BUSINESS SIDE OF GEOLOGY
By PETER R. ROSE
It's What You INspect, Not EXpect
This month's column features the thoughts and observations of Gary P. Citron, a 20-year geophysicist who specializes in the business side of geology. Before joining Rose & Associates in 1999, Gary worked with Amoco's International Risk Implementation Team for four years.
-- Pete Rose
By GARY P. CITRON
Many companies now recognize the need for a consistent, systematic process for evaluating all their E&P opportunities.
Often, implementing such a process represents significant organizational change. It represents management's tacit recognition that such a process can improve geotechnical performance, make E&P more efficient, and benefit the stockholder.
But such change can be threatening to both technical staff and management, who may have relied in the past on their intuition, salesmanship or command and control decision-making styles. They may see all kinds of "shadows" -- change is painful!
This column summarizes key steps necessary to bring about progressive change through sound portfolio management, which requires the consistent, unbiased and systematic (i.e. unbiased) characterization of all E&P opportunities competing for corporate funds, i.e., optimized allocation of capital.
The performance of the E&P portfolio becomes the overriding concern, rather than whether "your prospect" gets drilled!
Sound leadership facilitates progressive change, helping organizations compete more effectively.
Leaders give meaning to implementing risk assessment by stating their determination that their company will pursue this path. They reinforce those statements with behaviors that implement changes to the organization and the capital allocation process, so all projects compete for funds on an equal basis.
Without clear leadership commitment, the project evaluation process can be easily subverted or even avoided without consequence.
Professional Staff, Champions and Process Ownership.
Systematic assessment of investment opportunities requires functional linkage among the company's leadership, information systems and, of course, business results.
With such profound linkages, organizations that charge individuals with clear accountability to implement and sustain this key work process generate more informed decision making, more predictable results and, typically, greater profits.
Champions are people who, whether delegated or not, help implement such changes in a positive way. As change agents, they demonstrate the behaviors necessary to maintain process integrity. They facilitate the process on a local level.
They embody professionalism and become role models.
Standards and Consistency.
Systematic assessment demands standards for measurement, chance estimation, valuation methods and communication.
Definitions and conventions are often established in writing -- based on statistics and probability -- that cover estimating prospect reserves distributions and chance factors under uncertainty. Once these systems (typically for chance factor assignment and economic evaluations) are established, professional staff can develop and communicate their understanding of various potential size outcomes and their respective likelihoods, from whatever geologic province the drilling opportunity derives.
Training of both staff and management, however, is essential to develop the necessary standards. Peer reviews, risk normalization teams and company-consistent software tools often help maintain and test for consistency in everyday usage.
So the relevance of the risk assessment process becomes clear in a broader perspective: To quantify and communicate the results of geotechnical staff's primary role -- generation and selection of E&P opportunities that create the best chance for enhancing corporate value.
Central Coordination for Portfolio Management.
As the systematic process of prospect assessment proceeds, clear, consistent outputs emerge that form the building blocks of the E&P inventory. Management can then apply the appropriate economic hurdles to pick from the inventory those prospects for a portfolio that best implements their strategy. With consistency and later calibration, the inventory then becomes a useful predictor of future portfolio performance.
Portfolio management requires choices and actions that best execute company strategy.
As companies take the time (or build the courage) to compare their geotechnical predictions against actual results, future estimates become calibrated -- and usually, with proper feedback and communication, improve.
Considering that most exploration programs contain more dry holes than discoveries, there is a vast amount of information that can be gleaned from studying failure patterns. Sharing these patterns among corporate staff, and comparing forecast versus actual results, reveals the degree of estimation bias and helps focus future exploration technology spending.
Note that adult learning is often predicated on feedback from mistakes: "We are what we inspect, not what we expect."
Our experience has been that firm, comprehensive implementation of systematic procedures for measuring projects is the key to real, permanent improvement in E&P performance.