S-032 - Interim Stress Test for Capital Projects
History and development of the process
Triple EEE are well known for performance of Stage Gate reviews of capital projects in the Oil & Gas industry and the primary goal of the review process is to select the optimal solution based on the evidence and data at the time of the review. However when a fundamental parameter like the price of the product declines by 40% this represents an exceptional change in circumstances and argues for an interim review to reach decisions on future progress and plans for the project. Even though the most immediate impact to be assessed is financial for the project owner the project may depend on infrastructure to be provided by the country of operation.
Below are a sample of issues that may be addressed by a review and enable the company to consider options to mitigate and limit the impact of the fall in the oil price.
- Year-end financial statements (most are Dec 31) require a test to see if discounted future cash flows are sufficient to cover the current holding cost of a project. If the discounted value is less than the carrying value then a charge has to be made against profits. If companies wait until the auditors perform this exercise it is too late so a special review should consider and build a case for the auditors
- What future oil price scenario is to be put forward and what is the basis of the choice, is it supportable?
- What discount rate is to be applied on the future cash flows?
- What optionality in both Capex and Opex can be considered should oil prices remain low for an extended period?
- The above may require review of both design and scheduling i.e. can the project phasing be changed
- A fall off in revenues at the end of a project may mean that the project life is shortened and depreciation of project assets are to amortized over a shorter period
- If supply and off-take agreements are in place what are the implications from a commercial perspective?
Each project is different and require specific consideration but the potential impact of the changed environment needs to be assessed and it is certain that risk on price is real and that will in future be priced into funding costs and expected rates of return.
Triple EEE has the capability and the resources to organise a stress test for our clients. Please do not hesitate to contact us to discuss any issues you may have, and we will revert with solutions and, or a full blown proposal.