The growing market for energy risk management, and particularly price risk management, has brought a myriad of new players as intermediaries who provide risk management services. For that reason, risk management and the integration of futures, forwards, swaps, and over-the-counter (OTC) options with the cash markets have become an integral part of investment banks and oil companies alike.

An excellent knowledge of energy markets is required if the risk management plan is to be implemented successfully. At Petroleum-Insight we aim to reduce financial exposure and offer our clients a chance to buy downside protection so they can deploy their funds in other areas. Clients require our skills to help with profit margins, credit exposure, cash flow requirements, debt service obligations, project economics and planning requirements.

Because changes in the energy industry are frequent and deep, the risk management culture has spread across oil producers, refiners, marketers, electric and gas utilities, and end users. As a result, risk management tools in an uncertain and volatile economic environment are now at the very top of the strategic agenda.

Risk concerns anything which could act against or affect the organisation in achieving its objectives. The organisation might be negatively or positively affected. Both outcomes constitute risks with some systematic and others diversifiable. Risk is not to be confused with uncertainty. In the first case, it is possible to represent the future as a probability distribution of possible outcomes while it is impossible in the case of uncertainty. The process (from left to right) is as follows:

First of all, the risk identification provides a general map of risks based on uncertainty sources.
Secondly, the assessment of those risks is the quantification of associated impacts with the risks. Thirdly, techniques best suited to the identified risks are determined. Finally, those techniques are applied. Our techniques mainly revolve around:

• Mitigation:
Petroleum Insight Adopts measures towards reducing the frequency or severity of the risk’s effects on our clients.

• Transfer:
Petroleum Insight passes the exposure of a specific risk for our client to a third party, eg selling an asset of high risk or buying insurance.

• Retention:
Petroleum Insight advises clients to consciously absorb certain risks and cover losses out of their own resources.

• Avoidance:
Petroleum Insight and its clients take the conscious decision not to be exposed to a particular risk.

Whether they be project risks, operations risks, market risks, financial risks or political risks we at Petroleum Insight Ltd use sensitivity analysis, decision trees, discounted cash flows, Net Present Value, Internal Rate of Return and Monte Carlo Simulations to provide excellent risk assessment for our clients.