Basics are Boring – The Essentials of Good Portfolio Management at Independent Oil and Gas Companies
Gavin H.F. Ward
Noble Energy Inc, Houston, TX
Portfolio analysis and investment decisions depend upon realistic estimation and accurate data. The industry is renowned for its over optimism of geological resource sizes, yet little attention is paid to the other estimates which contribute to value such as, initial production rates, well costs, pricing and project delays.
The basic risk versus reward concept is simple but it is often over shadowed by more exciting theories like Option Value or complicated by management demands to maximize production, ROCE or rate of return. However, these sometimes-conflicting goals can be managed successfully by addressing both the basics in the Net Present Value calculation and the human factors which exist in large independent oil & gas companies like Noble Energy Inc.
Specifics of this Back to Basics approach of portfolio management include:
- Human ability to estimate ranges makes small projects more vulnerable to over optimism compared with large projects.
- Portfolio management can only work if every part of an organisation follows the same goal.
- The measurement of loss in value through discounting project delays does not properly reflect the impact on the value to the company as a whole.
- Setting inflexible economic thresholds for individual projects can lead to an overall loss in value.
- Independents are characterized by smaller portfolios, which is where the mean value and repeatability of results used in portfolio modeling starts to break down.
Specific case examples demonstrate how each of these factors has been addressed to improve portfolio prediction methods.