infrastructure strategy development

Midstream Strategy Development

Strategic GamingTM Approach

Contents◦ About Dragonfly

◦ Game Theory and Strategic Gaming for Midstream Strategy

Oct 2019 Strategic Gaming for Midstream2

Background


Our work has spanned the globe • Company &

Business Unit

Strategy

• Portfolio

Management

• Growth Strategy

• Investment &

Capacity Decisions

• Alliance & Joint

Venture Strategy

• Competitive

Positioning

• Market Entry

Strategy

• M&A and Licensing

• Strategic Sourcing

• Bidding Strategy

• Negotiation

Strategy & Tactics

• Product & Pricing

Strategy

• Governmental

Affairs & Political

Risk Assessment

We have helped

clients with a wide

range of strategic

challenges:

Our work has enabled our clients to capture billions of dollars in value from a wide range of projects


Services and Capabilities

Strategy Support

DecisionTools

Coaching & Training

Process Development

Typically our work involves a combination of our services and capabilities; our leading game-theoretic approach provides our clients with a competitive edge…

Strategic Gaming™

Decision Analysis

Real Options

Portfolio Analysis

Political Analysis

War Gaming


Contents◦ About Dragonfly

◦ Game Theory and Strategic Gaming for Midstream Strategy


Why game theory for midstream

• Interdependent systems cutting across value chain

• Future options that others may or may not exercise

• Competitive-Cooperative dynamics with other (potential) infrastructure and players

• Tariff negotiations

• Value of control questions

Decision

Analysis

Game

Theory

Game

Theory

Influence Potential

Yes

Yes

No

No

Decision

Analysis

(with options)


Strategic Gaming™: A Practical Game Theory Approach

• Players

• Choices

• Sequence

• Uncertainties

• Structure

• Strategic thinking

• Qualitative

evaluation

• Provide direction

• Quantify

uncertainties

• Compute

payoffs

• Anticipation of

others’ moves

• Initial evaluation

• Evaluate game

changers

• Develop tactics

• Ensure alignment

• How to change the

game

• Effective signaling

• Dynamic road map

• NegotiationReady™

Steps:

Deliverables:

Dynamic

Framing

Strategy

Evaluation

Execution

Planning

Oct 20198 Strategic Gaming for Midstream

Framing to capture interdependenciesA fried-egg diagram can help bring a more holistic frame and understanding of key interrelationships that are common to midstream strategy issues

Broader considerations

Out of scope, but may be strategically related

Broad scope on alternatives

Pipelinealternatives

A vs. B

Other pipeline

alternativesC, D, & E

Upstream projects

Broader portfolioissues, concerns

Refinery issues


Schematics are very useful in framing

Existing

In progress

ProposalShangri-La

Babylon

Eden

Asgard

Olympus

Key fields, prospects and discoveries


A timeline helps understand what decisions and uncertainties are important and when

Stage 2 Stage 3 Stage 4 Stage 5

May2013

Stage 1

Sept/Oct2013

Nov/Dec2013

2015-2016 2017

Evaluate, discuss terms, ownership potential with

pipeline sponsors

Open Season, bid/negotiate terms, ownership

Pipe 6 and Pipe 8 completed

Babylon storage expansions?

Babylon storage expansions?

Various uncertainties that impact value get resolved

These and increasing production determine capacity in the system as of 2016

Commitments to Shangri-La Gulf Coast plant destinations may deter some potentials

New pipeline projects go through permitting and construction. First

deliveries to Shangri-La 2017+

Our focus decisions, though later stages should impact our decisions


Several important stakeholders are typically involved/impacted

• IOC 1

• IOC 2

• PipeCo A

• PipeCo B

• FERC

• Environmental groups

• Other producers

Potential Key Players Other Players


Schematic trees help structure choices

Wait

Project sponsors

Move (have binding OS)

First mover advantages and concerns?

Deter others, influence destination

Question about whether producers would sign up/need incentives

to A via Babylon

to B via Babylon

to C via Babylon

Key decisions in stages 1 and 2

Other shippers likely to have to do take or pay – no real choice

Ownership, to have maximum influence, would be best secured before open season

Tariff amount/tiered capacity also key-use tariff calculator as first cut

There are a number of tactical and strategic choices we and others could make prior to support of projects, including P/L or other ownership (e.g., refinery, upstream deals).

Nash, Kahuna, Rover, Black Dog

Ownership (operator?, %)

Take or pay

Sizing and expansion capability of pipeline alternatives also is important to specify

Projects we/other shippers can support/not

Pipe 11

Pipe 5

Pipe 3

Pipe 2

to Babylon

to Shangri-La

Not mutually exclusive


Qualitative insights from framing midstream issues are typically quite insightful

◦ Coordination of P/L development is crucial to realizing full value

◦ Uncoordinated P/L development will lead to insufficient storage capacity at Babylon

◦ However, Babylon storage companies can be persuaded to commit to expansion if they are guaranteed adequate delivery

◦ Partner selection is critical

◦ Nash-Black Dog partnership offers win-win opportunities but Black Dog has other attractive partnerships to consider

◦ Threat of Nash-Kahuna partnership could preempt Black Dog from pursuing these other options; further analysis should focus on ways to make this threat credible

◦ Rover at first appears to be an attractive partner, but framing indicates that Rover has large incentives to deviate from partnership for its own advantage: modeling should evaluate whether potential upside offsets likely complications due to partner misalignment

◦ Timing is of the essence

◦ Wait-and-learn is an option, but waiting almost certainly will eliminate partnership options because other players are motivated to act quickly

◦ Pipe co’s wield more influence than initially assumed

◦ Though pipe co’s are not as strong as the integrated majors, they have some power to block or inflict damage/loss of value to Nash (expansions, reversals, new P/L’s)


Transparent, transportable models are key to decision-making


Economic ModelIntegrate alternatives and

uncertainties to see volume balancing, economic payoffs for

each player, tradeoffs across alternatives Pricing Models

Regional Supply

Other Supply

Other Supply

Other Supply

B Capacity

S-L Capacity

Nash Refinery & Pipeline Capacity

S-L Pricing

B Pricing

Pipeline Modeling

Plant Model

Illustrative

Assessments

• CAPEX• OPEX• Production scenarios• Etc.

http://images.search.yahoo.com/search/images/view?back=http://images.search.yahoo.com/search/images?p=pipeline&ei=UTF-8&fr=yfp-t-501&x=wrt&js=1&w=981&h=773&imgurl=www.teachersparadise.com/ency/en/media/b/b7/alaska_pipeline.jpg&rurl=http://www.teachersparadise.com/ency/en/media/b/b7&size=174.4kB&name=alaska_pipeline.jpg&p=pipeline&type=jpeg&no=12&tt=316,041&oid=d81b7308bb81eff0&ei=UTF-8

P/L expansions in 2 stages

Volume flows are of central importanceEconomic measures typically follow

in a straightforward manner from

volume flows, but 80-90% of the

answer, if not more, often comes

from volumetric analysis alone


Midstream Project Examples


Benefits Project 1 Project 2 Project 3

The right frame, structure, clarity Linkage of alternatives for A&BClient and non-client acreage, discoveries and prospects

Full value chain: upstream, pipelines, refining

Findings contrary to base case beliefs, prior studies

Area A p/l expansion could get blocked/not preferable & Area B p/l made lower priority

Single “Fit-for-purpose” line doesn’t fit the purpose, and two lines can be better for upstream economics

Timing premature unless change game

Identification and assessment of power and leverage

Client is relatively big, but needs partners of a key field

Client has strongest position in area and first mover advantages, can create barrier to entry

Client is small but can change the game via buy-sell contracts and p/l ownership

Showed best alignment targets Company X is keyCompany Y, and perhaps Company X or Z, are key

Company X is key; if not, Z

Pipeline ownership has economic andstrategic value

Ownership in key export lines would ensure capacity on the lines, reducing export risks

To own contract carrier lines captures lots of value, reduces export risks

Enabling contract carrier line can have high returns, ensure capacity, and bring marketing uplift

Prioritization – an understanding of how to proceed

Focus on Area A more than Area B, and get IOC alignment

Make BD case to key partner targets, update information on prospects and CAPEX, and reevaluate, prior to decision

Tactics for engaging Company X drafted and implemented

Team alignment fostered, facilitating execution

Consolidated two team efforts working at cross purposes; new team aligned and implementing

Team has developed and implemented tactics for the “business development” case

Team agreed and implemented a contingent strategy and tactics for execution

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