by Peter Carragher
I have been engaged with teams in reviewing and assuring plays and prospects since the late 1990s. I think it’s important to keep the title of this brief note front and center as a constant reminder that there is always something to learn. Continuing to learn will improve your ability to be effective in prospect evaluation and remain a valued contributor. Here are four areas to consider.
A prerequisite for learning from failures is the absolute necessity for rigorous written documentation of the pre-drill assessment. That must include all the pre-drill geological and geophysical assumptions, as well as the actual parameters and chance assessment logic you and the team used to build the assessment. Particularly instructive is writing down the possible failure modes for the prospect so you can determine if the actual failure was a surprise or not. The assignment of chance to the individual elements should reflect these concerns. Over time, you can determine the dominant failure modes in your program and take steps to address those issues with technology, or with different decisions.
Over estimation of discovered resources is a common problem, sometimes offset in a portfolio by underestimation of the chance of success, a classic case of two wrongs sort of making a right. What is happening here is that the relative ranking of prospects is incorrect, and that has consequences in the management decisions about the portfolio. For example, a company decided to drill a prospect at 100% and reject a valid farm-in / interest swap offer because the prospect resource and value was estimated to be very large. Unfortunately, one of the major risks was not recognized pre-drill. Not only was the well a dry hole, but the counterparty well was a commercial discovery.
One of the benefits of positive interaction in an assurance review is that the experience of the assurance team can help the project team in their technical work, prospect description and communications. Less well appreciated, is the necessity that the assurance team learns from the project team. Project teams bring diversity of thinking, new technology, different visualizations, new interpretation models, and the details of local geoscience data to bear on prospects. Careful, respectful listening and seeking to understand that point of view is a prerequisite for long term success in assurance.
Technological advances in the geosciences contribute towards increased specialization. Special effort is required to really learn what is going on in these specialized sub-disciplines, and how they interact with each other. For example, a 3D oil and gas migration model is critically dependent not only on the geochemistry of the source rock, but also the crustal mode that drives the temperature profile, biostratigraphy determining the ages of the burial sequence, geophysics generating depth maps and sequence stratigraphy predicting the distribution of permeability that controls migration vectors.
There is also much to learn from the wider set of disciplines involved in subsurface projects. You will become a better geoscientist if you take the time and put in the effort to learn from your colleagues in reservoir engineering, reservoir modeling and simulation, drilling, and production engineering, to list some of the opportunities. Assurance teams are best served by individuals who have taken this step, integrating learning across disciplines.
Whether you are involved as an assurance team member, or as a project team member, assurance presents a series of great opportunities to learn something new. Take them!
Pete Carragher has been the Managing Partner of Rose & Associates LLP since July 2014. Prior to joining R&A in 2010, his last role at BP was VP of Geoscience and Exploration, working as a member of BP’s global exploration leadership. Pete and his team introduced systematic risk and volume assessment, and assurance, into Amoco in 1990. Since then, he has evaluated hundreds of prospects from most of the world’s productive and frontier basins.
Posted on June 15, 2017 by Lisa Ward
Suppose I said to you “Sue’s got a bug”. Quickly now…what do you think Sue has? If you’re a programmer, you probably think Sue has a computer virus. But if you’re a doctor, perhaps the flu comes to mind. And if you’re an entomologist, a ladybug may be your first thought. Did you consider all three as possible outcomes? Probably not. And what about some others? If you’re a spy, you might think Sue found a listening device. If you sell cars, you might think Sue bought a Volkswagen Beetle. The list goes on and on.
So why didn’t all of these come to your mind? Well first off, I asked you to respond quickly, which reduced the time you spent thinking about it. And second, you based your response on your intuition, instinct, or experience. You responded reflexively. This is inherently how we make most decisions every day. Do you know how much fat and calories are in that Sausage McMuffin you ordered? Did you review the economic fundamentals before acting on a friend’s stock tip? Did you read the TripAdvisor reviews that mentioned bedbugs in the hotel you booked? The answer to all of these is probably “no”. We neither have the time nor stamina to properly frame each decision in terms of uncertainty and risk.
The same is true in our working lives. However, the difference is that we’re paid to make good decisions in our jobs, and those decisions often involve millions of shareholder dollars. In these situations, we can’t afford to think reflexively. Instead, we need to think reflectively, which requires deliberate time and effort.
There are multiple tools to help us approach oil and gas decision analysis reflectively including…
This sounds straightforward enough, but companies struggle to implement and apply these processes to their decision-making consistently. New management teams want to reorganize the way things are done. Staff turnover erodes the memory of what worked and what didn’t. Teams have turf to defend and walls to build. All of these contribute to lapsing into reflexive thinking.
“So what”, you say. “Let’s be bold and use our gut to guide us”. Could this be a successful strategy? Occasionally it does work, which provides memorable wildcatter stories (consider Dad Joiner). But given that oil and gas companies are in the repeated trials business, you’ll eventually succumb to the law of averages. For example, if we look at shale plays in the U.S., only about 20% of these have been commercially successful. You might get lucky by drilling a series of early horizontal wells in a shale play, but it’s more likely that you’ll squander millions of dollars you didn’t need to spend to realize that the play doesn’t work. In this sense, we’re like Alaskan bush pilots. There are old bush pilots and bold bush pilots. There are no old and bold bush pilots. If you want longevity, you need discipline.
Recently, we’ve begun to understand more about how people make decisions with their gut. It turns out that these reflexive decisions are very likely to be affected by cognitive bias. These are errors in thinking whereby interpretations and judgments are drawn in an illogical fashion. Some definitions and examples of this cognitive bias in the oil and gas industry are listed below:
So if you’re going to make decisions “with your gut”, at least realize the types of cognitive bias that could impact your decisions, and take some steps to lessen their impact on your exploration risk analysis, resource play evaluation, or production type curve generation.
With this in mind, we’ve come up with a new 2-day course at Rose and Associates called “Mitigating Bias, Blindness, and Illusion in E&P Decision-Making”. This course, in concert with our portfolio of courses, consulting, and software designed to help you think more reflectively about your project, is aimed at helping you make better decisions. Check out our offerings.
~ Creties Jenkins, P.E., P.G., Partner – Rose and Associates
Posted on April 27, 2015
The oil and gas industry remains the primary source of the world’s energy despite efforts to enhance the viability and acceptability of alternative sources. The growth potential for this industry is stable provided oil and gas risk analysis is deployed at strategic phases. The challenges faced by this sector span various aspects, including financial, strategic, operational, and regulatory compliance.
Financial Risks
Price volatility has been a major concern for the sector, but the urgency of this issue has been heightened with increasing costs of extraction and the frequency of political events that affect oil prices. For the most part, the industry favors extraction locations where the political system is stable since a change in leadership may lead to different regulations that directly affect operations.
Strategic Risks
While competition from alternative energy sources and new technologies remains limited, the oil and gas industry has to contend with fluctuations in demand. Politics may also add to strategic challenges. Access to reserves, risk of nationalization, and a shift in the regulatory climate can be costly for the industry.
Operational Risks
Oil and gas experts are involved in frequent testing to ensure that estimates of accessible reserves approximate actual values, but geological risk also includes challenges with extraction, cost containment issues, and ensuring safe conditions as drilling has moved to less hospitable environments.
Compliance Issues
Regulatory compliance has exacerbated operational and financial challenges. As safety regulations and environmental guidelines are tightened, the oil and gas sector is pressured to add substantial investments to ensure compliance.
Significant risks faced by the oil and gas industry coupled with massive investments involved to sustain operations have driven the need to deploy leading-edge methodologies to evaluate projects and measure risks. Mitigation strategies are most effective when oil and gas risk assessment involves an in-depth study of risks involved, including detailed determination and quantitative evaluation of risks involved to optimize investment returns.
DCF or Discounted Cash Flow, Sensitivity, and Scenario Analyses
The Discounted Cash Flow method compares the targeted rate of return or hurdle rate to the estimated net present value of the cash flow of the project. The DCF method is widely used in the industry as it provides a sound approach to accounting for the time value of financial investments, and it provides a clear baseline for critical decision-making. This method comes with a few inherent issues, including assumptions that cash flow is static, the discount rate sufficiently accounts for project risks, and inadequate assessment of risk mitigation efforts.
The application of sensitivity analysis and scenario analysis methodologies may address these shortcomings of the DCF method. Evaluating for uncertainty generates a range of values for the project’s metrics although the output may not adequately describe the range of possible outcomes for the project.
Quantitative Risk Analysis
Quantitative risk analysis takes each input and defines a set of characteristics to describe probability distributions. These metrics may include minimum and maximum values, expected values, standard deviations, and percentiles. Valuation models correlate the distributions to generate a relevant description of possible outcomes.
Quantitative oil and gas risk assessment provides for a broader and more in-depth accounting for uncertainties in project outcomes. The qualitative portion of the analysis identifies underlying factors that enhance risks. The ability to evaluate critical risk factors for oil and gas projects is crucial to optimizing outcomes and planning for effective and cost-efficient risk mitigation programs.
Substantial investments are required for gas and oil exploration and production projects. The attendant risks involved in this industry are considerable especially given increased regulation and vulnerability to political factors, which are among the wide-ranging factors affecting this sector.
Regardless of the size of the project or the outfit, operators may benefit from experts who specialize in petroleum economics consulting. Professionals with the experience and skill set to audit project risks, generate risk assessment surveys, and present mitigation strategies based on possible outcomes will certainly provide industry-relevant parameters for managing oil and gas projects.
