The Impact of Bias & Uncertainty on Achieving Investment Value
This presentation will describe the results of a model study of the effects of bias and uncertainties in the estimates of key value drivers, on the ability to deliver production and investment performance from typical development project portfolios. The effects of uncertainties and biases in estimates of reserves, peak rates, and capital costs were modeled for two portfolios, one “opportunity rich” and the other was “opportunity poor.” Results demonstrate that the conventional expectation of compensating uncertainties within a large portfolio is incorrect. Even moderate value driver uncertainties result in significant loss of potential asset value. This is true even when the estimates are, on average, unbiased. Introduction of systematic bias tends to increase these adverse effects.
Results of information derived from a project look-back analysis substantiated the model study. This also helped identify several particular opportunities for improving the reliability of value driver estimates for assessing future similar projects. This work was also instrumental in the development of a set of information quality metrics applicable to any set of assets with a long term development portfolio.