Upstream Decision Complexity
From the reservoir to the trading floor, our business has never been more complex. For example:
- Increased pursuit of frontier areas and unconventional resources such as shale, coal bed methane and tight gas continues.
- Heavier regulatory and compliance demands are translating into the need for more profitable decisions to support bigger corporate overhead.
- More sophisticated host countries, even in the most remote regions, are more than aware of the value their assets hold to potential producers.
- Increased public and political volatility stems from prices at the gas pump and related political pressure to “do something” about it.
- Heightened competition for hydrocarbons worldwide grows exponentially.
- Shorter decision-making windows are expected to better capitalize on new opportunities.
And along with all of this increased complexity comes increased decision-making difficulty. This is especially true early in the asset development process, when evaluating a certain exploration opportunity, answering questions pertaining to economical portfolio management or considering questions of initiating exploration activities in a foreign country.
It takes more than information to manage these types of decisions. It requires that information be placed into context against dozens of facets of the problem, which affects the pursuit of your corporate objectives. Risk must be understood at every step. And moving corporate objectives forward with total risk transparency demands full understanding of:
- The opportunities available to you
- Your alternatives for exploiting these opportunities
- Choosing the right alternative
- How to execute the alternative
- Monitoring and evaluating success
And last but not least you must determine how to get all interested parties together to both understand the issues and collaborate in a way that optimizes economic performance both now and in the long term.
Whether evaluating single-field development options or drafting a suitable gas contract, supporting corporate strategy through a sound understanding of your options takes decision-making muscle. Especially if you want to do it in a way that’s intuitive and repeatable. Today, while many operators have official decision-making processes in place, most such decisions are made using ad hoc tools and processes at the discretion of disparate individuals and small groups.
Leveraging decades of experience, each asset manager or operational director is able to make profitable decisions where corporate objectives meet real world questions of asset development. The problem is that these experts are retiring. Who will make these decisions going forward as today’s asset managers exit the stage? How will this ability to shoot development decisions from the hip be transferred to tomorrow’s upstream decision-maker?
Not only are these experts leaving faster than they can be hired, but the framework in place for imparting decision-making competency often does a poor job of giving nascent upstream development strategists the tools they need to make good development decisions consistently.
Less Decision Competency, More Risk
Our industry is facing an implosion of its decision-making competency when it comes to making smart choices during the asset development process. Consider the following:
- Half of all oil and gas workers are between 50 and 60, and will retire within the next decade.
- The global talent pool is shrinking.
- A mere 15 percent of the industry’s professionals are in their 20s or early 30s.
- In 2004, around 1,500 American students were studying petroleum engineering.
- Demand for petroleum engineers in 2009 is forecasted at around 30,000 people.
Numbers like these give scale to the pending chasm of asset development decision skills. Combining a technologically-conservative industry with one that will soon begin to starve its decision-making capacity will prove costly in the aggregate if measures aren’t taken immediately to put stable strategic development platforms in place and in use. There will be no shortage of business strategy. But those charged with turning strategy into reality in a way that’s most appropriate for your specific corporate objectives will be in short supply.
And what exactly is at stake here? What if we just grin and bear the upcoming drop in development decision-making quality? Commodity prices may or may not cushion the economic impact of the decision-making gap, but there will be consequences.
As today’s professionals retire, it’s not unreasonable to imagine that unprepared exploration and production organizations could experience as much as a 10 percent decrease in the efficiency of field development decisions. The cumulative effect every operator failing to make the most informed, economical decision one out of every 10 times could cost the industry hundreds of billions of dollars until the next generation of decision-makers gained true decision-making competency.
This sudden decrease in decision quality across the industry would be felt just when the world will be counting on us most to meet the projected rising demand in hydrocarbons predicted over the next two decades. Worsening the issue is that many of those with decision-making competency who haven’t yet retired are in heavy demand, and are being utilized for ongoing operations rather than knowledge transfer.
Transferring Decision Competency
When new oil and gas professionals enter the world of asset development decisions, our industry offers no convenient solutions for transferring the decision-making competency of retiring workers to those who must assume the task. Guidelines from their predecessors aren’t enough. Homemade spreadsheets and two-dimensional software solutions are not enough. A single program champion isn’t enough.
Successfully transferring the ability to make development decisions takes a proven process and communication platform that everyone involved can understand, share and leverage for better decisions.
Four different types of failure can occur when attempting to make better asset development decisions. These include the inability to:
- Agree on a common language and process for decisions
- Provide teams with structure, consistency and documentation through every step of the decision-making process
- Improve the way options are presented and communicated using complete information
- Measure success and create a continual improvement mindset for asset and portfolio decisions
To turn complex development decisions into easy ones with effectiveness and efficiency, it’s essential to avoid these four traps. Yet most operators rarely do, at least not on an enterprise-wide scale. Complex decisions can only become simple when risk is made transparent, options are made clear and objectives become aligned. And the only way to do that is to put a structured framework in place that centers asset and portfolio decisions on logic, discipline and collective intelligence rather than ad hoc tools and individual opinions.
Damage Control for Asset and Portfolio Decisions
To give the next generation of strategic decision-makers the tools they need to create high-level operational value quickly and consistently, we need to replace ad-hoc decision methodologies with effective and standardized decision-making frameworks. When do you know the decision platform you’ve chosen has done this successfully? When it delivers four things:
- True performance of dynamic decision making that mimics the way decisions are actually made
- Total transparency of all relevant risk from exploration to the marketplace using mathematics specifically formulated for the oilfield
- Full entity evaluation
- True business simulation rather than simple economic modeling
This last one is especially important. Most economic models change the values of each entity as inputs change, but cannot recognize how relationships between entities change as the variables themselves are modified. A business simulation not only accounts for interdependencies but also how decision dynamics shift as different options are evaluated.
Without truly satisfying the above four criteria, no system can lead you to quality decisions, align partners or speed up the decision-making process with any kind of consistency. A truly rigorous analysis of asset & portfolio risks integrates development planning, economic modeling and risk analysis to include:
- Reservoirs, wells and facilities
- Intuitive process flow diagrams describing the surface network architecture and fluid flow
- Schedules denoting key exploration, appraisal and development decisions and activities
- Rig utilization and facility capacity constraints
If you can create a framework for development decisions that satisfies these requirements, you can do more than merely avoid an implosion of your organization’s ability to make development decisions. In fact, you can significantly improve the average economics of the decision while decreasing your decision-making cycle time by up to 50 percent. And along the way you’ll ensure that new decision-makers are given the tools they need to translate your corporate objectives into consistently sound decisions every time.
The sooner new asset development decision-makers have a framework they can use to leverage existing decision competency, the less damage operators will see from the decision-making gap. So a case exists for putting a stable decision-making framework in place now that will make communicating to new decision-makers easier, while dramatically improving operational strategy economics for your current team. The question is which operators will put such a framework into place now and which will wait until the damage is done. |
