Risk Premium

(b) To compensate for the inherent uncertainty and risk involved.

(d) Stable market conditions.

(d) All of the above.

(d) Government subsidies for oil and gas exploration.

(c) Environmental sustainability.

Here's a possible solution to the exercise:

Factors contributing to the risk premium:

1. Technological Risk: Shale oil extraction is a relatively new technique, with uncertainties surrounding its long-term effectiveness, environmental impact, and potential for technical complications. This risk would necessitate a higher risk premium to compensate for potential losses and uncertainties.
2. Exploration Uncertainty: Drilling in a remote region increases the risk of finding no oil reserves, or finding reserves that are too small or difficult to extract. This uncertainty contributes to the risk premium, demanding a higher return to compensate for the possibility of a failed exploration project.
3. Regulatory Landscape: Governments often impose strict regulations on shale oil extraction due to environmental concerns. Potential changes in regulations or unexpected compliance costs could significantly impact project profitability, necessitating a higher risk premium to account for this unpredictability.

Influence on investment decision:

• Technological Risk: The level of technological risk would significantly influence my decision. I would need to carefully assess the company's expertise, existing data, and potential mitigation strategies for potential issues. A higher level of risk would likely lead to a higher required rate of return.
• Exploration Uncertainty: The remoteness of the region would require thorough geological analysis and an understanding of the potential size and quality of reserves. A higher probability of failure would necessitate a higher risk premium to justify the investment.
• Regulatory Landscape: I would thoroughly research existing regulations and potential changes in the region. The risk of increased compliance costs or unexpected regulatory hurdles would necessitate a higher risk premium to ensure an adequate return on investment.

Benefits and Drawbacks:

Benefits:

• Potential High Returns: If successful, shale oil extraction could yield substantial profits, given the increasing demand for oil.
• Technological Advancement: The project could contribute to advancements in shale oil extraction technology, leading to future opportunities.
• Economic Impact: The project could create jobs and boost the local economy.

Drawbacks:

• High Risk of Failure: Exploration and extraction may prove unsuccessful, resulting in significant financial losses.
• Environmental Concerns: Shale oil extraction can have negative environmental impacts, leading to potential reputational damage and legal challenges.
• Regulatory Uncertainties: Changing regulations could significantly increase costs or even halt the project.

Conclusion:

The decision to invest in this project would involve a thorough analysis of the identified risks, weighing the potential benefits against the potential drawbacks. A higher risk premium would be required to compensate for the uncertainties and potential losses associated with this specific project. Ultimately, the decision would depend on the company's expertise, the thoroughness of their risk assessment, and my own risk tolerance.