess; the uncertainty of the size of the hydrocarbon resource, if disco vered; and the value of the hydrocarbon resource. Most methods seemed to focus on the petroleum system components to define geologic chance, a probabilistic volumetric reserve calculation to define the resource size uncertainty and expected net present value to define value. New valuation methods included option pricing models applied to petroleum ventures and risk aversion techniques that define the utility function in terms of exponential, hyperbolic, and user-defined curves. Several presenters defined the risk management process in terms of (1) consid ering alternative opportunities, (2) predicting variables, (3) evaluat ing the sensitivities, (4) calculating the value of additional informa tion, (5) deciding on investments relative to other opportunities in t he portfolio, and (6) looking back on the results using project review s and annual performance assessments. Creative presentation techniques Were used by different groups to display biases in the actual analyse s and overall performance relative to reasonable expectations. Portfol io management discussions brought out the most diverse approaches to d ecision and risk analysis. There was also considerable discussion on t he topic of risk aversion and its application to estimating value and appropriate working interest in projects. Other topics of interest inc luded ''efficient frontier'' methods of balancing risk and reward, por tfolio optimization, and the appropriate level in the organization to make project selection decisions. New research directions appear to be focused on improving consistency, assessing less quantifiable risks, option-pricing applications as a substitute for conventional discounte d cash flow analysis, balancing multiattribute decisions, portfolio op timization methods, and incorporating corporate risk attitudes in the decision analysis.