Whilst industry players are well versed about "Below Ground" risks, the treatment of "Above Ground" risks have yet to be fully explored and used in making investment decisions. To address this deficiency, some propose adjustment to the Discount Rate. Others adopt the use of Horner's pseudo-rate. And yet others suggest the use of an "Attrition" rate along with the cashflows. There is also a suggestion to use a probabilistic approach to cater for risks. This paper examines the concepts and methodology proposed to address "Above Ground" risks. The advantages and disadvantages of each method are discussed.
Many ventures sanctioned at certain investment decision stages were found to be technically challenging to implement and economically less profitable than they were anticipated. Brasher et al. reported in 1990s that return on net assets by Majors was only 7% compared to their promises of meeting and/or exceeding the hurdle rate of 15%. Among the reasons contributing to ventures being under-performing may involve perception on "Above Ground" risks and its treatment.
Most companies have good understanding in dealing with Project Risks through multiple level technical data sets scenarios with deterministic approach. As for the Above Ground risks, there are several ways the Majors address them 1. Discount Rate Adjustment 2. Adoption of Horner's Pseudo-Rate and 3. Incorporation of Country Risk Rating (CRR)-derived Attrition rate.
Proposed GCRR-derived Attrition Rate method will provide comfort to Decision maker on the impact of Above Ground Risk. From the business case shown, Project economics IRR & NPV@10% from initial assessment of IRR = 15% & US$ 214 Mill. to GCRR risk-adjusted IRR = 11% & US$ 22 Mill.
Recognizing the Above Ground Risks uncertainties and managing its impact early through improvised and GCRR-derived Attrition Rate approach would enable Decision Makers to make proper techno-commercial judgement on a project viability & informed decision on its attractiveness thus, safeguarding the Project value.