Monte Carlo Simulation and Risk Analysis: Case Study on Libyan Oil Project

Abstract

        The oil industry is characterized by the needs of large amounts of money, difficulty of estimating future cash flows, low success rates and increased risk and uncertainty. Since there are several ways to help decision-maker on investment risk analysis and take appropriate decisions, this study focused on illustrating the advantages of using Monte Carlo simulation to assess an investment project in the oil sector, which is one of the most important economic sectors in Libya. Results showed that high proportion of risk according to the current circumstances, which include the sharp decline in oil prices. It has been proven that probability of positive net present value (NPV) is only 20.84%. So, management must focus on controlling expenditures, operational costs, fundamental analysis of relevant agreements, operating excellence and voting and veto rights of cancellation or reduction of capital expenditure. Results also showed that the most important element that must pay more attention and analysis is oil price. Therefore, decision maker can also delay decision because of current situation such as profitability of project, oil price are not as high as expected.

Keywords:  Monte Carlo Simulation, Risk Analysis, Oil Project