KNPC Risk Approach for Projects Economic Evaluation

Implementation Approach

March 2015

Presented by

Eng. May Al-Ebrahim

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.

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KNPC old deterministic approach for project economic evaluation

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3 2 1 Future value

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2 1 High

case Base Case

Low case

▪ Discrete scenarios ▪ Scenarios based on “spontaneous”

assessment

▪ Full range of outcomes with associated probabilities

▪ Removes bias towards “most likely scenario”

▪ Quantify potential downsides

Deterministic Probabilistic

Probabilistic risk view against deterministic approach

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Teamwork to implement the new approach

ERM

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Risk Module Developed by the Team

Risk Software

Risk Module

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Risk type Examples Description

K-company level risks

▪ Delays (approval, execution)

▪ CAPEX overrun ▪ Operational risk ▪ Technology risk

▪ Risks common for all K-companies and reflected in the CFaR model

Project risks

▪ Feedstock risks ▪ OPEX risks

▪ Project-specific risks

KPC level risks

▪ Crude price volatility ▪ Refining margins ▪ Interest rate ▪ Foreign exchange

▪ Risks associate with the external environment

Three risk categories in the Risk Module

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Current refinery configuration topping scheme Full conversion refinery

Application on KNPC mega projects

Various Scenarios Al-Zour Refinery

Clean Fuel Project Evaluating the project economics in case of

KNPC 100% Equity Evaluating CFP Financing scenario

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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

Running @Risk 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.

Added Risk-based activities within project appraisal process

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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

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Risk Modeling

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Identified Risks for Al-Zour Refinery & CFP

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Project execution delay

Capex overrun

Refined products price volatility

Crude price volatility

Interest rate volatility

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Dashboard: Risk-based economic Evaluation Matrix (Illustrative)

RAROC = (Expected NPV) / (Planned Investment + NPVaR)

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Stress-test project economics 1

Add a risk lens to baseline deterministic metrics and assess their likelihood to materialise

Compare design options 2

Calculate RAROC and other risk-based metrics for different design options of the project

Identify priority risks 3 Estimate impact of individual risks and prioritize them

accordingly

Assess overall impact of mitigations 5

Estimate total cumulative impact of selected mitigation options on project economics

Optimize/ prioritize mitigation options 4

Assess the impact of different mitigation options on the project profitability measures in order to help prioritize most effective options

Benefits of Applying Risk-Based Economic Evaluation Approach

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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.

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Thank You

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