Overseas Investment in Oil Industry and the Risk Management System XI Weidong, JIN Qingfen Northeast Electric Power University, China, 132012 jelinc@163.com Abstract: Based on risk management content, risk management procedures and an investigation of the special features of overseas investment in the oil industry, the paper analyses the overall process of the investment that includes risk identification, risk evaluation, risk management and risk security, to make risk managers understand the causes and conditions of risk formation clearly, predict the likelihood of risk, control risk loss, make more and more risks can be managed. Keywords: overseas investment, oil industry, risk, management system 1 Introduction Currently, the leading oil group is actively developing overseas markets, to compensate for the lack of oil resources in China, while overseas business has covered the upstream and downstream industries of the oil industry, its strategic position has become increasingly important. Overseas oil investment is a high-risk, high investment, high return projects, the risks involved in addition to general engineering industry risk, economic risk and political risk, and also its unique geological risk, often faced with can not recall the situation shown with even the sinking of investment. Overseas oil investment management is essentially a risk management and requires a set of effective risk management process. Risk management should include: identify all the significant risks of decreasing investment value by any possibility, measure the potential loss probability and extent, develop and select appropriate risk management method, implement the selected risk management method, supervise the implementation and applicability of risk management. Thus we have introduced the risk management process: (1) Risk identification, is through a variety of scientific methods to find and discover the various risks faced by the project. (2) Risk assessment, using various processing techniques, makes quantitative assessment on the risks they face. (3) Countermeasures, according to the current risk instance, select economically reasonable, technically feasible management techniques to cope with the loss of future. (4) Risk management measures ensuring implementation and promote, based on the countermeasures choice of risk, to develop detailed risk management implementation plan. As can be seen from the above analysis, a complete risk management system should include risk factors analysis, risk assessment, risk management countermeasures choice and risk ensuring implementation and promote. According to it, overseas oil investment risk management system can be built, but because of the particularity and risk characteristics of overseas oil investment, in the system, the risk factors analysis identification, risk assessment, risk management countermeasures choice and risk ensuring implementation and promote has its own unique methods and contents. 2 Construction of Overseas Investment in Oil Industry and the Risk Management System Specific operational processes of risk management system, as shown in chart 1: 2.1 The risk factors identification of overseas investment in oil industry. The goal of risk identification is to identify and ascertain the risk factors, what basic characteristics of 179
these risk factors are, and what aspects these risk factors will influence. Oil investment risk can be divided into: geological risk, technology risk, economic risk and political risk. Geological risk is the possibility of finding no oil and gas as a result of exploration and development investment in oil and gas, or can not find the oil and gas fields processing commercial value; technical risk is the risk of investment projects due to technical design, construction, operation or other reasons; economic risk is the risk due to cost, price and other economic factors, caused by unexpected changes, changes in world political and economic situation, directly affect the fluctuations in the value of project outputs, there are mostly price risk, cost risk, financial risk and tax rent risk; political risk is the possibility of investment losses due to resource changes in government or legislation caused on oil companies, mostly including the risk of nationalization, war, civil strife risk, transfer risk. Methods of risk identification commonly used in overseas investment projects are SWOT method, flow chart, brainstorming, scenario analysis, financial statements method and so on. SWOT method is the way to evaluate strength, weak, opportunity, threat, mainly used in the Risk Identification of the investing direction, through the analysis of investment external environment, opportunities, threats and the company's own comparative advantages and disadvantages, combination, determine the direction of investment, analyze transnational business strategy. Identify risk factors Quantitative risk assessment Select risk management countermeasure Constitute risk management implementation plan Implement and evaluate the results Adjustment Chart 1 Overseas investment in oil industry project risk management system diagram Flow chart is item workflow, the relationship between various departments such as information chart, comprehensive analysis and identifies risks using these charts, this method has a high structure degree, and it is very useful to identify system risks and all kinds of risk factors. Flow chart can help risk identification staff analyze and identify investment risk, the risk exists in all aspects of investment and all causes and effects of every investment risk. Scenario analysis describes an intending state or situation (scenario) in detail and analyzes the risk and risk factors described in the situation, thereby identify risks. This method generally requires: first gave the description of investment scenarios, and then change some factor, further analysis of changes in investment and possible risk and risk consequences. Brainstorming use creative thinking, divergent thinking and expertise, analyze and identify risk in the form of meeting. When using this method, it allows the experts and analysts speak their minds, search and find a variety of investment risks. Organizers should be good at asking questions and cleaning up 180
the results of risk analysis in time, and encourage participants to continue to discover and identify risks and risk factors. When identifying risk factors, collect the most comprehensive and complete geological conditions, geographical, ecological climate on the investment project by any possibility, on the collection of information, and socio-economic, cultural and political background conditions, reconsider our own technology, management, finance, risk tolerance, also the world's political climate, economic climate, the oil price ups and downs, and finally, by analogy, expert surveys and other methods to make information detailed and accurate by any possibility. 2.2 Risk Quantification Assessment. Quantitative risk assessment is mostly about measurement of risk possibility, risk consequences, risk incidence. Risk assessment is the basis and prerequisite of oil investment decisions, including: (1) Provide basis for decision making, risk assessment provides reliable basis for managers decision making. Oil companies can have all types of relatively complete information on target blocks by risk assessment, thus reduce the blindness. (2) Preventive function, through risk assessment, enables decision makers to understand the origin and development trend of risk, to develop risk-averse or risk prevention plan. (3) Stimulating function. Through risk assessment, the decision maker can be convinced that the financial risks can endured, thereby enhancing the confidence of exploration and development. Common risk assessment models used in overseas investment in oil industry includes: Comprehensive Analysis, CAPM, Oil was found rate or exercise model, Monte Carlo simulation and Decision Tree. Monte Carlo simulation is a statistical simulation method, input the probability density function of the geological parameters into the computer, and converts to the corresponding probability distribution function, through random sampling and operation, risk probability and Storage Reservoir can be measured, also can measure the profitability of investment. Investment decision-making in different stages, commonly used Decision tree method to make decisions, which is a very convenient, indirect and intuitionistic analysis methods, it uses aforementioned probability estimates. Comprehensive analysis uses system decomposition, breaking down a complex investment projects into simple easy identification of system, then determine the relationship between the layers, and determine the rating scale, finally, educes an analysis results through a summery of expert opinion. Here are the steps comprehensive analysis assessments. First step, establish hierarchical structure that perspicuity the problem to be resolved, according to three risk affecting factors: the size of risk cost, risk selection, risk obstacle, constitute a criterion layer of hierarchy, only these three factors is not enough to refine the risk, so they set up sub-criteria layer, the hierarchy includes geological risk, technology risk, political risk, oil price risk, cost risk, financial risk. Structure is shown in chart 2. 181
Investment risk to determine Target layer Risk obstacle Risk selection The size of risk cost Criteria layer Geological risk Technical risk Political risk Oil price risk Cost Risk Financing risk Sub-criteria layer Chart 2 Risk Identification hierarchical structure diagram When a concrete analysis is putting up, specific technical indicators The second step is to determine weights of criteria layer and sub-criteria layer. Weight may be determined by AHP, the method is first put forward by Sartre, who is well-known operations research experts from the United States. Theory and practice shows, use this method to determine the hierarchical structure of the relative weight, is quite reasonable. According to ideas the method set out can work out the weight of each factor level of the criteria and sub-criteria layer W 1, W 2, W 3 and W 1i, i = 1,2,, 6; W 2j, j = 1,2,, 6, namely consider the relating risk among various risk factors, and various risk factors impact investment result. The third step, determine the rating scale; the correct classification of rate levels will directly affect the results of evaluation. The classification is fixed for the company; it may have been used in a period of time. It can use level of investment environment score specifically; convince ideas of experts to determine grade-level. There are three significant features: first, anonymity. This will eliminate the influence of authority and psychology stress, free to express opinions without interference. Second, statistical, can handle a variety of feedback information statistical processing. Third, astringency, by the classification and convergence of expert advice, after repeated rounds of opinion test, various experts opinion will be in line (Standards such as Table 1). Table 1 Comprehensive Assessment List of experts Score Investment projects 5(Less than 10%) risk 4(10%~30%) obstacle 3(30%~50%) rate 2(50%~70%) 1(More than 70%) 182
damage 5(Less than 20%) of risk 4(20%~30%) obstacle 3(30%~50%) to risk 2(50%~80%) cost 1(More than 80%) 3(Less than 1000 risk cost 2(1000~2000 Millions) 1(More than 2000 Millions) Total score ORIENT ACADEMIC FORUM The fourth step, rate this item by the experts, then summarize and calculate the score value and the percentile of the maximum possible value, estimate the incidence of risk obstacle, damage degree risk obstacle work out to risk cost and risk cost, as a first qualitative identification of risk factors. 2.3 Risk Management Countermeasures. In a complete risk management system, once risks are identified and detailed assessment, various risk countermeasures should be considered, in allusion to risk types and their possible impact, find and determine the appropriate risk management techniques, study out a variety of decision-making projects to choose from. Through several years practice of overseas oil investment, it believes that overseas oil investment risk management in the following points: (1) Investment selection techniques, this is specific applications avoiding the loss in the investment. Investment options include two meanings: first, the choice of investment direction; second, the choice of investment projects. The choice of investment direction, focus on the familiar and have competitive advantages industry, the likelihood of success relative to larger. First, companies should know what they can do, what they not do, which aspects they are good at, which aspects they are not, selective management is the key to the success of the project. Investment choice, the project select should be able to play the company's strength, avoid that need to acquire new skills or weaknesses of the company. (2) geological risk management strategies using credible resources assessment,carry out diversification. Use advanced science and technology, improve the resource evaluation credibility of the drilling success rate: found joint venture, reduce the risk, and reduce exploration costs. The reliability evaluation of geological resources, directly impact on investor enthusiasm and interest income. Over-optimism often leads to the sinking of a large number of investments. Therefore, reliable assessment is the basis for all work. Carry out investment diversification, namely, based on fully investment environmental assessment, Carrying out the diversification of diversity of exploration and development, this keeps the success of investment in other projects compensate for risk loss of the geological exploration of oil. (3) political risk management strategies have the correct assessment of political risk investment; carry out quarantine measures, implementation of the decentralization policy of the exploration area; use risk transfer techniques; increase the diversification of financing; strengthen and improve relations with the sovereign state, in order to get more financial support, also can disperse risk; another approach is, oil companies found joint venture company with sovereign government, to avoid sovereign countries to take the policy that is not conducive to investors. Strengthen and improve relations with the host country, good and mutually beneficial management can significantly reduce the occurrence probability of political risk; this has become one of prerequisites for development of oil business. (4) Economic Risk Management, mainly deal with oil price risk, financial risk and tax risk rent. To cope with oil price risk, must always have right forecasts on short-term and long-term trends in the international oil prices; use futures trading and other measures reasonably, appropriately, in response to losses brought by fluctuations in international oil prices, in particular, the use of forward contracts. 183
2.4 Risk ensuring implementation and promote. Following risk identification, measurement and risk measures in place, is the implementation stage of risk management, based on risk assessment report and risk management measures, risk managers, develop detailed risk management implementation plan, carry out objectives management, and carried out by relevant departments, develop assessment methods. Specific operational measures can introduce risk reporting system, including weekly, monthly, annual reports and emergency communications. Each report analyzes the major risk factors currently, and informs the current geological risk, technology risk, political risk, oil price risk, cost risk and financial risk, and puts forward analysis results and key solutions, concerns about the key points. And they monitor the implementation of the major risk management decisions last period, assess the implementation results of decision-making, according to the implementation results of the specific objectives to carry out examine, release reward results, adjust and control risk management objectives and measures changed on the actual situation timely. Also should have emergency plans, inform emergencies information timely, response and put forward loss control scheme. Risk managers should decompose and implement specific risk monitoring and control of responsible, provides specific functions, and develop appropriate plans and arrangements of time, from the risk management measures program, finally select risk control or alternative project to be used, carry out risk control actions, conduct results of evaluation, provide feedback, and in accordance with the development and changes in investment risk constantly revised risk control programs. Only institutionalized, with specific procedures, risk management system of implementation method will be reflected the value of risk management in practice, and to achieve control objectives. 3 Main Features of Oversea Investment in Oil Industry Risk Management System The overseas investment in oil industry risk management system, is a summary and upgrade on risk management methods and concepts of overseas investment in recent years, is also the overall management of risk of oversea oil operations, its main feature is a whole process, all elements, the whole team, dynamic and adjustable risk management system. The whole process feature of risk management system is risk management methods and concepts run through the project process, in allusion to risk incident may appear in each stage and activities spread of necessary identify, measure, response and monitoring aspects of risk management work, this also has been the risk management methods and concepts in pursuit. Risk management system is all elements management, analyze and control risk factors from geological, technical, political and economic and different angles, in order to achieve comprehensive management. First reflected in each risk factor of the overall management; also be able to analyze and identify the objective relationship of the elements and inter-relationship between configuration elements, more than to consider a single individual elements of risk management; any elements of risk management can not leave out in risk management, carries out a comprehensive integrated risk factors management. Team risk management of risk management, is philosophy and methods of the investment management organization, requires all stakeholders should attend or participate, and achieves the maximization of investment interest and rationalization principles of investment benefits distribution, to work together to do a comprehensive risk management. Based on maximizing benefits, it carries out objectives management, gives a reasonable allocation between all relevant subjects, namely, rewards and punishments have degree, its core idea is to mobilize all relevant stakeholders to involve in risk management, to work together to do a comprehensive risk management. Risk management system is adjustable, dynamic control, risk identification, assessment, selection,implementation and promote, to be carried and carried out cross and overlap each other, cycle, comprehensively carry out the work cycle in various stages of investment activities. And in stage of protection implementation and promotion of the risk, can collect information of risk management and give feedback, take advantage of tracking to identify the effectiveness of risk management activities, 184
whether the development of risk has new changes, according to information areas given to improve specific risk control program and implementation, this is an adjustable dynamic risk control system. 4 Conclusion Overseas investment in oil industry project risk management system, is carried out in promotion and application of overseas investment projects, not only make risk manager understand reasons and conditions of the formation clearly, and through appropriate measures, predict likelihood of risk, control the damage of risk in a certain range, also with the improving of risk management techniques and methods, make available risk management more and more. But the system also needs to have investment management institutions, personnel and rules and regulations, as well as learn risk management theory and risk analysis assessment technology from other enterprises and research institutions to make it more perfect and effective. References [1]. An zuoxiang, Maji. Current thinking problems of petroleum geology. [J]. Offshore Oil and Gas. 2003(10)(in Chinese) [2]..Qie anbang. Ten risks of project management.[m] Beijing; China Economic Publishing House, 2004 (in Chinese) [3]. Wu Shaoping, Li Xiaoyan. On determining standard of financial crisis early warning indicators. Financial Science(in Chinese) [4]. Gu Xiaoan, Financial Early Warning System, Collected Essays (in Chinese) [5]. Nie Minghua, On Foreign Direct Investment Risk, [J] International trade 2008(10): 4. (in Chinese) [6]. Ma Guangqi, Capital Market Game [M] Shanghai Shanghai Finance University Press, 2006. (in Chinese) 185