Integrating and Adopting Economic Uncertainty in Upstream Investment Decision Making

Abstract

Energy exploration encompasses many facets – geoscience, engineering, legal, political and social to name a few. All of these endeavors are fundamentally dependent upon energy exploration being a successful business enterprise. This imperative for business success is felt on industry, corporate, and personal levels. Energy exploration puts substantial capital at risk, often for long periods of time, and is marked by profound uncertainty. The business cycle common to the industry applies different stresses on industry participants at different times during the cycle. In the face of these challenges, a good investment decision process can be a matter of survival. In a prior presentation, the rationale and basic methodology for robustly capturing uncertainty in prospect economics - not just in prospect volumes - was discussed. This presentation addresses integrating the captured economic uncertainty in decision making and adoption of this new process. Integrating captured economic uncertainty requires a new way of thinking. Traditionally, whatever metric one chooses for making decisions is presented as a single value. Inherent in this single value is implied certainty. Extensions of this approach use multiple cases for the evaluation - high, median, and low cases - in order to capture some of the uncertainty. In the traditional approach, even in its more sophisticated form, uncertainty is not captured as an element of the metric of choice. This presentation presents a methodology for capturing risk and reward within the metric of choice in order to allow more informed investment decisions. While the presented approach is quite robust, several less robust approaches (which may be improvements over the traditional approach) will be discussed. Perhaps the most challenging aspect of more informed upstream investment decision making is not learning to think a new way, but rather being willing to consider adopting a new approach. Like any good prospect, this new approach needs to be presented with integrity and sold to its audience. The value proposition must be clear and compelling – its benefits need to be overwhelming compared to its costs and weaknesses, which should be acknowledged. What a “better” decision means will be discussed. Barriers to adoption need to be recognized and addressed. Benefits, costs, and barriers will vary depending on the role occupied – buyer, seller, or generator.

AAPG Datapages/Search and Discovery Article #90291 ©2017 AAPG Annual Convention and Exhibition, Houston, Texas, April 2-5, 2017