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17
is at risk
MoF
50since
2014managers naturally feel they know
perhaps,
Risk
tools
for oilHowever,
and gasit does undermine
their own
business.
Exhibit
1
of
4
their ability to understand the potential results of a
new investment. Even a first-class evaluation
Exhibit 1
5% case to
95% case
Base case
Mean case
8
7
6
5
4
3
2
1
0
10
Year
18
MoF 50 2014
Risk tools for oil and gas
Exhibit 2 of 4
Exhibit 2
Key metrics
Baseline
metrics
Risk-corrected
metrics
1,974
2,221
NPV, $ million
428
284
18.5
16.8
10
10.9
Return on
capital
33
22
Expected
NPV
Baseline
Capital expenditure,
$ million
NPV/I,1 %
RAROC,2 %
16
Key decomposition
Key risks
48
Probability to
break even = 92%
284
NPV at risk:
$476 million
428
Capital-expenditure
overrun
347
Crude price
Probability to meet
baseline = 25%
Execution delay
310
35
19
percent likely to meet that baseline. Nevertheless, it has more than a 90 percent chance of
attractive returns.
20
projects numbers.
MoF
50 2014
the process.
Projects that clearly failed to meet
Risk
tools
for oil andlowest
gas cutoff for risktheir cost
of capitalthe
Exhibit
3 of 4
adjusted returnswere
speedily declined or sent
Exhibit 3
Ongoing projects
Fast-track approval
Soft
capital
limit
Selectively approve
Hard
capital
limit
Decline
Fast-track
hurdle
Cost of
capital1
Project
External
sources
N O P
Cumulative capital
deployed
21
Exhibit 4
MoF
50 2014focused, or further develop the
were currently
Risk
tools
for oildownstream
and gas portfolio.
companys
nascent
Exhibit
4 of
4 in a risk-return graph allowed
Plotting the
options
Current
+ 75% downstream
+ 50% upstream with hedging
90
85
Current
+ 80% downstream
+ 30% upstream
80
75
Current + maximum
upstream stake
70
65
60
55
50
Current portfolio
45
40
10
15
20
25
30
22
Martin Pergler (Martin_Pergler@McKinsey.com) is a senior expert in McKinseys Montral office, and Anders
Rasmussen (Anders_Rasmussen@McKinsey.com) is a principal in the London office. Copyright 2014 McKinsey &
Company. All rights reserved.