Illustration by Rusty Johnson
folks who are dedicated to the status quo, or to a particular philosophy
or procedure, may come up with perverse interpretations of data
that challenge their existing reference-frames.
Like the prohibitionist preacher
who was holding forth one afternoon out in front of the local saloon,
inveighing mightily on the evils of Demon Rum. A small crowd of
passers-by had gathered (including a few regular clients of the
aforementioned drinking establishment), and the preacher was bent
on proving to them the destructive consequences of liquor.
The preacher held up a clear
glass of water and dropped an active earthworm into it, pointing
out how the submerged worm continued to thrive vigorously. Then
he held up a glass of whiskey, into which he dropped the wriggling
earthworm, which promptly underwent three convulsive spasms, then
sank to the bottom of the glass, paralyzed.
Triumphantly, he asked the assembled,
"Now, brethren, what does that prove?"
Whereupon the town drunk replied
from the front row:
"Proves that if you drink whiskey
you won't get worms!"
Some years ago, I was introducing
the concepts and procedures of exploration risk analysis to an in-house
class of geoscientists and engineers in Lafayette, La. About a week
later, one of the class members called me on the telephone.
He was complimentary about the
course and how much he had learned, even though he openly confessed
to being a skeptic. Then he said, "You know, I applied your methods
to about half a dozen of my prospects, and I conclude that, just
as I had suspected, the concepts just don't work here in South Louisiana."
I said, "Why do you say that?"
"Because none of my prospects
ended up with a positive expected net present value!"
As diplomatically as possible,
I replied, "Well, do you suppose this could be telling you something
about them as business ventures?"
He was so personally vested in
the existing procedure that had been leading to many of his prospects
getting drilled, that he had lost sight of the fact that they were
substandard business ventures!
A well-known consultant specializing
in economics and petroleum exploitation had a similar experience:
He set up a simple process for a group of company reservoir and
production engineers by which they could compare their geotechnical
forecasts of key value-driven parameters -- such as drainage area,
net pay, average porosity, recoverable reserves, initial production
rate, drilling costs and price forecasts -- with the actual outcomes
that could be measured after drilling and completion.
The idea was to measure their
predictive ability, and calibrate it with actual results, i.e.,
to learn how to make better forecasts.
In their first trial period,
the actual outcomes showed discouragingly poor correspondence to
the geotechnical forecasts on which the projects were approved.
However, rather than accepting that their estimating skills needed
substantial improvement, their response was to challenge the comparative
They didn't want to face the
possibility that their estimating procedures had a strong over-optimistic
bias, and that routinely measuring their estimating performance
might force them to shift their priorities and modify their procedures.
Change is painful.
For a business that so highly
prizes new technology and tries aggressively to stay on the cutting
edge of new tools and concepts, it is an ongoing wonder to me that
E&P people are so entrenched with regard to their business procedures.
I attribute this to the difficulty
of measuring the true "value added" by E&P projects. Such difficulty
naturally leads to rewarding activity rather than results -- and
that leads in turn to folks focusing on business procedures rather
than what those procedures generate.
That takes us back to my November
column, discussing what incentive systems companies set up (whatever
you incent, you get more of!). When companies give bonuses based
on overall company performance, it encourages cooperation within
and between different business units and departments. Professional
employees want the firm to invest in the best projects, no matter
where they're located. Professional staffs are naturally interested
in results, not just activity.
When you reward folks just for
getting wells drilled, it tends to lead only to a lot of uneconomic
If we really want to improve
our E&P efficiency, it means having the courage to look objectively
at real results, even though such data may indicate the need for
different procedures and priorities.
In other words, to be willing
to put aside what is familiar, and focus objectively on reality
-- and the right conclusions.
Recommended Reading: When
Genius Failed: The Rise and Fall of Long Term Capital Management,
by Roger Lowenstein, Random House, 2000.
This is a fascinating account
of the collapse of Long Term Capital Management, one of the commodity
mega-traders of the 1990s. Even though owned and managed by recognized
commodity experts, including Robert C. Merton and Myron S. Scholes,
who won the 1997 Nobel Prize in Economic Sciences for their 1973
derivation of the Black-Scholes equation to value stock options,
the hubris and greed of LTCM led to severe over-extension, consequential
collapse and eventual rescue in late 1998 by a group of major investment
banks (with the encouragement of the U.S. Federal Reserve).
Their disastrous experience was
a precursor of the Enron scandal, suggesting that some regulation
(or at least increased scrutiny) of the commodities market may be
Read it, you'll like it!