06 geotechnical project risking.ppt

7/27/2019 06 GEOTECHNICAL PROJECT RISKING.ppt

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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


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CONTINUALLY ADVANCING E&P

TECHNOLOGY

Image and Understand Subsurface

Find and Produce in Deep Ocean

Settings

Recover from Previously Non-commercial Reservoirs


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BUT -- 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

were still learning to deal with Uncertainty!


4/36



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MANY E&P PROJECTS: NFWS ACQUISITIONS

A REPEATED-TRIALS GAME

20 Prospects with five

classes of risk and

reserves

Probabilistic expression

of chance and reserves-

outcomes.


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E&P PORTFOLIO

Unbiased Estimates

A predictive tool-- 3 - 23MMBOE (mean 12)-- 4 - 8 discoveries (6)

Strategic Planning

Tactical Choices

Portfolio-management software tools


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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


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Manage by Managing the Portfolio

Fit project-mix to stated goals

Desired number and mix of

projects from BUs Reward oil-finders

Reward geotechnical objectivity

(post-audits)


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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 your

Company in key trends


10/36


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.


11/36


AREA

RESERVOIR YIELD

P10 = 600 Ac P50 = 200 AcP90 = 60 Ac

10 1000100

P90

P10

(P1 = 1500)

P99=25

AVERAGE NET PAY

P10= 40

P90= 10P50= 20 P90

P10

(P1 = 75)

400 BAF = P10

200 BAF = P50

100 BAF = P90

ESTIMATING PROSPECT RESERVES

10 1001

P99=6

P90

P10

(P1 = 700)

P99= 6010 100 1000


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10 1000100P99=25

(P1 = 1500)

P90

P50

P10

(P1 = 700)

P99= 6010 100 1000

AREA, ACRES RESERVOIR YIELD, BAF

(P1 = 75)

10 1001P99=6

AVE. NET PAY, FT.

P90P50P10

P1

P990.01 0.1 1 10RESERVES, 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


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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 HydrocarbonSystem That Provides Oil/Gas inQuantities 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)


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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


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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 bythe cost of

completing and

connecting the well.

P90

P1

P10

P50

P99MCFS

Pc = Pg x P MCFS

0.8 x 0.27 = 0.22


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Sound portfolio management reflects the choices that are made

after understanding project interactions relative to goals

provides insights,

not the answer


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Review Model Portfolio

20 PROSPECTS

Pc = 0.1 0.5

Mean reserves =

0.39 10.82


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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)


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PORTFOLIO SPINNER RESULTS

MMBO 230 Trials

3.5

10

23

12


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0 2 4 6 8

Increasing

likelihoo

0 2 4 6 8 10 12 14

Increasing

likelihood

Number of Discoveries

Average Reserves per Discovery1.92


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Rose & Associates, LLP. 2005 Trial

PORTFOLIO SPINNER RESULTS


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-100

-80

-60

-40

-20

0

20

40

60

80

100

0 20 40 60 80 100

NUMBER OF WELLS IN PORTFOLIO

%D

IFFERENCE

FROM

MEAN

P90P10

VARIANCE FROM THE MEAN OF FORECAST PORTFOLIO

REDUCED AS NUMBER OF WELLS INCREASES


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DEALING WITH HIGH-RISK

PORTFOLIOS1. 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-riskventures (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 terr i tory)


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Making a Simplistic E&P Picture

More Realistic

Balance Holistic Portfolio --

Expand via Development, EOR,and Property-acquistions

Include Resource Plays

Covariance among Projects


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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)

0

500

1,000

1,500

2,000

2003

2005

2007

2009

2011

0.000.200.400.600.801.00

Production (MMBO)

0

50

100

150

200

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 (%)

0.0

5.0

10.0

15.0

20.0

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)


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-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 INDICATORLarger Inventory leads to Better Portfolio Performance

McMaster & Citron 1997


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IN PRA ISE 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 PVxPcxPVCostRTln


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FACTS OF LIFE FOR MANY FIRMS:

Companies cant afford the luxury of accumulating a large multi-

year inventory, instead they proceed rejecting or acceptingprospects on a serial basis

One solution: Design a model Portfolio, where different divisionsprovide certain types of prospects, consistent with:

1) firms needs for a balanced portfolio2) firms needs with respect to acceptable risk vs. reward

Caveat: This technique

could impair thepredictive power of

the portfolio


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KEY MESSAGE:

Plays and Large Concessions

can be Systematically and

Objectively Evaluated as

Full-cycle Business Ventures

for Undiscovered PotentialVolumes, Value,

and Chance of SuccessJust Like Prospects.

The Most Impo rtant Exp loration Decis ion

Is Not Wh ich Prospect To Dri ll ,

Bu t Rather, Wh ich New Play To Enter!


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E&P WORRIES:

Does PM commonly tend to encourageRisk-aversion?

How does Frontier Exploration (new

plays) fit into E&P Portfolio Management(new prospects/projects)?

Has Amplitude-emphasis impeded

new-play developments in Frontierareas?

No DUMB (?) Dry Holes


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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


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1) Reduce volatility of E&P programresults

BENEFITS OF E&P PORTFOLIO

MANAGEMENT:

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


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1) RA & PM dont find oil & gas directly help youdrill more good prospects with the $ you didntwaste drilling bad ones.

2) Need transparent Project RA process at BU

level (no black boxes for RA); staffaccountable for objective estimating.

3) Centrally coordinated portfolio management not

incompatible with autonomous BU operations.

4) Exploration play analysis may not fit neatly intoproject-oriented portfolios.

KEY INSIGHTS (1):


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5) Elegant software tools cannot fix problems thatare behavioral, cultural, or professional.

6) PM allows you to ask the right questions to letyou choose options that best fit your strategy.

7) RA & PM may lead to excessive risk-aversionand avoidance of some frontier projects.

8) Successful implementation of portfoliomanagement changes corporate cultures.

KEY INSIGHTS (2):


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Does Implementation of E&P Risk

Analysis and Portfolio Management

Guarantee Superior Performance?

But Any Company That Does Not Employ

These Techniques Probably Cannot Hope ToSustain Improving E&P Performance Over

Multi-year Periods!


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Rose & Associates LLP 2005

GEOTECHNICAL PROJECT

RISKING AND E&PPORTFOLIOS: ASSUMPTIONS,

REQUIREMENTS, FALLACIES,

AND CONSEQUENCES

Peter R. Rose

APPEX

28 February 2005

L d

06 geotechnical project risking.ppt

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