An
almost universal requirement for team leaders, exploration managers or exploration
executives is setting, tracking and fulfilling goals -- objectives that
usually relate to reserve additions and finding costs.
Too often, however,
despite promising drilling portfolios and everyone's best efforts, organizations
fall short, leaving only disappointment, frustration and finger pointing.
Why do good programs
fail to achieve their goals?
Bad drilling
outcomes, even on good prospects, are an obvious reason, but here are
three other common problems that are frequently seen, but not often talked
about.
♦ Strange as it may seem, some goals aren't really meant to be taken too
seriously. It is not unusual for management to propose highly ambitious
"stretch" goals -- usually for inspirational purposes, or perhaps to suggest
a future strategy.
This is the lowest
form of goal -- the "wish" -- an objective that is only theoretically
possible. Organizational problems arise only when this type of goal is
mistaken as a serious, tangible objective.
The tip-off:
No specific action plan is ever implemented, a tacit admission that this
goal is only a pleasant pipe dream. But there is a downside -- "missing"
stated goals regularly sets a bad corporate precedent.
♦ A second, related problem in exploration is setting goals that appear
to be feasible, but which, when carefully examined year-by-year, are impossible
to achieve within practical resource limits.
A common example
is the goal of doubling production within a certain time period -- but
the additional discoveries or acquisitions required to both offset decline
in present production, as well as reach the goal, are usually enormous
and essentially unrealistic.
This is further
aggravated when the management that set such ambitious goals doesn't also
change organization, resources or behaviors.
If you keep doing
what you've been doing, you'll keep getting what you've been getting.
♦ A third common problem in E&P goal-setting is setting appropriate
reserve addition targets that reflect both the potential of the program
on the upside as well as responsible accountability for minimum results
on the downside.
An easy and obvious
approach is to simply report the sum of the net expected reserves from
each prospect. The problem is that while this is technically correct,
it fails to take into account the fact that almost all exploration programs
have reserve distributions that inherit a high-variance, strongly asymmetrical
character from the individual lognormal prospects that comprise them.
For most exploration
programs the mean reserve outcome is located above the median near the
30th percentile of the distribution. Consequently, an outcome the size
of the mean reserve goal would be achieved or exceeded only one or two
years out of five, even if the underlying estimates were perfectly unbiased
-- not a good track record for inspiring confidence (or ensuring job tenure),
especially if management doesn't understand lognormality!
This is aggravated
by two other factors:
- Small numbers of exploration
prospects.
- (More importantly) Programs
in which a few prospects have much larger reserve potential than the
others.
Holding full
working-interests in such "company-makers" may be an important element
of the growth strategy of many companies, but significantly increases
variance of reserves and finding cost.
The classic diversifying
solution -- smaller ownership in a larger number of opportunities -- can
reduce the severity of the problem, but carries its own penalties: the
likelihood of having to drill some lower quality prospects, and the elevated
overhead involved with finding (or selling) more deals and oversight of
joint-venture activities.
Figure 1 shows
that, for a fairly typical medium size independent company's balanced
exploration portfolio, about 60 wells are required in order to forecast
new reserves discovered with an accuracy of ±50 percent of the portfolio
risked mean at 80 percent confidence.
When forecasting
annual portfolio outcomes, scaling back the reserve goal, perhaps to the
median reserve value, might make sense, except that the associated finding
cost then appears to be unreasonably large.
Better than any
single-valued exploration goal is the more forthcoming disclosure of the
full range of predicted exploration program outcomes. Showing the full
range of outcomes is an effective communication strategy, represents reality
and does not require an unreasonable technical background to appreciate.
Most of all,
it's really important that your management understand the substantial
variance involved in E&P portfolio outcomes. Forewarned is forearmed!
Uncertainty in
exploration results is not a defect. Effectively measuring and managing
uncertainty is the heart of our business and is the source of most of
the value we create.
The problem is
setting goals that fail to realistically and honestly represent that uncertainty
to management, shareholders and professional staff.