Definition:
The process of identifying, assessing, and mitigating risks that could impact a project’s viability at or after the final investment decision stage.
Key Components:
- Market & Economic Risks: Fluctuations in commodity prices, currency exchange rates, and interest rates.
- Regulatory & Political Risks: Potential changes in policies, tariffs, or trade restrictions.
- Supply Chain Disruptions: Risks associated with long lead-time equipment and material availability.
- Execution & Construction Risks: Delays, labor shortages, and permitting issues affecting project schedules.
- Operational Performance Risks: Uncertainties in long-term facility output and maintenance costs.
Use Cases/Industries:
- Oil & Gas: Managing price volatility risks in multi-billion-dollar investments.
- Infrastructure: Addressing funding and contract risks in transportation projects.
- Power Generation: Evaluating regulatory risks for carbon-intensive vs. renewable energy projects.
Advantages:
- Prevents Cost Overruns: Identifies potential budget risks before financial commitment.
- Strengthens Contingency Planning: Ensures adequate reserves for unforeseen issues.
- Improves Decision Transparency: Helps investors understand project uncertainties.
Challenges:
- Difficult to Predict Long-Term Risks: Some uncertainties, such as policy changes, are unpredictable.
- Requires Ongoing Risk Monitoring: Risks evolve throughout execution and operations.
Related Terms:
Project Finance Risk, Market Sensitivity Analysis, Investment Risk Evaluation
Example:
An offshore drilling project implemented FID-stage risk management, identifying a geopolitical risk factor that led to an alternative investment location, saving $200 million in potential losses.
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Synonyms:
Investment Decision Risk Mitigation, Pre-Commitment Risk Analysis, Capital Project Risk Assessment
