Many
companies now recognize the need for a consistent, systematic process
for evaluating all their E&P opportunities.
Often, implementing
such a process represents significant organizational change. It represents
management's tacit recognition that such a process can improve geotechnical
performance, make E&P more efficient, and benefit the stockholder.
But such change
can be threatening to both technical staff and management, who may have
relied in the past on their intuition, salesmanship or command and control
decision-making styles. They may see all kinds of "shadows" -- change
is painful!
This column summarizes
key steps necessary to bring about progressive change through sound portfolio
management, which requires the consistent, unbiased and systematic (i.e.
unbiased) characterization of all E&P opportunities competing for
corporate funds, i.e., optimized allocation of capital.
The performance
of the E&P portfolio becomes the overriding concern, rather than whether
"your prospect" gets drilled!
♦ Leadership.
Sound leadership
facilitates progressive change, helping organizations compete more effectively.
Leaders give
meaning to implementing risk assessment by stating their determination
that their company will pursue this path. They reinforce those statements
with behaviors that implement changes to the organization and the capital
allocation process, so all projects compete for funds on an equal basis.
Without clear
leadership commitment, the project evaluation process can be easily subverted
or even avoided without consequence.
♦ Professional
Staff, Champions and Process Ownership.
Systematic assessment
of investment opportunities requires functional linkage among the company's
leadership, information systems and, of course, business results.
With such profound
linkages, organizations that charge individuals with clear accountability
to implement and sustain this key work process generate more informed
decision making, more predictable results and, typically, greater profits.
Champions are
people who, whether delegated or not, help implement such changes in a
positive way. As change agents, they demonstrate the behaviors necessary
to maintain process integrity. They facilitate the process on a local
level.
They embody professionalism
and become role models.
♦ Standards
and Consistency.
Systematic assessment
demands standards for measurement, chance estimation, valuation methods
and communication.
Definitions and
conventions are often established in writing -- based on statistics and
probability -- that cover estimating prospect reserves distributions and
chance factors under uncertainty. Once these systems (typically for chance
factor assignment and economic evaluations) are established, professional
staff can develop and communicate their understanding of various potential
size outcomes and their respective likelihoods, from whatever geologic
province the drilling opportunity derives.
Training of both
staff and management, however, is essential to develop the necessary standards.
Peer reviews, risk normalization teams and company-consistent software
tools often help maintain and test for consistency in everyday usage.
So the relevance
of the risk assessment process becomes clear in a broader perspective:
To quantify and communicate the results of geotechnical staff's primary
role -- generation and selection of E&P opportunities that create
the best chance for enhancing corporate value.
♦ Central
Coordination for Portfolio Management.
As the systematic
process of prospect assessment proceeds, clear, consistent outputs emerge
that form the building blocks of the E&P inventory. Management can
then apply the appropriate economic hurdles to pick from the inventory
those prospects for a portfolio that best implements their strategy. With
consistency and later calibration, the inventory then becomes a useful
predictor of future portfolio performance.
Portfolio management
requires choices and actions that best execute company strategy.
♦ Performance
Tracking.
As companies
take the time (or build the courage) to compare their geotechnical predictions
against actual results, future estimates become calibrated -- and usually,
with proper feedback and communication, improve.
Considering that
most exploration programs contain more dry holes than discoveries, there
is a vast amount of information that can be gleaned from studying failure
patterns. Sharing these patterns among corporate staff, and comparing
forecast versus actual results, reveals the degree of estimation bias
and helps focus future exploration technology spending.
Note that adult
learning is often predicated on feedback from mistakes: "We are what we
inspect, not what we expect."
Our experience
has been that firm, comprehensive implementation of systematic procedures
for measuring projects is the key to real, permanent improvement in E&P
performance.