MGMT 1035 - Case Study 2 Yasuni National Park PDF

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MGMT 1035 Yasuni National Park: To Excavate or Not? George Brown College Tasnim M Taufique Hossain November 17, 2020

Group 7

Case Study Questions 1. What risks did Lucia’s team uncover in its analysis of a potential oil venture in Ecuador and what are the possible consequences of each?  Social - The area that is supposed to be dedicated to the oil extract is home to indigenous people that have isolated themselves from the world. Going forth with the project would displace these people, having caused losses to their homes and land. The area is also home to 4,000 plant species and 173 types of mammals. There was a petition to stop anything being done in the rainforest but only 359,761 signatures were recognized out of 757,000. This can cause the company to have strong opposition to this project by the people and can cause possible protests if the project is to commence.  Political – there is a history of failed contracts with the Ecuadorian government. Protests and resistance to the project have happened in the past.  Economic – The Ecuadorian government was only able to get the international community to pay 13 million USD in an initiative to protect the Yasuni National Park which was originally supposed to be 3.2 billion USD. Which resulted in scrapping the contract.  Personal - a chance of contracting Zika virus from mosquitos in the area.  Commercial – Companies have been forced to withdraw from their contracts because of protest, therefore losing their investment in their projects.  Foreign physical assets - Companies have been forced to withdraw from their contracts because of protest, therefore losing their investment in their projects. 2. Using the risks identified in Question 1, analyze each risk and place a checkmark indicating the degree of impact (critical, serious or marginal) in the second column. Risk 1. Social risks: as this activity will affect communities, there will be a negative impact. There is a critical degree for the organization may incur in contamination of the flora and fauna, hazards to the communities that live in the affected areas, and foremost threats to biodiversity and cultural heritage 2. Political risks: The ROI of this operation can be seriously affected due to political decisions. The profitability of the project could also be highly impacted due to corruption or even by a change in the political scenario that may introduce new laws and/or regulations against this kind of project. 3. Economic risks: as Ecuador has a variable and sort of unstable economy,

Degree of impact

Critical

Critical

Serious

changes in the interest rate, minimum wage, taxes, market prices may affect how the company covers operating and maintenance costs, as well as the inherent debt of the business. 4. Personal risks: In this case, the risk of contracting a disease such as Zika is a personal risk due to its serious impact on the contractors and their families depending on the outcome of the situation 5. Commercial risks: there’s not a high potential for loss in this case since the explorations will derive into the exploitation of such findings, and therefore minimize the impact of this risk. 6. Foreign physical asset risks: gradual deterioration of the machinery used to do perforations in such remote areas is a serious risk due to the delays it may cause. Replacement of the components and other situations can take days or even weeks to be solved, pushing the schedule and creating issues on the way.

Serious

Marginal

Serious

3. What strategies might the risk analysis team suggest to mitigate the most probable and impactful risks identified in Question 2? 

As for the mission to Ecuador, there are many risks to be accounted as well as many reasons why they should utilize their fields. Not only there are high risks on behalf of indigenous people, land and social values, but there is the risk from the highly dangerous diseases in nature for the employees. As the case study said, most smaller companies would give up on getting an agreement with Ecuador’s government which implements that Parasol has to estimate the risk of losing a huge amount of money in case the project got denied halfway through there. These are probably the most important risks to be considered.

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To mitigate these risks is a hard task. For the safety of the employees, they should attend orientation seminars to get prepared for the foreign environment and get prepared flu shots for the diseases that could be opposing the employees.

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In terms of the Physical asset risk to mitigate, getting the best insurance for equipment, or renting the equipment from other companies could be one way, it would be better if they were local.

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Social risks are probably the hardest because Ecuador has its UNESCO residents who make a huge impact on the decision of exploiting their fields. To mitigate this issue, perhaps having an agreement with the indigenous people and other citizens by explaining to them how the country could develop from this project and help the poverty that is present in the country.

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Political risks could be mitigated by having a fair agreement with the government, like sealing a deal on political risk insurance that would prevent any war, violence, or corruption. Also, creating a healthy relationship with the government from the beginning, accommodating financial plans to the government deal.

4. Based on the overall risk posed to ParaSol should it successfully submit and win the bid, what should Lucia’s team finally recommend? Through the risk management strategy, it was intended to examine the potential threats that ParaSol’s oil venture in Ecuador entails. Some of the critical aspects, which were considered in this assessment, were intended to be primarily based on the company’s tolerance level towards risk and its willingness to accept a higher level of risk in return for higher rewards or its preference to minimize these risks even at the expense of getting higher returns. In the final analysis, it might be more beneficial to suggest that ParaSol restrains from submitting and winning the bid considering that the inherent risks of the venture outweigh its potential gains. Based on the results of the identification and evaluation of each potential risk, along with the calculation of their probability plus impact; Lucia’s team should recommend the company to retreat from this project and instead focus on an opportunity with more favorable outcomes. Seeing that the degree of social, political, economic, personal and foreign physical assets risks’ impact is either critical or serious, the risk management processes should be extremely efficient. However, according to the mitigation strategies that were evaluated these external risks are mostly unpredictable and uncontrollable. As Lucia investigated Yasuni’s history of oil exploration and development, she discovered that strong opposition has been continuously expressed towards any activity related to oil extraction by environmentalists and community groups of the area. These indigenous communities have a strong will and are always eager to organize protests against potential contracts. In addition, it has been stated that no agreement providing access to their territory would be recognized, which reiterates the region’s history of failed oil exploration contracts. Moreover, since opposition groups became more influential, companies such as Tesico Inc. and several others have been forced to withdraw projects from the country. Under these circumstances, ParaSol’s likelihood of succeeding has been considerably lowered. Not to mention the significant risk of ParaSol’s production and engineering team catching the Zika virus, whose vulnerability is even greater because no vaccine against this virus has been developed yet.

In conclusion, If ParaSol cannot address the risks to reduce either their severity of loss or probability, it is utterly suggested to avoid the risk of winning the bid but being forced to withdraw after the exploration phase, which would lead not only to a loss in profits, but also would damage the company’s reputation and the success of its future projects.

Step 2: Identify Key Risks Checklist: Unpredictable and Uncontrollable External Risks ☒ Regulatory ☐ Natural hazards ☐ Accident, vandalism or sabotage ☒ Unanticipated environmental or social impacts ☒ Political unrest ☒ Threats to health or public safety from contamination or disease ☐ Market risks ☐ Operational issues ☒ Environmental or societal impacts ☐ Currency fluctuations, inflation, changes to taxation

Checklist: Non-Technical but Generally Controllable Internal Risks ☐ Management ☐ Excessive reliance on one individual for a critical part of the project ☐ Human error ☒ Delays due to regulatory approvals, labour shortages, poor productivity, work stoppages, material shortages, late deliveries, unforeseen conditions, accidents, sabotage, start-up problems ☐ Cost overruns ☐ Cash flow squeezes, interruptions or insolvency ☒ Loss of profits or other benefits ☒ Changes in technology ☒ Technology deficiencies ☐ Design problems ☐ Overall complexity is beyond management capabilities Checklist: Generally Controllable Legal Risks

☒ Company’s licenses and patent rights are not respected: IP is copied by others because of inadequate legal protection ☐ Contractual difficulties due to misinterpretation, misunderstanding, inappropriate contracting strategy, wrong contract type ☐ Outsider or insider suits ☒ Suits against competitive practices or monopolies ☒ Force majeure (unforeseeable circumstances, such as war or natural disaster)...