Opinion
- Editorial- Commentary
Mary
King: Economic
risk management
My best subject at UWI in the area of economics
and mathematics was Statistics and Probability.
This gave me the tools to deal with uncertainty
and eventually to manage the attendant risks of
even day-to-day living.
This tool is fundamental to actuaries, telecommunications
engineers, financial fund managers, to the study
of quantum mechanics and of extreme value to petroleum
exploration engineers. In the last case seismic
technology still cannot say where there is petroleum
with perfect accuracy. Seismic testing at best
allows the identification of the locations of geological
structures that are very likely to hold petroleum.
Note the uncertainty again- i.e. no seismic analysis
can say with 100 per cent accuracy that there is
oil/gas in a particular formation.
When bpTT decides to drill an exploration well
based on these seismic reports, it is well aware
of the risks being taken. The failure of its deep
sea well, Ibis, is proof of this uncertainty that
underpins the industry. When BHP found oil and
did its analyses of its projected size and production
flow rate, again, the published results had a certain
probability attached to it. We saw the failure
of the well to live up to these expectations and
this is in accord with the uncertainty in the industry
even at this production stage.
The
severe fall of gas production in California that
interrupted electricity generation is another
example of the uncertainty even of producing wells.
One must admit though, that finds in the past may
increase the probability of new finds in the neighbourhood,
but also, these major first finds usually are the
more economical to exploit and those coming after
become less and less economic. The industry players
understand the risks and manage these uncertainties
accordingly. For example, as Mr Houston of BG recognises,
petroleum in T&T will become harder and more
costly to find and if found the individual fields
will become smaller and smaller and less cost efficient.
Thus to manage such risks the companies require
more incentives, though the risks cannot be completely
alleviated.
Similarly, any government that depends on the proceeds
(taxes) from the energy sector has to be cognisant
of the risks attached to its cash flow, of the
concept that petroleum is a finite and depleting
resource. As a result it has to manage the economy
to alleviate as much as possible the impact of
this risk on the operation of the economy. Our
Government has recognised the risk of price volatility
in the market, though with Peak Oil the only
way for average prices to go, appears to be up,
and has set up a Stabilisation Fund.
However, it is yet to acknowledge the traditional
exploration risk of the industry which increases
with age of the current fields as recognised by
bpTT, BG and BHP. We have not found any new gas
reserves for sometime now and though we HOPE that
there is more out there, the risk (probability)
that there is no more is not zero. Surely we have
to give new and more incentives for Big Oil to
keep digging, keeping in mind as I demonstrated
last week that we are now on the declining slope
of marginal returns for gas. The people whom the
population trust should be telling us about the
risks and how these are being managed instead of
saying to have faith and not to worry, be happy.
These risks are aggravated by the global Peak Oil
phenomenon.
The important risks ahead of us are: how are we
ensuring energy security locally for the population?
Clearly it appears to be most inefficient to
run down our reserves, selling cheap gas, and
then import high priced petroleum from Big Oil
in Africa. Another risk is how are we going to
ensure adequate food security now that the world
prices of food are escalating again because of
Peak Oil? Another is how are we going if at all
to manage the risk of a decline in the tourism
industry because of rapidly increasing fuel costs,
again because of Peak Oil. Lastly but potentially
the biggest risk is how are we going to craft
a "beyond petroleum" economy that can
take us to what some see as Vision 2020 and beyond?
The last of these may be the most difficult since
inherent in the reconstruction of the on-shore
economy is its non-determinism and attendant risks
that have to be managed to optimise economic results.
The economic development literature advises against
picking of detailed industries (printing and packaging,
marine etc.). Instead the creation of an Experimentally
Organised Economy driven by an Innovation Diamond
is top of the list.
Mary
King is an independent Senator and columnist
of the Trinidad Express (maryking@tstt.net.tt).
Petroleumworld not necessarily share these views.
Editor's
Note: This article was first publish in Trinidad
Express, Monday, September 3rd 2007. Petroleumworld
reprint this article in the interest
of our readers.
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Petroleumworld
09/04/07
Copyright ©2006
Mary
King. All Rights Reserved.
