Model Investment Mechanism of Cost Management in the Oil Business Based on RAROC Methodology
Development of the oil and gas business is inextricably linked to large-scale investment programs. Significant investment flows, long-term projects, and the high uncertainty of the external environment of oil and gas businesses bring a high-risk investment and therefore become urgent methodological tools for a risk management development problem. The authors’ approach to risk management investment allows us to estimate the individual risk level of the investment project on the basis of the rating model and to evaluate the need for capital to cover potential losses on the basis of the target level of financial stability and long-term strategy of the company. The authors’ technique, RAROC analysis (risk-adjusted return on capital) of investment projects allows us to calculate the return on investment of the risk and to carry out the selection of projects that contribute most to the creation of value and conduct screening projects that destroy the company value. The results can be used in making financial decisions.
KeywordsCost management Oil and gas company The investment project Investment risks The probability of default The economic capital
The work was supported by Act 211 Government of the Russian Federation, contract № 02.A03.21.0006 and Russian Foundation for Basic Research (RFBR), contract № 16-06-00317.
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