True Economic Impact of
Project Decisions
Peter Kirkham and Tom Mead
Fact Or Fiction?
Upstream Developments - Speed is of the essence. The time it
takes to bring a newly discovered oil or gas field into
production is critical in ensuring that the project is profitable
for the company. Long lead times lead to capex creep, written
off over the life of the well making every barrel produced less
profitable, while free cashflow is negatively impacted for
longer than necessary during the development phase.
Recent E&P Financial Analyst Report
The wisdom that fast project schedules deliver
better returns is accepted almost without question by
financial analysts and business executives
but is it true?
CONFIDENTIAL UIBC 2012 2 INDEPENDENT PROJECT ANALYSIS
Measuring Change in NPV
Definition of New Economic Metric
Economic Gain/(Loss) : (Actual NPV Expected NPV)
(Facilities + Drilling CAPEX)
Metric measures change in NPV relative to total
capital expenditure
Metric can be calculated for many closeout projects
in current database using an economic simulator
Provides a single metric to measure complete asset
performance
NPV is Net Present Value and is an economic measure of a projects value. It is calculated
as the sum of discounted net cash flows over the life of a project.
CONFIDENTIAL UIBC 2012 3 INDEPENDENT PROJECT ANALYSIS
Projects With Planned Aggressive Schedules
Value Appears To Be Lost, Not Gained
50%
Economic Gain/(Loss) (% of CAPEX)
Pr < 0.02
25%
2 * Pr < 0.02
0%
(25%)
(50%)
(75%)
(100%)
+1 Std. Dev.
MEAN
(125%)
-1 Std. Dev.
(150%)
Not Schedule Aggressive Aggressive Schedule Target
Projects with an execution schedule duration target of less than 0.85 are classified as
Aggressive Schedule Target
CONFIDENTIAL UIBC 2012 4 INDEPENDENT PROJECT ANALYSIS
Distribution of Actual NPV Gain/(Loss)
Average Project Loses Value
Economic Gain/(Loss) Distribution
30%
Mean = 41%
Median = 31%
25% Std. Dev. = 63%
Percentage of Projects
20%
15%
10%
5%
0%
(200%) (150%) (100%) (50%) 0% 50%
CONFIDENTIAL UIBC 2012 5 INDEPENDENT PROJECT ANALYSIS
Outline
The Case for Improving Decision Making
Economic Folly of Schedule Aggression
Conclusions and Path Forward
CONFIDENTIAL UIBC 2012 6 INDEPENDENT PROJECT ANALYSIS
Asset Outcomes Are Interrelated
To Maximize NPV, We Must Ensure No Aspect Is Sacrificed
Cost Schedule
Lean cost-driven Focus on schedule
development may leads to cost
experience quality growth and poor
and operability production as
issues corners are cut to
meet startup date
Quality
(Operational Performance)
Cautious approach to asset development increases
overall cost and schedule
CONFIDENTIAL UIBC 2012 7 INDEPENDENT PROJECT ANALYSIS
Ranked Drivers of NPV Gain/(Loss)
Ironically the Least Important Contribution Is Schedule
(40%) (30%) (20%) (10%) 0% 10% 20% 30%
Initial Pr > |t| 0.001
Production
RPE Volatility Pr > |t| 0.001
Asset Cost Pr > |t| 0.001
Growth
Execution Pr > |t| 0.005
Schedule Slip
Range reflects contribution to NPV Gain/(Loss) from P90 to P10 distribution for each
outcome component
CONFIDENTIAL UIBC 2012 8 INDEPENDENT PROJECT ANALYSIS
Breakdown of Projects by Objectives
Drive for Schedule Is Common
70%
60%
50%
Percentage of Projects
40%
30%
20%
10%
0%
Schedule Driven
Schedule Driven Cost
Cost Driven
Driven Other
Other
CONFIDENTIAL UIBC 2012 9 INDEPENDENT PROJECT ANALYSIS
Perception of Value Via Accelerated Schedule (1)
Start With an Ordinary Schedule
Revenue
Baseline NPV
FEL Investment
FID
Capital Expenditure
Time
Net Revenue
Cumulative Discounted
Cash Flow
Cost
CONFIDENTIAL UIBC 2012 10 INDEPENDENT PROJECT ANALYSIS
Perception of Value Via Accelerated Schedule (2)
Accelerate Time to First Oil Through Fast-Track to FID
To achieve a Perceived
faster schedule, NPV Gain
it is easier to
accelerate the
decision to FID
FID
than it is to
accelerate
execution the
fast-track
project
Expectation is that
capital costs and net
revenue are simply
shifted to the left and
on a discounted basis,
this leads to a higher
NPV
CONFIDENTIAL UIBC 2012 11 INDEPENDENT PROJECT ANALYSIS
Typical Fast-Track Project
Generalized Anonymous Real-Life Example
Development of fast-track offshore oil field Rapide
Example is intentionally obfuscated, but similar to several
projects in IPA database
Project Estimate at Benchmark Index at
FID FID
Facilities CAPEX US$2,500 million 1.05
Drilling CAPEX US$1,000 million 1.05
Facilities Schedule 30 months 0.80
Drilling Schedule 1,000 days 0.95
Resource Promise
250 100 percent
Estimate (MMBOE)
Planned Production
100 100 percent
Plateau (KBOEPD)
CONFIDENTIAL UIBC 2012 12 INDEPENDENT PROJECT ANALYSIS
Pathways To Success
Appraisal and Reservoir FEL Are Reflected In All Outcomes
Facilities Facilities
Appraisal
FEL Outcomes
Reservoir Not Integrated Asset
FEL Asset Team Outcomes
Wells
Wells FEL Outcomes
ASSET NPV
CONFIDENTIAL UIBC 2012 13 INDEPENDENT PROJECT ANALYSIS
Appraisal Affects All Subsequent Drivers
Fast-Track Has Implications for All Outcomes
Appraisal Reservoir FEL Facilities FEL
Effectiveness Index
4.00
Fair
Conservative
Best
4.50 Pr < 0.001
Poor
5.00
Good
5.50
Moderate
Pr < 0.001
Wells FEL
6.00
Fair
Good
6.50
Aggressive
7.00 Pr < 0.001 Fair
Poor
7.50 Poor
CONFIDENTIAL UIBC 2012 14 INDEPENDENT PROJECT ANALYSIS
Project Definition Drives Outcomes
Subsurface Definition Indicates Risk to Project
Appraisal: Facilities
Moderate/ Outcomes
Facilities Facilities
Aggressive CI = 1.01
FEL Outcomes
SI = 0.83
Growth: 4%
Slip: 3%
Reservoir CA = 1.05
Asset
SA = 0.80
FEL Asset
Outcomes
Fair or CA = 1.05 Outcomes
PDA = 65%
worse SA = 0.95 RPE = 20%
Wells
Outcomes
Wells
CI = 2.10
Wells FEL Outcomes
SI = 1.90
Growth: 100%
Slip: 100%
Target Setting
Risk <<< Less ----- More >>>
Results <<< Better ----- Worse >>>
Low Medium High
CA/CI = Cost Aggressiveness/Index PDA = Production Attainment
SA/SI = Schedule Aggressiveness/Index RPE = Change in RPE
CONFIDENTIAL UIBC 2012 15 INDEPENDENT PROJECT ANALYSIS
Illustrated Economic Erosion (1)
Industry Average Cash Flow Stream
Industry NPV10 = US$1,991 million
CONFIDENTIAL UIBC 2012 16 INDEPENDENT PROJECT ANALYSIS
Illustrated Economic Erosion (2)
Project Initial Expected Cash Flow Stream
NPV10 = US$2,111 million
CONFIDENTIAL UIBC 2012 17 INDEPENDENT PROJECT ANALYSIS
Illustrated Economic Erosion (3)
Effect of Facilities Cost Growth and Schedule Slip
NPV10 = US$2,145 million
CONFIDENTIAL UIBC 2012 18 INDEPENDENT PROJECT ANALYSIS
Illustrated Economic Erosion (4)
Additional Effect of Production Attainment
NPV10 = US$1,059 million
CONFIDENTIAL UIBC 2012 19 INDEPENDENT PROJECT ANALYSIS
Illustrated Economic Erosion (5)
Additional Effect of Resource Promise Estimate Deviation
NPV10 = US$683 million
CONFIDENTIAL UIBC 2012 20 INDEPENDENT PROJECT ANALYSIS
Illustrated Economic Erosion (6)
Additional Effect of Wells Cost Growth and Schedule Slip
NPV10 = US$381 million
CONFIDENTIAL UIBC 2012 21 INDEPENDENT PROJECT ANALYSIS
Misguided Tradeoffs
NPV Impact From Sacrifice Outweighs Perceived Gain
Common Problem: When one or more of the targets is set so
aggressively that the project is likely destined to
be a major disappointment
Quality is sacrificed
for low cost
Safety is sacrificed Cost is sacrificed
for speed for fast schedules
Quality is sacrificed
for fast schedules
CONFIDENTIAL UIBC 2012 22 INDEPENDENT PROJECT ANALYSIS
Outline
The Case for Improving Decision Making
Economic Folly of Schedule Aggression
Conclusions and Path Forward
CONFIDENTIAL UIBC 2012 23 INDEPENDENT PROJECT ANALYSIS
Alternative Hypothesis
Obsession With Schedule Erodes NPV
Roughly half of E&P projects are schedule driven and
this focus is established very early in the planning
phase
The emphasis on schedule limits FEL, which then has
a cascading effect across all subsequent project
phases
The problem is failing to recognize the magnitude of
the cascading effect that these early decisions have
on outcomes
Project framing does not properly account for trade-offs
between cost, schedule, and operability
Leads to suboptimal NPV outcomes
CONFIDENTIAL UIBC 2012 24 INDEPENDENT PROJECT ANALYSIS
ABC of Schedule-Driven NPV Loss
Schedule Focus Adversely Affects All Outcomes
Antecedent Behaviors Consequences
Compress All Outcomes
Definition Phase Affected By Poor
Definition
Less Complete
Schedule Reservoir Evaluation Production Shortfall
Parallel Subsurface Reserve Downgrade
Driven and Project Planning
Cost Growth
Poor Planning and
FEL Schedule Slip
Aggressive Significant
Schedule Targets Destruction of
Unrealistic Estimates Planned NPV
CONFIDENTIAL UIBC 2012 25 INDEPENDENT PROJECT ANALYSIS
Compression of FEL Driven by Business
Target Date for Startup Is Often to Blame
Project teams get cornered into compressing FEL to
meet business objective of early first hydrocarbons
Subsurface definition FEL
FEL Duration
Facilities FEL
Project execution Target Startup
Start FEL 2
Sequential
Phased
Overlapped
CONFIDENTIAL UIBC 2012 26 INDEPENDENT PROJECT ANALYSIS
The Economic Folly of Chasing Schedule
Chasing schedule is commonly done under the
impression that NPV is enhanced
Implicit assumption is that any negative outcomes
that result from shorter appraisal and FEL duration
are outweighed by the accelerated first oil date
Potential cost growth and schedule slip will have much
smaller effect on NPV compared to gain from schedule
Disappointment in RPE and production attainment is rarely (if
ever) considered
Combined effect of actual cost, schedule, and
production outcomes on NPV is more devastating
than commonly believed
This is a non-obvious conclusion
CONFIDENTIAL UIBC 2012 30 INDEPENDENT PROJECT ANALYSIS
How to Avoid the Schedule Trap
Can We Go Fast Without Eroding NPV?
Schedule itself is not the culprit for the poor
economic results; practices are to blame
Schedule aggressiveness can lead to a cascading
series of events that ultimately destroys NPV
Aggressive Compressed Reservoir
Poor Outcomes
Schedule- FEL Phase & Uncertainty &
Lead To NPV
Driven Aggressive Unclear
Erosion
Project Appraisal Trade-offs
CONFIDENTIAL UIBC 2012 31 INDEPENDENT PROJECT ANALYSIS
Breakdown of Outcomes
But Trades Fast FEL for Poor Outcomes
PRODUCTION
ATTAINMENT Overlapped
0.60
Schedule-Driven
Sequential or
0.70 Phased
0.80
FACILITY
WELLS COST
COST 0.90
20% 20%
GROWTH
GROWTH 15% 15%
10% 10%
5% 1.00 5%
0% 0%
0.50 0%
0.60 5%
0.70 10%
0.80 15%
0.90 20%
FEL DURATION
SCHEDULE SLIP
INDEX
CONFIDENTIAL UIBC 2012 33 INDEPENDENT PROJECT ANALYSIS
Recipe for Value Preservation
Go Slow to Go Fast
A solid foundation of basic data and clear project
objectives are the necessary starting point
Good project definition leads to a cascading series of
events that ultimately preserves NPV
Set Realistic
Completed Stable Project
Mitigation Of Cost & Schedule
Subsurface During
Risks During Targets Based
Definition & Execution
FEL Phase On Project
Clear Trade-offs Preserves NPV
Definition
CONFIDENTIAL UIBC 2012 35 INDEPENDENT PROJECT ANALYSIS
Outline
The Case for Improving Decision Making
Economic Folly of Schedule Aggression
Conclusions and Path Forward
CONFIDENTIAL UIBC 2012 39 INDEPENDENT PROJECT ANALYSIS
Fact or Fiction?
Upstream Developments - Speed is of the essence.
Fact Fiction
Some projects have Chasing a fast project
delivered fast schedules schedule can lead to
with no loss of NPV unintended consequences
A fast schedule is the result A significant proportion of
of good project definition NPV is eroded if the project
Faster time to first oil leads does not meet all targets
to an increase in NPV Poorly defined projects with
aggressive schedule targets
have highly unpredictable
NPV outcomes
CONFIDENTIAL UIBC 2012 40 INDEPENDENT PROJECT ANALYSIS
Emphasise FEL, Not Schedule
The Tail Cannot Wag the Dog
Good practices lead to successful economic
outcomes irrespective of whether or not a project is
schedule driven
The prize for well-defined projects is competitive
targets and preservation of expected NPV
Achieving Best Practical project definition requires
both time and effort; neither are made reliably
available to schedule-driven projects by business
The most challenging aspect of delivering
a successful schedule-driven project is
NOT focusing on the schedule
CONFIDENTIAL UIBC 2012 41 INDEPENDENT PROJECT ANALYSIS
Good FEL Preserves Economic Value
It is possible to achieve a successful schedule-driven
project with an aggressive schedule target
Well-defined projects with good integrated schedule
and comprehensive project execution planning are
the differentiator for success
Poorly planned projects suffer larger NPV loss on
average, but are also more unpredictable
Without Good or better FEL, a project is
potentially giving up over half of its NPV
CONFIDENTIAL UIBC 2012 42 INDEPENDENT PROJECT ANALYSIS
Making Good Decisions Is a
Complex Optimisation Problem
There is a complex relationship between project
outcomes and project drivers
An economic simulator backed by strong data
relating drivers to outcomes is needed to reveal to
true effect of project decisions
Provides insight into the most appropriate balance between
cost, schedule, and production attainment
Indicates the possible unintended consequences of any
particular decision
The true economic impact of a project
decision is non-obvious and can lead to
unintended consequences
CONFIDENTIAL UIBC 2012 43 INDEPENDENT PROJECT ANALYSIS
Thank You!
