Methodology of Risk Management in Petroleum Industry Case Study Libya's National Oil Corporation LNOC Case Study

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Risk management in petroleum industry: case study Libya's National Oil Corporation (LNOC)

Libya's National Oil Corporation (LNOC) is a Libyan owned oil corporation that carries out the exploration, production and distribution of both crude and refined oil. LNOC also engages in the oil production and sharing agreement with specialized international companies. Typically, L NOC is the biggest oil producing company in Africa and controls 70% of Libya oil. While LNOC is very rich in oil reserve, however, the company is encountering various risks, which it is having challenges to manage. (World Bank, 2006).

Complex investments are commonplace in the petroleum industry and they are generally characterized by high-automated infrastructure and processes. Petroleum industry is generally characterized with expensive items which include pipeline, oil tankers, drilling rigs, transport equipment and other expensive items. (World Bank, 2008). With expensive capital equipment to run the business, petroleum industry generally encounters lot of risks at micro and macro levels, which could ultimately escalate into industry-wide crisis. (Fernandes et al. 2010).

More importantly, petroleum industry faces waves of unprecedented challenges because of the constant added costs and regulatory protocols that the industry needs to comply in their business process. The issues make petroleum industry to face several risks factors which include commodity price volatility, oil and gas price movements and risks of oil leakages that could lead to the loss of billion of dollars. Since petroleum industry is characterized with capital-intensive projects, the industry always implements the mega project which is difficult to manage. Petroleum industry is also increasingly engaging in mega-projects where development of project costs may run into billion of dollars. Such projects generally entail enormous challenges in planning, logistics, scheduling, data management and communication. "As expanding project scope becomes bigger challenges to manage project risk grow bigger." (Oracle, 2011 P. 2). With increase in the project scope, creating a new risk management also become challenging.

Similar to the risks associated to petroleum industry, LNOC encounters various risks while implementing its business operations, which the company is encountering challenges to manage.

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(Energy Information Administration, 2012).

1.2: Problem Statement

Risk is a state of uncertainty which could lead to a negative outcome. "Uncertainty and risk are everywhere in the petroleum industry." (Nolan & Thurber 2010 P. 9). Within the last few decades, Libya's National Oil Corporation has faced various risks during its business operations. Exploration risks are the major risks that the company is facing. Moreover, the corporation faces series of and non-quantifiable risks that impede its operations and some of the quantifiable and non-quantifiable risks are as follows:

Quantifiable Risks

Non-quantifiable Risks

Financing/financial risk

Operational risk

Market/price risk

Legal risk

Modeling/valuation risk

Political risk

Business continuity risk

Technological risk

Credit/default risk

Strategic/franchise risk

Volumetric risk

Staffing/organization risk

Operations risk

Regulatory risk

Financial reporting risk

Environmental risk

With complexity of multiple risks facing the company, LNOC has not yet devised a valid and reliable methodology to manage these risks. Thus, LNOC requires a sophisticated and comprehensive risk management approach to manage the risks.

1.3: Dissertation Aims & Objectives

To develop a risk management methodology in petroleum industry: Case study of Libya's National Oil Corporation (LNOC).

1.4: Dissertation Hypothesis

Risk management is very complex to implement within the petroleum industry. Fluctuation in market price is one of the risks that LNOC is encountering in its operations. Since the company is largely dependent on government, the company lacks effective methodology to manage the risks facing the company. While LNOC is envisaging in risk management plan, choosing the right methodology to manage the risks has become challenging for the company. Nolan, et al., (2010) argues that project could be accomplished with minimal risks if an organization:

chooses a project carrying lower uncertainty

Estimating the project uncertainties before project implementation,

Reducing capital that would be invested in a project with higher uncertainties.

HI: Effective methodology for Libya's National Oil Company to manage the risks is by conducting a project risk feasibility plan to identify the risks and identify the method to control the risks before embarking on the project.

Ho: Effective methodology.....

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