BUSINESS SIDE OF GEOLOGY
By PETER R. ROSE
Are They Goals -- Or Just Wishes?
From time to time, I plan to include essays from other knowledgeable folks who specialize in the business side of geology. The first "guest columnist" is Roger Holeywell, Marathon Oil Co., Houston.
-- Pete Rose
By ROGER HOLEYWELL
almost universal requirement for team leaders, exploration managers or exploration
executives is setting, tracking and fulfilling goals -- objectives that
usually relate to reserve additions and finding costs.
Too often, however, despite promising drilling portfolios and everyone's best efforts, organizations fall short, leaving only disappointment, frustration and finger pointing.
Why do good programs fail to achieve their goals?
Bad drilling outcomes, even on good prospects, are an obvious reason, but here are three other common problems that are frequently seen, but not often talked about.
Strange as it may seem, some goals aren't really meant to be taken too seriously. It is not unusual for management to propose highly ambitious "stretch" goals -- usually for inspirational purposes, or perhaps to suggest a future strategy.
This is the lowest form of goal -- the "wish" -- an objective that is only theoretically possible. Organizational problems arise only when this type of goal is mistaken as a serious, tangible objective.
The tip-off: No specific action plan is ever implemented, a tacit admission that this goal is only a pleasant pipe dream. But there is a downside -- "missing" stated goals regularly sets a bad corporate precedent.
A second, related problem in exploration is setting goals that appear to be feasible, but which, when carefully examined year-by-year, are impossible to achieve within practical resource limits.
A common example is the goal of doubling production within a certain time period -- but the additional discoveries or acquisitions required to both offset decline in present production, as well as reach the goal, are usually enormous and essentially unrealistic.
This is further aggravated when the management that set such ambitious goals doesn't also change organization, resources or behaviors.
If you keep doing what you've been doing, you'll keep getting what you've been getting.
A third common problem in E&P goal-setting is setting appropriate reserve addition targets that reflect both the potential of the program on the upside as well as responsible accountability for minimum results on the downside.
An easy and obvious approach is to simply report the sum of the net expected reserves from each prospect. The problem is that while this is technically correct, it fails to take into account the fact that almost all exploration programs have reserve distributions that inherit a high-variance, strongly asymmetrical character from the individual lognormal prospects that comprise them.
For most exploration programs the mean reserve outcome is located above the median near the 30th percentile of the distribution. Consequently, an outcome the size of the mean reserve goal would be achieved or exceeded only one or two years out of five, even if the underlying estimates were perfectly unbiased -- not a good track record for inspiring confidence (or ensuring job tenure), especially if management doesn't understand lognormality!
This is aggravated by two other factors:
Holding full working-interests in such "company-makers" may be an important element of the growth strategy of many companies, but significantly increases variance of reserves and finding cost.
The classic diversifying solution -- smaller ownership in a larger number of opportunities -- can reduce the severity of the problem, but carries its own penalties: the likelihood of having to drill some lower quality prospects, and the elevated overhead involved with finding (or selling) more deals and oversight of joint-venture activities.
Figure 1 shows that, for a fairly typical medium size independent company's balanced exploration portfolio, about 60 wells are required in order to forecast new reserves discovered with an accuracy of ±50 percent of the portfolio risked mean at 80 percent confidence.
When forecasting annual portfolio outcomes, scaling back the reserve goal, perhaps to the median reserve value, might make sense, except that the associated finding cost then appears to be unreasonably large.
Better than any single-valued exploration goal is the more forthcoming disclosure of the full range of predicted exploration program outcomes. Showing the full range of outcomes is an effective communication strategy, represents reality and does not require an unreasonable technical background to appreciate.
Most of all, it's really important that your management understand the substantial variance involved in E&P portfolio outcomes. Forewarned is forearmed!
Uncertainty in exploration results is not a defect. Effectively measuring and managing uncertainty is the heart of our business and is the source of most of the value we create.
The problem is setting goals that fail to realistically and honestly represent that uncertainty to management, shareholders and professional staff.