Risk Management at Apache Harvard Case Solution & Analysis

Problem Diagnosis

This paper attempts to analyze the risk management strategies that have been formulated and implemented by Apache Company. Apache Company is basically an independent gas and oil production and exploration company founded by Raymond Plank in 1954. The oil and gas market is highly volatile to changes in its prices and therefore, in order to reduce the exposure of the company to this significant price risk, the managers of Apache had formulated a limited hedging program which had focused primarily upon the properties that had been acquired by the company recently.

However, the managers also knew that hedging itself was not free of risks and therefore, they needed to re-evaluate the success of this new program. The managers of Apache now need to make a decision that whether the firm should continue its hedging practices, extend them beyond the hedging for revenues and whether hedging is value adding or not.

Analysis

Risk Faced By Apache

Apache is basically an independent gas and oil exploration and production company and therefore, the company is exposed to myriads of risks which are stemming from the oil and the gas market. If the prices of oil rise significantly, then the company will face high risk as around 80% of the total proven resources for Apache are in the United States. The production of oil is then shifted away from the domestic sources when the oil prices rise in the United States and the reason for this is that extracting oil in the United States is much expensive than any other parts of the world. The major risks which are currently being faced by Apache are as follows:

Price Volatility Risk

As the prices of oil start to decline in the United States, then the production in the United States is shifted away to other countries as the costs for extracting oil in the United States are high. The deep water drilling in the United States was of major interest in the Gulf of Mexico;however the risks associated with this were much higher as the fixed costs were very large. The availability of the drilling rigs was also affected as a result of the fluctuation sin the oil prices.

If the prices of oil declined, then most of the oil companies in US would have to reduce the investment in capital expenditures significantly and as a result of this, most of the rigs of the companies were tied in docks to rust. Specific layoff programs would also have to be executed if the oil prices declined in order to cover up for the lost institutional knowledge of the geologists and reservoir engineers. Lastly, unhedged gas and oil in the market also increased the uncertainty and risk associated with the future profits for the companies.

Field Risk

This is yet another risk, which is faced by Apache as a result of the size of the company, which has not increased more than the size in most areas of the world and this has caused the oil fields in the United States to become more mature. The maturing of the fields in the US caused the company to extract the oil exponentially and in order to cover these extraction costs, the company had to reduce its production costs. The management of Apache also had to look out for certain technological advancements in order to extract oil from these mature fields.

Risk Management at Apache Case Solution

Political Uncertainty

The objective of the company in the case has been stated to reduce their costs and maximize their production. On the other hand, the company had been also expanding its reserves and holdings through acquisition, development and exploration. Although these might be less costly to develop however, as the reserves are not proven therefore, they bring additional risks for the company in the form of political uncertainty...........................

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