Maximizing the value of an unconventional development project

The Exploration and Production area of a leading oil and gas company allowed us to challenge the decisions associated with the development strategy of one of its Assets with greatest potential and highest profitability in the medium and long term. Together with a multidisciplinary team from the client, and based on Tandem’s proprietary methodologies, it was possible to identify, evaluate and quantify the value of new alternatives in different aspects of the project (drilling strategies, recovery technologies, infrastructure capacity, among others). 

The impact associated with the strengthening of key decisions was an increase of +10% in the expected NPV of the project as a whole.

Context

It is common that, in highly complex development projects, with multiple elements, and of high profitability as a whole, the uncertainties and the analysis of alternatives are simplified, since “some of high value” are quickly identified. This leads to a limited analysis of alternatives given that the business case becomes positive very quickly and therefore, there is a perception it is not necessary to explore different options.

In our client’s challenge, given the high profitability of the project, there was the possibility of a bias not to explore additional initiatives to increase the value of the project. Given the level of risk and the size of the investments associated with it, our client’s leadership sought to deepen and thoroughly explore more alternatives and ensure that the decisions to be made actually maximized the expected NPV.

Approach

The first step consisted of a granular and thorough mapping of all the elements that directly and indirectly affect the value of the project (infrastructure capacity and dates, production and decline profiles, drilling dates and times, economic variables, geological, economic, operational and executional uncertainties). Based on this mapping, the main real spaces for action and decision were determined, in order to explore options for maximizing value. 

For each of these decision spaces, the analysis of the uncertainties that affected them (e.g., thinking stochastically vs. deterministically) was delved into. Together with client teams and Tandem experts, and based on real historical information, each of them was modeled and simulated to identify their behavior and implications for decision making.

In conjunction with each of the disciplines involved in the different decision spaces, new real decision alternatives were explored, identified and quantified. The incorporation of these new alternatives implied the need to significantly strengthen the economic evaluation model, which allowed us to fully simulate all the scenarios and alternatives and evaluate the performance of the different decisions and strategies associated with the project. 

Results

This approach not only made it possible to understand which strategy provided the greatest value, but also made it possible to study each decision at stake and build an optimized strategy with a simple and compelling narrative to explain to the different stakeholders in the project. 

The result involved adjusting the decision of ~5-7 elements of the project resulting in a +10% increase in the expected NPV of the project.

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