401674 Gas Monetization and Risk Monetization

Monday, April 27, 2015: 2:30 PM
16B (Austin Convention Center)
Dennis Butts1, Stephen Shaw2 and Katie Shackelford2, (1)ERM, Houston, TX, (2)Americas Risk Practice, ERM, Houston, TX

Gas Monetization and Risk Monetization

Dennis Butts, Partner, Environmental Resources Management

Stephen Shaw, Managing Partner, Environmental Resources Management

Katie Shackelford, Principal Consultant, Environmental Resources Management


Major gas monetization projects involve a significant investment of both time and money.  With this investment comes the potential for cost and schedule overruns, alterations in market conditions, counterparty issues in long term contracts, and regulatory uncertainty, all of which can lead to net present value (NPV) erosion resulting in negative investor and stakeholder reaction.  Budget overruns and schedule delays are generally accounted for in the contingency portion of capital expenditure budgets (capex), while ongoing operational cost uncertainty is covered in the operational expenditure budget (opex).  However, neither of those covers the risks inherent in major gas monetization projects, leading to an underestimation of the total costs over the life cycle of the project.  A recent study on oil and gas megaprojects reported that 64% of projects are facing cost overruns and 74% are facing schedule overruns.[1]  And this is before the projects have been put into operation.  The quantification of risk expenditure (RiskEx) helps capture this uncertainty and provides a means of measuring the project risk exposure relative to capex and opex, allowing additional value to be added to projects by preempting potentially high risk components that may otherwise have not been considered.  In other words, a major gas monetization project should include a risk monetization exercise.

Specific topics will include:

  • A method to identify, assess, and financially quantify risks and associated mitigations that could affect major gas monetization project development, such as regulatory, geopolitical, contractor-related factors, human capital, technical, etc.
  • How to establish RiskEx into life cycle economics to better understand how, when, and why plans may be affected
  • How to use existing techniques to visualize risks that could result in loss of investment return
  • The benefits of using RiskEx at various stages of projects
  • An example using RiskEx to demonstrate the impact on project economics, which resulted in a drastic change on project decisions

[1] Ernst & Young, “Spotlight on oil and gas megaprojects”, 2014.

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