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Exploration Portfolio Optimisation: a Rigorous Tool for Strategic Investment Decisions


Cairn Energy PLC (Cairn) is currently at the third phase of implementation of a portfolio optimisation programme based on the concept of the Efficient Frontier as introduced by H. Markovitz in 1952. Optimised portfolios lie at the efficient frontier, where maximum possible value is obtained from a unique combination of assets for a given investment/risk constraint. The portfolio optimisation analysis occurs at the downstream end of the prospects and new venture opportunities ranking workflow, starting from a Montecarlo simulation volumetric output and progressing to the commercial evaluation based on a conceptual development (both for a standalone and tie-back case if applicable) and the resulting full cycle cash flow analysis. The value of the blocks/licenses is obtained from the Montecarlo consolidation of all the prospects evaluated in them, using Bayesian trees to estimate the conditional POS (technical chance of success) of prospects within the same play. Portfolios to be tested for efficiency are made up of venture building blocks (VBB) which typically for Cairn are exploration blocks but also include decision units: these can be the option to enter or exit a venture at a determinate stage or increase/decrease the company position in a particular geographical, fiscal, political or technical area. Alternative venture plans and strategies envisaged by the asset teams can thus be assessed and compared as portfolio elements in the model. When all VBB are simulated, optimisation is carried out at multiple levels of constrains (e.g. investment, risk, minimum EMV constraints, etc.) to generate efficient frontier portfolios with respect to the selected metrics to maximize (EMV, return on investment, breakeven, etc.) The portfolio optmisation model ensures a consistent evaluation of the company’s assets and facilitates high level discussions on the company’s investment decisions, opportunities and aspirations by quickly and interactively assessing their impact to the value of the current portfolio and strategy.