SPE WA Distinguished Lecturer – Creating Value from Uncertainty and Flexibility

Abstract:

An increasing number of oil & gas companies use decision analytic methods to deal with complex and uncertain decisions, but still they get consistent under-performance in typical business metrics (cost, production rates, time to start, etc… ) leading to less value than expected, or, more perniciously, than possible. Uncertainty per se is not the culprit, rather a failure to make the best decisions under uncertainty – which are often non-intuitive. The real value-destroyers are bias and failing to plan for, and exploit, the different ways reality might evolve – if you under-estimate the real uncertainty, you are likely to under-invest in managing its consequences. Making the best decisions requires an accurate assessment of uncertainty (unbiased, neither optimistic nor pessimistic) – and an unbiased approach to managing its consequences – putting as much effort on capturing upside opportunities as mitigating risks.

We often make decisions to live up to expectations rather than to live up to possibilities. Despite the ubiquity of options in the oil & gas industry, in practice these embedded options are often overlooked in the formulation and evaluation of investment opportunities, even when uncertainties are explicitly modelled. This talk will illustrate and discuss how to create value from uncertainty and flexibility by applying an option pricing methodology that explicitly focuses on upside possibilities. To properly value flexibility, we must model not only the possible future decisions, but also the information available at the time these decisions are made.

Presenter: Reidar B. Bratvold

Reidar is Professor of Petroleum Investment and Decision Analysis at the University of Stavanger. His research interests include decision analysis, project valuation, portfolio analysis, real-option valuation, and behavioural challenges in decision-making. Prior to academia, he spent 15 years in the industry in various technical and management roles. He is a co-author of the SPE book Making Good Decisions. Professor Bratvold has previously twice served as an SPE Distinguished Lecturer. He is the 2015 recipient of the North Sea Region SPE Management & Information Award and currently serves as the executive editor for the SPE Economics & Management journal.

Reidar is a Fellow of the Society of Decision Professionals and a member of the Norwegian Academy of Technological Sciences. He holds a PhD in petroleum engineering and an MSc in mathematics, both from Stanford University and has studied business and management science at INSEAD and Stanford University.

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