Risk assessment and portfolio management

Risk Assessment in the Context of Portfolio Management and Decision Making

Graeme SimpsonBernie Vining

Fiona Macmillan

AAPGInternational Conference and Exhibition,

Perth, November, 2006

Outline

• Role of risk and uncertainty assessment in resource classification

• Geological versus economic chance of success

• Is chance of success an uncertain variable?

• What is the impact on portfolio management and decision making?

Noble plans $300m notes offering

Risk, Uncertainty and Resources … SPE/WPC/AAPG

DiscoveredCommercial

DiscoveredSub-Commercial

Undiscovered

Reserves

1P 2P 3PProved Prov+Prob Prov+Prob+Poss

Contingent Resources

Low Best High

Prospective Resources

Low Best High

Project Status

On Production

Under Development

Planned for Development

Development Pending

Development On Hold

Development not Viable

Prospect

Lead

Play

Low

Risk

HighUncertainty

P90 P50 P10

Risk really matters …

• Jason McVean (2000) in “The Significance of Risk on Portfolio Selection”, SPE 62966, quote:

“The definition of risk can significantly affect portfolio selection.”

Risk and uncertainty are defined as …

• Risk (or, better, chance) … the probability of a discrete event occurring (and so one minus the risk is the chance that the discrete event will not happen).

• Uncertainty … the (usually continuous) range of possible outcomes if the discrete event happens.


Risk, Uncertainty and Resources … SPE/WPC/AAPG



Undiscovered

Reserves



Low Best High


Low Best High

Project Status

On Production

Under Development


Development Pending

Development On Hold


Prospect

Lead

Play

Low

Risk

HighUncertainty

P90 P50 P10

Risk and uncertainty are defined as …

• Risk (or, better, chance) … the probability of a discrete event occurring (and so one minus the risk is the chance that the discrete event will not happen).

• Uncertainty … the (usually continuous) range of possible outcomes if the discrete event happens.

• But it’s actually not quite that simple …

Figure 17, page 32, from Rose (2001)

Should risk measurement be Pg / GCoS or Pe / ECoS?

Risk and uncertainty

Hypothetical Prospect – GCoS = 30%

Sample volumes for economic analysis

Minimum Economic Volume

-100

-50

0

50

100

150

200

0 20 40 60 80 100

MMBbls

NP

Vx

Zero crossing on x-axis gives Minimum Economic Volume

Portion of curve above Minimum Economic Volume gives ECoS

ECoS = 20%

So a potential source of confusion is …

• A “discrete event” can be the achievement of at least a certain value on a continuous distribution


Risk, Uncertainty and Resources … GCoS



Undiscovered

Reserves



Low Best High


Low Best High

Project Status

On Production

Under Development


Development Pending

Development On Hold


Prospect

Lead

Play

Low

Risk

HighUncertainty

P90 P50 P10

Approx GCoS %

100

100

100

100

100

100

10-50

0-15

N/A




Undiscovered

Reserves



Low Best High


Low Best High

Project Status

On Production

Under Development


Development Pending

Development On Hold


Prospect

Lead

Play

Low

Risk

HighUncertainty

P90 P50 P10

Approx ECoS %

100

100

90-100

50-95

20-80

0-30

5-25

0-10

N/A

Risk, Uncertainty and Resources … ECoS




Undiscovered

Reserves



Low Best High


Low Best High

Project Status

On Production

Under Development


Development Pending

Development On Hold


Prospect

Lead

Play

Low

Risk

HighUncertainty

P90 P50 P10

Risk, Uncertainty and Resources …

CoD

GCoS

ECoS

Is “Chance of Success” an uncertain variable?

• Yes, but does it matter?

• No, if uncertainty is symmetrical, for the distribution acts as if it is the mean, and the mean = the most likely (the mode)

• Maybe GCoS estimates ought to have symmetric uncertainty ranges, so using the most likely estimate is fine

• But ECoS is a function of economic assessment, that is multiplicative calculations involving independent variables

• So the Central Limit Theorem suggests uncertainty in ECoS should tend towards being lognormally (i.e. asymmetrically) distributed

• So the most likely does not equal the mean, and hence the most likely deterministic and the probabilistic methods give different results

Hypothetical Case

Deterministic GCoS = 40%

Probabilistic Symmetrical GCoS ML = 40%

Probabilistic AsymmetricalGCoS ML = 40%

Percentiles: Forecast valuesP100 0.00P90 0.00P80 0.00P70 0.00P60 0.00P50 0.00P40 0.00P30 217.22P20 245.51P10 276.26P0 505.38



Figure 17, page 32, from Rose (2001)

Should risk measurement be Pg / GCoS or Pe / ECoS?

Risk and uncertainty

Fixed, binary event

Floating, uncertain event

Alternative Definitions …

• GCoS is the probability of a Prospective Resource maturing into a Contingent Resource

• ECoS is the probability of a Prospective Resource maturing into a Reserve

• And the chance of a Contingent Resource maturing into a Reserve is usually less than 100%. We call this the Chance of Development, CoD

And the impact on Portfolio Management and Decision Making is …

• To optimise on discovered volumes, use GCoS

• To optimise on economic volumes, use ECoS / CoD

• To optimise on value, use ECoS / CoD

• When using ECoS / CoD, take the mean of the distribution, not the most likely, or perform the calculation probabilistically, using the whole distribution

Thank you … questions?

Back-up Slides

Maximise value of a portfolio of assets by:

Optimising, relative to goals and constraints, in terms of:

– Asset content and timing

– Identification, by product type, portfolio performance, including resource maturation

Hence identify options and opportunities for improving resource management performance

Objective of Resource Management is to …Objective of Resource Management is to …

Portfolio Management Schematic

Robust, coeval,Robust, coeval,consistent,consistent,technical & technical & commercialcommercialanalysis, analysis, on asset by on asset by asset basis:asset basis:

VolumetricsVolumetricsDev PlngDev PlngEconomicsEconomicsRisk & UncertaintyRisk & UncertaintyOptionsOptionsStandalone valueStandalone value

Full underFull under--standing and standing and clear expression clear expression of organisation’sof organisation’sgoals, objectives, goals, objectives, targets and targets and constraints:constraints:

MetricsMetricsRisk measuresRisk measures

Generation Generation and analysisand analysisof possibleof possibleportfolios:portfolios:

OptimisationOptimisationIncrementalIncrementalvalue/riskvalue/risk

Incorporation of Incorporation of insights gained intoinsights gained intoportfolio managementportfolio managementstrategy formulation strategy formulation and implementation:and implementation:

Qualitative inputsQualitative inputsStrategic thinkingStrategic thinking

1 2 3 4

Standalone asset valuation

PortfolioDecision making/

Strategy formulation

Analysis

GCoS calculation …

Reservoir

Min ML Max

0.7 0.8 0.9

Source 0.4 0.5 0.6

Timing 0.3 0.4 0.5

Trap and seal 0.7 0.8 0.9

Multiply, to get ….

GCoS distribution …

Best fit is an asymmetric Beta distribution

Risk assessment and portfolio management

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