KNPC Risk Approach for Projects Economic Evaluation

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Antonia Whitehead
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1 KNPC Risk Approach for Projects Economic Evaluation Implementation Approach March 2015 Presented by Eng. May Al-Ebrahim

2 Introduction Investment decisions require special attention because they involve irreversible commitment to large amount of funds and influence the company future. For this reason, KNPC welcomed KPC decision in 2014 to deploy the risk-based economic evaluation approach in all K-companies. Today, we thought it might be useful to share the implementation of this approach within KNPC. 1

3 KNPC old deterministic approach for project economic evaluation 2

4 Probabilistic risk view against deterministic approach Deterministic Probabilistic 1 High case 2 Base Case 3 Low case Discrete scenarios Scenarios based on spontaneous assessment Future value Full range of outcomes with associated probabilities Removes bias towards most likely scenario Quantify potential downsides 3

5 Teamwork to implement the new approach ERM 4

6 Risk Module Developed by the Team Risk Module Risk Software 5

7 Three risk categories in the Risk Module Risk type KPC level risks K-company level risks Project risks Description Risks associate with the external environment Risks common for all K- companies and reflected in the CFaR model Project-specific risks Examples Crude price volatility Refining margins Interest rate Foreign exchange Delays (approval, execution) CAPEX overrun Operational risk Technology risk Feedstock risks OPEX risks 6

conversion refinery Evaluating the project economics in case of

8 Application on KNPC mega projects Various Scenarios Al-Zour Refinery Current refinery configuration topping scheme Full conversion refinery Evaluating the project economics in case of KNPC 100% Equity Evaluating CFP Financing scenario Clean Fuel Project 7

9 Added Risk-based activities within project appraisal process Adjusting the Risk Module for the needs of two project Linking the Risk Module to the projects economic models Risk Modeling of the identified risks software for the two projects evaluation Analyzing the results and come up with recommendations Holding workshops with project execution teams and consultant to come up with set of mitigation actions to minimize the impact of the various risks. 8

10 Risk Modeling Data collection and analysis Distribution selection Parameter assignment Review historical records to create project database Obtain data available from market sources Perform analysis to refine database Interview project managers for more insights Review and adjust dataset for exceptions (i.e. exclude impact of crisis) Create histograms and correlations if applicable Interview experts if possible Calculate key parameters of the data Or agree on key parameters with experts and project managers 9

11 Identified Risks for Al-Zour Refinery & CFP 1 Project execution delay 2 3 Capex overrun Crude price volatility 4 Refined products price volatility 5 Interest rate volatility 10

12 Dashboard: Risk-based economic Evaluation Matrix (Illustrative) RAROC = (Expected NPV) / (Planned Investment + NPVaR) 11

13 Benefits of Applying Risk-Based Economic Evaluation Approach Stress-test project economics Compare design options Identify priority risks Add a risk lens to baseline deterministic metrics and assess their likelihood to materialise Calculate RAROC and other risk-based metrics for different design options of the project Estimate impact of individual risks and prioritize them accordingly 4 5 Optimize/ prioritize mitigation options Assess overall impact of mitigations Assess the impact of different mitigation options on the project profitability measures in order to help prioritize most effective options Estimate total cumulative impact of selected mitigation options on project economics 12

14 Because of the significant uncertainties in the O&G Business forecasts, we believe that the Risk Approach projects economic evaluation will add tremendous value to the decision making process in all K-Companies. 13

15 Thank You 14

TONY MILSOM Specialist Risk Engineering KPC

www.kuwaiterm.com Quantitative Risk Management Methods, Techniques and Tools TONY MILSOM Specialist Risk Engineering KPC w w w. k u w a i t e r m. c o m KPC ERM Objectives: Three key objectives of KPC