© Rose & Associates, LLP. 2005
GEOTECHNICAL PROJECT RISKING AND E&P PORTFOLIOS:
ASSUMPTIONS, REQUIREMENTS, FALLACIES, AND CONSEQUENCES
Peter R. RoseRose & Associates, LLP.
APPEX London28 February 2005
© Rose & Associates, LLP. 2005
CONTINUALLY ADVANCING E&P TECHNOLOGY
Image and Understand Subsurface
Find and Produce in Deep Ocean Settings
Recover from Previously Non-commercial Reservoirs
© Rose & Associates, LLP. 2005
BUTBUT -- IF SCIENCE AND TECHNOLOGY ARE SO GOOD, WHY DO WE STILL:
Drill Expensive Dry Holes?
Find Non-economic Fields?
Revise Proved Reserves Downward?
Overspend on Capital Projects?
-- Mother Earth is still a “Coarse Filter”, and we’re still learning to deal with Uncertainty!
© Rose & Associates, LLP. 2005
© Rose & Associates, LLP. 2005
MANY E&P PROJECTS: NFW’S ACQUISITIONS
A REPEATED-TRIALS GAME
• 20 Prospects with five classes of risk and reserves
• Probabilistic expression of chance and reserves-outcomes.
© Rose & Associates, LLP. 2005
E&P PORTFOLIO
• Unbiased Estimates
• A predictive tool -- 3 - 23MMBOE (mean 12)-- 4 - 8 discoveries (6)
• Strategic Planning
• Tactical Choices
• Portfolio-management software tools
© Rose & Associates, LLP. 2005
Professional Responsibilities Of Petroleum Geoscientists And Engineers
1. Find promising Opportunities
2. Measure them without Bias
3. Communicate effectively with Decision-makers
BIAS IS THE MORTAL ENEMY OF PORTFOLIO MANAGEMENT
© Rose & Associates, LLP. 2005
Manage by Managing the Portfolio
• Fit project-mix to stated goals
• Desired number and mix of projects from BU’s
• Reward oil-finders
• Reward geotechnical objectivity (post-audits)
© Rose & Associates, LLP. 2005
E and P Capital Allocation (Portfolio)
Prospect Inventory
Prospect Risk Analysis
Play Analysis
INVENTORIES AND PORTFOLIOS
A selection from the inventory to achieve a specific objective
The collection of projects
Consistent, systematic evaluation of prospects
To properly position yourCompany in key trends
© Rose & Associates, LLP. 2005
“Portfolio Management”:
• Projects characterized consistently, probabilistically, and objectively (chance, reserves, cash flows, costs)
• Stochastic simulations of possible projects in candidate portfolios
• Find best portfolios re goals and budgets to carry out strategy.
© Rose & Associates, LLP. 2005
AREA
RESERVOIR YIELD
P10 = 600 Ac P50 = 200 Ac
P90 = 60 Ac
10 1000100
P90
P10
(P1 = 1500)
P99=25
AVERAGE NET PAY
P10 = 40’
P90 = 10’P50 = 20’
P90
P10
(P1 = 75)
400 BAF = P10200 BAF = P50100 BAF = P90
ESTIMATING PROSPECT RESERVESESTIMATING PROSPECT RESERVES
10 1001
P99=6
P90
P10
(P1 = 700)
P99= 60
10 100 1000
© Rose & Associates, LLP. 2005
10 1000100
P99=25
(P1 = 1500)
P90
P50
P10
(P1 = 700)
P99= 60 10 100 1000
AREA, ACRES RESERVOIR YIELD, BAF
(P1 = 75)
10 1001
P99=6
AVE. NET PAY, FT.
P90
P50
P10
P1
P990.01 0.1 1 10
RESERVES, MMBO
9.6
0.06
3.3
0.800.20
DISTRIBUTIONS OF AREA, Ave NP, AND RY ARE MULTIPLIED
TO DERIVE THE PROSPECT RESERVES DISTRIBUTION…
x x =
1.37
© Rose & Associates, LLP. 2005
Five Factors:
- Hydrocarbon Source Rocks - Migration and Timing - Reservoir Rocks - Closure (Structural or Stratigraphic)- Containment (Seal, Preservation)
When Multiplied Together, Represent the Chance of an Active Hydrocarbon
System That Provides Oil/Gas in Quantities Sufficient for Sustainable Flow
Pg, PROBABILITY OF GEOLOGICAL SUCCESS
0.9 x 0.9 x 0.6 x 0.8 x 0.7 = 0.27 = Pg
(0.9)(0.9)
(0.6)(0.8)
(0.7)
© Rose & Associates, LLP. 2005
Product of the Geological Chance Factors
CHANCE OF GEOLOGICAL SUCCESS
Pg = 0.27
The Chance of Finding Sustained Flowable Hydrocarbons; From P99, and up, on the prospect reserves distribution.
P90
P1
P10
P50
P99
“The Chance of landing somewhere on the curve”
© Rose & Associates, LLP. 2005
Chance of finding the Minimum Commercial Field Size (MCFS) or more
CHANCE OF COMMERCIAL SUCCESS
Pc = 0.22
Fields > MCFS generate PV > 0 when burdened by the cost of completing and connecting the well.
P90
P1
P10
P50
P99 MCFS
Pc = Pg x P MCFS
0.8 x 0.27 = 0.22
© Rose & Associates, LLP. 2005
Sound portfolio management reflects the choices that are made after understanding project interactions relative to goals…
provides insights, not the answer
© Rose & Associates, LLP. 2005
Review Model Portfolio
20 PROSPECTS20 PROSPECTS
Pc = 0.1 Pc = 0.1 0.5 0.5
Mean reserves = Mean reserves =
0.39 0.39 10.82 10.82
© Rose & Associates, LLP. 2005
record your predictions: P90 P10
______ to ______ Number of discoveries
______ to ______ Reserves discovered
______ to ______ Average reserves / discovery
PORTFOLIO EXERCISE:
Unbiased spinner =Unbiased Portfolio
84 (6)
23MM3.5MM (12MM)
3.0MM0.6MM (1.92MM)
© Rose & Associates, LLP. 2005
PORTFOLIO SPINNER RESULTS
MMBO – 230 Trials
3.5
10
23
12
© Rose & Associates, LLP. 2005
0 2 4 6 8
Incre
asin
g lik
elih
ood
0 2 4 6 8 10 12 14
Incre
asin
g lik
elih
ood
Number of Discoveries
Average Reserves per Discovery1.92
© Rose & Associates, LLP. 2005 Trial
PORTFOLIO SPINNER RESULTS
© Rose & Associates, LLP. 2005
-100
-80
-60
-40
-20
0
20
40
60
80
100
0 20 40 60 80 100
NUMBER OF WELLS IN PORTFOLIO
% D
IFF
ER
EN
CE
F
RO
M
ME
AN
P90P10
VARIANCE FROM THE MEAN OF FORECAST PORTFOLIO REDUCED AS NUMBER OF WELLS INCREASES
© Rose & Associates, LLP. 2005
DEALING WITH HIGH-RISK PORTFOLIOS
1. Add more wells (increases exploration costs)
2. Expand the portfolio by joint ventures
3. Measure performance over multi-year periods
4. Replace some high-risk ventures with lower-risk ventures (Trade-offs on high side?)
5. Improve chance of success through geotechnology
6. Management recognizes the consequences of lognormality and risky projects, and accepts higher annual risk for expected longer - term growth
(Sometimes a bad year goes with the territory)
© Rose & Associates, LLP. 2005
Making a Simplistic E&P Picture More Realistic
Balance “Holistic” Portfolio -- Expand via Development, EOR, and Property-acquistions
Include “Resource Plays”
Covariance among Projects
Copyright 2004, Portfolio Decisions,Inc.
Example 6-Pack
Capital ($MM)
0
500
1,000
1,500
2003
2005
2007
2009
2011
0.000.200.400.600.801.00
Op Income ($MM)
0500
1,0001,5002,000
2003
2005
2007
2009
2011
0.000.200.400.600.801.00
Production (MMBO)
050
100150200
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.000.200.400.600.801.00
Staff Reqd
050
100150200250
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.000.200.400.600.801.00
ROCE (%)
0.05.0
10.015.020.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.000.200.400.600.801.00
Reserves (MMBOE)
0500
1,0001,5002,0002,500
2003
2005
2007
2009
2011
0.000.200.400.600.801.00
Probability of Achieving (dashed line)
© Rose & Associates, LLP. 2005
-500
0
500
1000
1500
2000
2500
3000
1991 1992 1993 1994 1995 1996 1997 1998
INVENTORY, SUM OF RW MEANS, MMBOE
EUR DISCOVERED, MMBOE
est PV(10), $MM
INVENTORY AS LEADING INDICATOR“Larger Inventory leads to Better Portfolio Performance”
McMaster & Citron 1997
© Rose & Associates, LLP. 2005
IN PRAISE OF JOINT VENTURES . . .
Reduce risk via OWI
Expand Portfolio (participate in more ventures)
Improve Estimates & Decisions (group wisdom)
Learn from Partners (expand expertise)
Expand Contacts & Influence
Fill-in Portfolio-gaps (time, balance)
Costs: generation vs. promotion
CostxPf
PVxPcx
PVCost
RTln
© Rose & Associates, LLP. 2005
FACTS OF LIFE FOR MANY FIRMS:• Companies can’t afford the luxury of accumulating a large multi-
year inventory, instead they proceed rejecting or accepting prospects on a serial basis
• One solution: Design a model Portfolio, where different divisions provide certain types of prospects, consistent with:
1) firm’s needs for a balanced portfolio 2) firm’s needs with respect to acceptable risk vs. reward
Caveat: This techniquecould impair the
predictive power of the portfolio
© Rose & Associates, LLP. 2005
KEY MESSAGE:Plays and Large Concessions
can be Systematically and Objectively Evaluated as
Full-cycle Business Ventures for Undiscovered Potential –
Volumes, Value, and Chance of Success –
Just Like Prospects.
The Most Important Exploration Decision Is Not Which Prospect To Drill,
But Rather, Which New Play To Enter!
© Rose & Associates, LLP. 2005
E&P WORRIES:
Does PM commonly tend to encourage Risk-aversion?
How does Frontier Exploration (new plays) fit into E&P Portfolio Management (new prospects/projects)?
Has “Amplitude-emphasis” impeded new-play developments in Frontier areas?
“No DUMB (?) Dry Holes”
© Rose & Associates, LLP. 2005
INTEGRATED PORTFOLIO MANAGEMENT
Technical and Conceptual
Human and Organizational
• poor estimating
• motivational bias
• counterproductive incentives
• inconsistency
• ethical lapses
• reliance on intuition
• hidden hurdles
BARRIERS TO IMPLEMENTATION
© Rose & Associates, LLP. 2005
1) Reduce volatility of E&P program results
BENEFITS OF E&P PORTFOLIO MANAGEMENT:
BOE $$
2) Balance reserves growth vs. future cash flow needs
3) Plan by assessing interactions & consequences of different choices
4) Choose projects that implement strategy
5) Deliver what you promised
© Rose & Associates, LLP. 2005
1) RA & PM don’t find oil & gas directly – help you drill more good prospects with the $ you didn’t waste drilling bad ones.
2) Need transparent Project RA process at BU level (no “black boxes” for RA); staff accountable for objective estimating.
3) Centrally coordinated portfolio management not incompatible with autonomous BU operations.
4) Exploration play analysis may not fit neatly into project-oriented portfolios.
KEY INSIGHTS (1):
© Rose & Associates, LLP. 2005
5) Elegant software tools cannot fix problems that are behavioral, cultural, or professional.
6) PM allows you to ask the right questions to let you choose options that best fit your strategy.
7) RA & PM may lead to excessive risk-aversion and avoidance of some frontier projects.
8) Successful implementation of portfolio management changes corporate cultures.
KEY INSIGHTS (2):
© Rose & Associates, LLP. 2005
Does Implementation of E&P Risk Analysis and Portfolio Management Guarantee Superior Performance?
But Any Company That Does Not Employ But Any Company That Does Not Employ These Techniques Probably Cannot Hope These Techniques Probably Cannot Hope To Sustain Improving E&P Performance To Sustain Improving E&P Performance
Over Multi-year Periods!Over Multi-year Periods!
© Rose & Associates, LLP. 2005
GEOTECHNICAL PROJECT RISKING AND E&P
PORTFOLIOS: ASSUMPTIONS, REQUIREMENTS, FALLACIES,
AND CONSEQUENCES
Peter R. Rose
APPEX
28 February 2005
London
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