Value of Popular Decision Analysis Tools in Upstream Asset

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  • 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)

  • Decision Analysis, What is it?

    Motivations & Design of the Study

    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

    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)

  • 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 Authors

  • 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

  • Decision Analysis, What is it?

    Motivations & Design of the Study

    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

  • 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

  • Information Gathering

    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: Ldre 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

  • 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

  • Sensitivity Analysis

    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)

  • Decision Analysis, What is it?

    Motivations & Design of the Study

    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 havent 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

  • 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 i