Value of Popular Decision Analysis Tools in Upstream Asset ...

Perceived Value & Popularity of DA tools in Upstream E&P

Decision Analysis, What is it?

Decision Analysis in O&G Industry

Motivations & Design of the Study

Toolkit Analysis

Summary of Results

Modeling the Real World

Real World MathematicalTheory

MathematicalModel

Prediction

Abstraction Application

Application Calculation

Source: Applebaum (2008)

Is Decision Making an Iterative Process?

Formulate Evaluate Appraise

Refine

Real DecisionProblem

Real Action

Source: Howard (1988)

What about Preferences of Decision Makers?St

ages

Proc

esse

sCo

mpl

exiti

es

Generate Proposed Alternatives

Specify Objectives & Attributes

Determine Magnitude & Likelihood of Impact of Proposed Alternatives

Structure & Quantify Values of Decision Makers

Evaluate Proposed Alternatives and Conduct Sensitivity Analysis

Step 1Structure the Decision Problem

Step 2Assess PossibleImpact of Alternatives

Step 3Determine Preferences of Decision Makers

Step 4Evaluate and Compare Alternatives

• Multiple Objectives• Difficulty in Identifying Good

Alternatives• Intangibles• Many Impacted Groups• Sequential Nature of

Decisions

• Long-Time Horizons• Risk & Uncertainty• Interdisciplinary Substance

• Several Decision Makers• Value Tradeoffs• Risk Attitude

Source: Keeney et.al. (1982)

Are all Decision Problems the Same?

A single forecast precise enough for determination of strategy.

A few discrete outcomes that define the future.

Range of outcomes but no natural scenarios.

No basis to forecast the future, true ambiguity.

Traditional ModelsRegression Analysis

Decision AnalysisGame TheoryOption Valuation Models

Scenario PlanningMulti Case ModelsMonte Carlo Simulation

AnalogiesPattern RecognitionNon-linear dynamic models

Wha

t can

be

kno

wn?

Anal

ytic

alTo

ols

1

2

3

A B

C D

?

Source: Courtney, Kirkland and Viguerie (1997)

Towards a More Comprehensive Model…

Decision Problem

Structuring

Information Gathering

Assessment of probability

distribution for chance events

Evaluating alternative

strategies using choice criterion

Sensitivity Analysis

Managerial Judgment &

Review

Decision & Choice

Intangibles & other decision parameters

Assessing consequences (outcomes) associated with alternative strategies

Source: Thomas (1982) & Raiffa (1968)



Toolkit Analysis

Summary of Results

Previous SurveysNorth Sea Operators on Decision Analysis Tools

A B C D E F G H I J K L M N O P Q R S T Score Structured Analysis 98%Holistic view 95%Discounted cash flow 98%Risk and uncertainty definitions 38%Use MC for prospect reserves 83%Take p10,p50,p90 43%EMV, via decision tree 78%Use MC for prospect economics 8%Use MC for production reserves 3%Use MC for production econ. 0%Portfolio Theory 35%Option Theory 15%Preference Theory 10%Qualitative and Quantitative 5%Sophistication Score 11 18 32 36 36 36 36 39 43 43 43 46 54 54 54 54 54 57 61 61

Partial Implementation Full Implementation

Source: Simpson et.al. (2000)

Survey DesignToolkit Framework

Decision Problem

Structuring


Assessment of probability

distribution for chance events

Evaluating alternative

strategies using choice criterion


Managerial Judgment &

Review

Decision & Choice

Intangibles & other decision parameters

Assessing consequences (outcomes) associated with alternative strategies

Source: Thomas (1982) & Raiffa (1968)

Survey DesignKey Measures

Satis

fact

ion

Leve

ls

Very Satisfied 2

Satisfied 1

Neutral 0

Dissatisfied -1

Very Dissatisfied -2

Never 0

Almost Never 1

Sometimes2

Very Often3

Always4

Usage Frequency

Blunt InstrumentsRudimentary Implements

Power ToolsSpecialty Tools

Source: Rigby and Bilodeau (2007) and Author’s

Survey DesignResponse Profile

Executive Manager Spv. Professional

Earth S. Engineering Prj.M. Finance/Legal/Commercial

4 yr. Bachelors Degree / Less Masters Degree Ph.D. Higher

Less than 12 Yrs 13-20 Years 21 Years & +

E&P Companies Others

Less than 100 100-1,000 1,000-10,000 More than 10,000 Employees

Less than $100M $100M-$1B $1B-$10B More than $10B Revenue

Located @ US / Canada Europe Asia/Australia Others

Company Headquartered in Located @ US / Canada Europe Asia/Aus. Others

About 400 respondents…



Toolkit Analysis

Summary of Results

Assessing Consequences of Alternate Strategies

Assessing Consequences of Alternate Strategies

Discounted Cashflow Analysis Real Option Value Levers

PV ofFixed Cost

PV ofExp. CF.

PV ofExp. CF.

ValidityPeriod

Volatility ofExp. CF

Yield ofRiskless Sec.

Lost Value OverOption Period.

PV ofFixed Cost

Decision Problem Structuring


Project DataProject ScheduleCapital & Operating Costs Reserve BaseProduction Profile & Forecast

Regulatory FrameworkLegal SystemFiscal SystemProduction Sharing/JV ContractsJoint Operating/Tariff Contracts

Economic Analysis

Macro EconomicsProduct PricesExchange RatesInflation Data & ForecastDiscount Rates, Financing Env.

Decision Enablers / MetricsRevenue & Revenue SplitBefore & After Tax Cash FlowsNPV, IRR, Pay Out Time, PIREconomic Limit & Sensitivity An.

Information GatheringProduction Information

Information GatheringCosting Information

Source: Lædre et. al. (2001)

Information GatheringProduct Pricing

Source: Staber (2006)

Information GatheringProduct Pricing

Information GatheringScheduling

Source: Wood (2001)

Assessment of Probability Distributions

Assessment of Probability Distributions

10 10,000

1010

,000

100 1,000

100

1,00

0

Source: Norwegian Petroleum Directorate

Before

Afte

r

Evaluating Alternative Strategies


Source: Bratvold & Begg (2008)

Intangibles & Other Decision Parameters

Source: Kelly (2003)

Intangibles & Other Decision Parameters

Source: Asrilhant, Meadows & Dyson (2006)

Managerial Judgment & Review

Managerial Judgment & Review

Source: Luehrman (1998)



Toolkit Analysis

Summary of Results

Key Classifications

Tools with universal acceptance are characterized by high levels and low variance of Utilization Frequency, such as “Selection & Ranking Based on Economic Indicators”

Tools that haven’t been embraced by industry have both low levels and variance of Utilization Frequency, such as “Random Walk Models”.

Tools with partial acceptance have moderate utilization but high variance, some exhibit linkage to demographic dimensions such as “scheduling tools” being used more by Project Mngmnt.

Demographic Dimensions

Company Size; tools such as Discrete Stochastic Forecasts, Front End Loading, Balanced Scorecards show an increasing trend with increasing company size

Job Position Level; Tools such as Scenario Planning, Tornado & Spider Diagrams, Breakeven Analysis, Payoff Matrices appear to be more used by executives.

Functional Silos; Especially present in Information Gathering Group of tools, certain sets appear to be used by certain functional groups.

Rank Order Usage Frequency vs. Satisfaction

There are tools that are very very complicated, but it not necessarily means that are a good tools. I prefer the simplest.

On few questions you have been able to cover a broad spectrum of the various techniques that the industry uses today.

My feeling would be that decision analysis tools and theories are allthe more convincing as they are intuitive, easy to understand andexplain, and "match-able" with reality.

We have all the possible tools weneed. The issues are (1) management discipline in decision-making and(2) communication of analysis.

I'm now in management ... I use these tools less than I used to…

…they make incompetent managers feel good, they are more a waste of very valuable time than anything else. The bottom line is we don't need better tools, we need smarter people.

We use very simplistic and often deterministic approaches to economic analysis. Usually the simpler and faster the better.

No discussion on quality data...It is the key.

We use an NPV 10 structure and calculate the NPV at 10% to understand returns.

Respondent Comments

Contact & References

http://www.onepetro.org/mslib/app/Preview.do?paperNumber=SPE-162675-MS&societyCode=SPE

http://www.linkedin.com/pub/erkan-karakaya/2/439/149

Value of Popular Decision Analysis Tools in Upstream Asset ...

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