BP - optimising an investment strategy
BP was considering a substantial capital investment in a newly discovered gas field in South-Eastern Siberia. The project would involve piping the gas to China and selling it in the Beijing area, and possibly elsewhere. The key issues facing BP were how to handle the political risk, as well as identifying the optimal levels for well appraisals and marketing spend. BP was also keen to gain a better understanding of the total value of the asset and the costs involved in exploration.PricewaterhouseCoopers advised BP on the maximisation of value and minimisation of risk when exploiting the field, using the Real Option Valuation methodology (ROV). In particular, we helped to identify the importance of cultivating a downstream market. This was key to achieve overall success, since the project involved developing significant gas reserves where no natural market existed.
This led to a new emphasis on the Chinese power market as a source of value and as a result a greater focus on political risks and mitigation strategies. The work was unique because it directly factored the political risk associated with the project into the final evaluation, which also included devising a funding strategy for the project. The PwC team also recommended the scaling back of an appraisal programme (since it was not reducing uncertainty commensurate with its cost); the expansion of the market development study in China; and the instigation of a lobbying effort to align government interests with that of the project itself.
