Risk Identification and Mitigation There are several risks and uncertainties Passami needs to consider before making his decision to sell out to Statoil or not. These risks can be divided into four generalized categories: 1. those risk factors that directly impact the production of oil and affect the cost Project risks – of capital 2. those factors impacting the oil market as a whole Market risks – 3. risks facing any business operation in Nigeria Sovereign risks – Below is an in depth analysis of these risk factors as well as potential mitigating factors. Project risk: General Risks Specific Risks Agbami Mitigating Factors Direct currency risk: Exchange rate and Oil sold in USD which takes a big bite out of Sovereign currency fluctuations can directly impact the the risk premium. All transactions regarding Currency value of goods and services sold. the export of oil take place in dollars. There Indirect currency risk: Macroeconomic remains some risk, as Petrobras exports to policies can cause the local currency to other countries and the dollar can move up or devalue which has a secondary effect. down against their currency. However, these Massive devaluation can cause major unrest movements are rather stable and there are in the country. adequate derivative markets through which such currency risks can be hedged. Expropriation Direct: The government can seize assets Direct: Oil projects are capital intensive projects in which large capital investments Diversion: The government can divert exports are made get projects up and running. The Creeping: The government can alter its government can seize some of the PSOs and taxation policies sell oil in the thriving black market. Currently $10bn worth of oil barrels are stolen every year from the Niger Delta for illegal trade which has a corrupting effect on security services and institutions. Creeping: The government can alter its taxation policies by increasing taxes (currently at 85%), can increase the royalties collected (currently at 18.50%) or can decrease the profit allowance (currently at 16%) which would have a negative impact on Petrobras's revenue in Agbami. Diversion: There seems to be very little risk of the government diverting exports. Though it is unlikely that Petrobras will exit Nigeria even if taxes and royalties increase, the government would not want to antagonize Petrobras or any foreign oil investor in the
Risk Identification and Mitigation There are several risks and uncertainties Passami needs to consider before making his decision to sell out to Statoil or not. These risks can be divided into four generalized categories: 1. Project risks – those risk factors that directly impact the production of oil and affect the cost of capital 2. Market risks – those factors impacting the oil market as a whole 3. Sovereign risks – risks facing any business operation in Nigeria Below is an in depth analysis of these risk factors as well as potential mitigating factors. Project risk: General Risks Specific Risks Agbami Mitigating Factors Sovereign Currency Direct currency risk: Exchange rate and currency fluctuations can directly impact the value of goods and services sold. Indirect currency risk: Macroeconomic policies can cause the local currency to devalue which has a secondary effect. Massive devaluation can cause major unrest in the country. Oil sold in USD which takes a big bite out of the risk premium. All transactions regarding the export of oil take place in dollars. There remains some risk, as Petrobras exports to other countries and the dollar can move up or down against their currency. However, these movements are rather stable and there are adequate derivative markets through which such currency risks can be hedged. Expropriation Direct: The government can seize assets Diversion: The government can divert exports Creeping: The government can alter its taxation policies Direct: Oil projects are capital intensive projects in which large capital investments are made get projects up and running. The government can seize some of the PSOs and sell oil in the thriving black market. Currently $10bn worth of oil barrels are stolen every year from the Niger Delta for illegal trade which has a corrupting effect on security services and institutions. Creeping: The government can alter its taxation policies by increasing taxes (currently at 85%), can increase the royalties collected (currently at 18.50%) or can decrease the profit allowance (currently at 16%) which would have a negative impact on Petrobras's revenue in Agbami. Diversion: There seems to be very little risk of the government diverting exports. Though it is unlikely that Petrobras will exit Nigeria even if taxes and royalties increase, the government would not want to antagonize Petrobras or any foreign oil investor in the