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SIS Business Consulting Asset Portfolio Optimization (APO)

SIS Business Consulting Asset Portfolio Optimization (APO). Assess & Plan Methodology – Version 3.0 Marty Stetzer, APO Practice Leader June, 2004 - Houston. Contents An exchange of ideas…. Where APO Fits in SBC Consulting Offerings APO Business Context APO Solution

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SIS Business Consulting Asset Portfolio Optimization (APO)

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  1. SIS Business Consulting Asset Portfolio Optimization (APO) Assess & Plan Methodology – Version 3.0 Marty Stetzer, APO Practice Leader June, 2004 - Houston

  2. ContentsAn exchange of ideas… • Where APO Fits in SBC Consulting Offerings • APO Business Context • APO Solution • Conducting an Assess & Plan Engagement • Appendices: I. SLB Credentials and Case Studies II. Work Products and Deliverable Samples III. Reserves Management Initiatives (RMI) Samples IV. Best Practices V. Facilitation Hints • References (SLB and other)

  3. SBC Business Consulting Offerings Where APO Fits

  4. SBC Perspective NSA Consulting OrganizationLeadership Team Don Painter Consulting Director, NSA Marty Stetzer Asset Portfolio Optimization (APO) Denver Roopchand Health, Safety and Environmental (HSE) Bob Peterson Dynamic Drilling & Production (DPP) John Pronsky HR Mgmt / Organization Change Mgmt (HRM / OCM) Jan Erik Johannson Asset Lifecycle Mgmt (ALM) Randy Tidd Enterprise Technology Solutions (ETS)

  5. SBC NSA talent from Tier 1 firms

  6. SBC Perspective Cross-functional Integration is Essential to Unlocking Client Added Value Performance Management 1 Asset Portfolio Optimization Project Management 5 Asset Lifecycle Management Process People and Technology Reliability Management 2 Drilling Optimization 4 HSE Management 6 Production Optimization 3 HR (Workforce) Management

  7. SBC Perspective SBC Offerings Provide a Large Set of Potential Benefits to Clients • Expected return (for a $10B company) • Asset Portfolio Optimization- 10% on capital allocation – $100M • HSE- 30% on HSE related costs – $45M • HR (Technical Skills) Management and Change Management- $100M per year • Rationalize Enterprise IT Operations - 30% of IT Budget – $45M per year • Protect Corporate Assets thru lifecycle - $20M to $100M 6. Dynamic Drilling/Production; DDP/ALM CERA est. – $50M to $300M Potential Benefits 1 6 2 5 3 4 Implementation Costs

  8. Business Context Business Drivers and Challenges for APO

  9. HeadlineMajors and independents targeting exceptional but risky prospects • “New reality places premium on sound management principles and decision making fundamentals” • Rex Tillerson - ExxonMobil Upstream Profitability by Region Source: Merrill Lynch estimates

  10. 9 Increased Demand – 1.5%/yr 30 Decline in Production – 4.8%/yr 47 High risk investments and multiple options across the complete supply chain The Problem of the DecadeIntegrated industry facing very large capital commitments… World Oil Supply – Demand: A.G. Edwards (MMBOPD) 77 86 2010 2000

  11. 86 MMBOPD 9 30 47 2010 Implications for Integrated CompaniesCapital planning will take on new dimensions... Increased Demand More Refineries Decline in Production Importance of LNG Capital Discipline

  12. Capturing Uncertainty ImportantE&P decision making interrelated and complex… • Project questions • How will a new investment affect shareholder value over the next 5 or 10 years? • What impact does a major project failure have on our corporate goals and valuation? Massive Business Challenge • “Overarching task is to reduce decline in mature fields and add new supplies – many in remote, high risk areas” • Source: CERA Week 2004 - Houston • Portfolio analysis related questions • What is the probability of achieving our corporate goals if oil price drops 20%? • What investments are best to include in our portfolio if there is an decrease/increase in available funds? • Corporate strategy questions • Are all of today’s investment decisions supporting the ability of my company to meet its long-term strategic goals?

  13. Schlumberger APO Solution

  14. Set Strategy and Vision • E&P CEO • Manage the Business Reserves Mgmt Process Business Planning Process Capital Allocation Process AcquireProspect ExploreProspect AppraiseProspect DevelopProspect ProduceProspect AbandonProspect • CXO Portfolio Focus • Asset Life Cycle • APO Key Citations • Domain Expertise PDO - Oman Portfolio Analysis Shell Global Process / Platform Standardization Kerr McGee Reserve Management Benchmark Guiding Principle: Upstream Asset Life CycleMust relate key strategic processes to the business…

  15. Relating the Process to the Life CycleThis has been a real challenge for Merak teams… Ideal Solution As-Is Constrained Solution Reserves Maturity • Match to • Strategy Decision Model • Process Model • Organizational Model • Logical Business-Data Model

  16. Set Strategy and Vision • CEO • Manage the Business Asset Mgmt Process Business Planning Process Capital Allocation Process • CFO Portfolio Focus • Asset Life Cycle Research Opportunity Evaluate Opportunity Develop Opportunity Operate Abandon or Modify • Asset Portfolio Optimization (APO) • Key Citations • Domain Expertise Shell Europe Standardized & Integrated Processes Anadarko Benchmark for Project Effectiveness BG Application Across Enterprise Guiding Principle: Integrated Asset Life CycleSome slight differences exist…

  17. Capital Planning Probabilistic portfolio optimization Set strategy. Define goals, business rules and objectives to generate optimized portfolios The Merak HeritageReliable tools for uncertainty analysis from project to portfolio… Application Role Capabilities Peep Capture project uncertainty Define project outcomes using scenarios ResultsBroker Consistent probabilistic results set Standardized calculation of results using project outcomes and correlated price outcomes

  18. DTK Decision & Risk Analysis Cap Plan Volts PEEP Reserves Management Rules, Goals, Optimization for Portfolio Analysis Project Economics Decline MMRA Alliance Partner • Production forecasting • Probabilistic reserves estimation ResBro – Results Broker Standardized Result Calculations Our Domain Perspective is Invaluable AssetLeveraging Merak solution set and citations… 1 2 3 Manage the E&P business Capital Allocation Process Reserves Mgmt Process Business Planning Process Fiscal Modeling Current Merak application architecture Economic reserves

  19. Guiding Principle: Consistency Important Whatever choices are made for representing uncertainty, we need to ensure consistency in the evaluation methodologies of all projects

  20. North West Europe (6) North East Europe (2) United Kingdom (1) U.S. Lower 48 (1) North America Frontier (3) Central Asia (4) Southern Europe (4) North Africa (7) Middle East (8) South China Sea (9) West Africa (8) Southern Asia (5) Central Africa (4) South America Atlantic (9) South America Andean (8) Australasia (4) Southern Africa (6) Total: 89 models Guiding Principal: Global PerspectiveRemote prospects are the rule not the exception… • Understanding fiscal & regime modelling is the key to project forward economics

  21. Getting Started Conducting an Assess & Plan Engagement

  22. Projects Need… Domain Calgary 5 MEA 6 Consulting Modeling or Configuration ECA 3 NSA 7 Determining the right mix? APO – A Different type of ProjectSuggested team components and skills available… We Have… Experience Level 3&4 Total: 21

  23. Capability Assessment Business Case Solution Architecture Implementation Plan APO Assess & Plan OutlineFramework below identifies the key solution drivers for APO… APO Solution Components A&P Solution Outputs Improved Business Results Process 2 $ Risk External business drivers Internal business strategy E&P Portfolio Strategy Organization 3 1 Technology 4 • Regime economics • Political risk • Compliance • Technology advances • Risk reduction goals • R/P Ratio • Acquisition • Align APO strategy with overall business direction • Global in scope • Meet compliance • Inc. third parties • Reduce risk • Improve return • Improve consistency

  24. The Quick Start Template Helps rapidly identify problems and opportunities… 1 2 3 4 Strategy Process Organization Technology • Preconditions: • Business drivers • Standards • No de-configuration • business • technical • Compliance requirements • Planning process definition • Performance monitoring • at what level(s) • of what data • Business archiving • Structure • virtual asset teams • co-located asset teams • departmental silos • centralized services • Roles • titles • number of people • reporting / decision structure • responsibilities • Competency • skills assessment • Logical data structure • Tools • use of • inputs • outputs • Data storage / access • working data • archived data • Security model • Strategic drivers/goals • Regime economics • Political risk • Corporate risk tolerance • Guidelines and principles

  25. SBC Client What to do?The standard SBC workflow for Assess & Plan engagements… Assess Plan & Develop Validate Present Initialize Align Strategies List Strategies Executive Review ‘As-Is’ Processes ‘To-Be’ Processes “Target” Solution Mobilize ‘As-Is’ People & Org* ‘To-Be’ People & Org* Analyze Solution Gaps Business Case ‘As-Is’ Applications ‘To-Be’ Applications Fill / Resolve Solution Gaps How to do it? Specific APO Methodology Solution Architecture ‘As-Is’ Technologies ‘To-Be’ Technologies Architecture Capabilities Capability Assessment Plan Best Practices Gap Analysis Plan Implementation

  26. Manage organisation & people development • Implement effective communications • Build employee commitment • Assess change barriers • Manage conflicting agendas How to do it? – TogetherAPO: Assessment & Planning project, a typical route map… Assess AS IS Plan TO-BE Processes & Rules Define Solution Architecture Mobilize, set up and initiate project • Define business decision models: • R&M • E&P • Corporate • IT Cross functional work sessions to design “To Be” Level 2 processes, organization, data,& technology features • Define • process details • people requirements • technology features Define solution architecture Recommend Best Commercial Option • Evaluate • processes • decision rules • physical capabilities • External market issues • IT systems OPTION: Performance measures and methods Industry best practices & external research options Develop next stage work and timing Assess organization Assess other key client initiatives Assess adequacy of current data & systems

  27. How to go about it?Approach: Maximum employee involvement…. Validate Business Model Identify Issues Quantify Benefits • 5 Workshops • 60+ Employees Participated • Supplier-Owner-Customer • Front Line/Cross-Functional Teams • Identified 350+ Issues Select Projects

  28. Industry Gov’t. Reg Agencies Competition Strategic Direction 1.0 Crude & F/S Planning 3.0 Product Planning Marketing & Customers 5.0 Distribution Mgmt. 4.0 Product Supply & Trading 2.0 Crude & F/S Mgmt. Financial Support Transporters Business Model ExampleStarting point for project….

  29. Managing IssuesHundreds (even thousands) of issues generated… Ties to SPOT Tie to Business Model

  30. How to go about it?From model to process - concentrate on the links…

  31. Activity Wk 1 Wk 2 Wk 3 Wk 4 Wk 5 Wk 6 Wk 7 Project Mobilization Step 1 – Assess AS IS Processes & systems Step 2 – Plan for TO BE Processes Step 3 – Define Target Process & People Components Step 4 – Develop Implementation Projects Initialize Teams for Next Stage of Work How Long Does It Take? – TimelineSimilar projects have used the following activity sequence…

  32. How Do We Organize?Petrotrin example - Joint project team recommended… Active full-time participation required with Petrotrin personnel to meet project schedule Executive SponsorPetrotrin TBN SteeringCommittee Project Management Petrotrin TBN Schlumberger Business Consulting (SBC) Process TeamPetrotrin TBN Bertrand Groulx (SBC) People-Skills Team H/R – Petrotrin ColleenBurke (SLB) To be Nominated: SBC Global Subject Matter ExpertsUpstream & Downstream Planning, Portfolio Tools, Risk & Uncertainty

  33. Appendix IWhy Schlumberger Case for Change Case Studies – Keep Appropriate Schlumberger Capabilities – APO Highlights

  34. Why do this??? Typical Portfolio Management frustrations… • “Our staff is not trained to do formal risk analysis / portfolio management” • “Process is inconsistent, labor intensive and time-consuming” • “I have no easy way to update my analysis and tell if I’m on track” • “We have too many tools, nothing works together” • “Our plans always forecast tremendous growth, but we regularly fall short of our projections” • “Can’t compare my opportunities in a meaningful way” • By the time we allocate capital, our assumptions are out of date”

  35. Process and Domain Experience Exists Across the Asset Lifecycle… • Strategy • A&D • Expenditure Mgmt Target of APO Solution • Process • Workflow • Compliance • Organization • Org structure • Roles/responsibilities • Technology • Configuration • Data • Tools Percentage implemented and documented Methodology available, some documentation

  36. Extensive Credentials for Best PracticesMerak suite implementations need mined for this info… • Strengths • Deep domain knowledge in risk mitigation and uncertainty quantification • Long history of providing industry business modeling and solution • Ability to leverage the MERAK and Schlumberger brands • Customer base includes most majors, NOC and independent E&P companies • Access to senior management decision process via head of strategic planning

  37. Similar Project ExperiencePresentation of related cases important… 100 Koch Supply BP Supply Star Enterprise BP OTI Koch S&T Neste Oy Degree of Process Improvement EDF Mann Stasco 0 100 Degree of Change

  38. Why SBC – Consulting Advantage

  39. Appendix IIWork Product and Deliverable Samples Business Models Strategy – Process – Organization – Technology Other

  40. Pemex Others Experience Equiva Shell Oil Products Crude & Products Physical Trading TTTI Domestic Crude Physical Trading (30,000 Leases) Pectin Vessels Physical/Paper Cargo Trades Trading TRMI Products Exchanges STAR Products Exchanges Shell - Pemex Koch S&T Stasco OTI BPUSA Koch Supply Star Enterprise EquilonOperatingGroup MotivaOperatingGroup Stasco TOTS Sample Business ModelDetermining what’s in and out of scope…

  41. Upstream Business Process Planning Model How the Merak team sees the world…

  42. Sample Work Product Data integration with planning cycle…

  43. Corporate standard vs. Business unit autonomy • Centralized control and standardization at odds with • innovation and engineer imagination • Managing deal stream seen as a core competency • Solution framework • Balanced scorecards across organization • Stepwise rollout of desired goals over time • Unified incentives to get correct result Strategy S • Individuals inherent resistance to change • Perpetuation of established norms and practices • Existing solutions adequate, stable and cheap • User-driven solution model • Develop roles & scenarios • Get user buy-in early • Cascading teams with interactive training Process P • Diversity of needs across organization • Multiple, silo BUs (R&M, E&P, Corporate & IT) • Vocabulary and process differences across entities • User-centric implementation thinking • Deep O&G expertise across SBC Team • Use joint, cross-functional, front-line teams • Project & Change Management Organization O • Complex implementations • Many solution variables • Complex decision rules • Wide-ranging skills sets and competencies • Application, data & modeling flexibility • Stringent data standards • Utilize multiple workflows & configurations Technology T What are Critical Success Factors?Defining the 4-5 things that must go right to be effective… Complexities Example – Critical Success Factors

  44. What does client get?Typical Deliverables & Work Products… • Deliverable: Categorized business drivers along the Client portfolio • Work Product: Issues register, themes, drivers • Work Product: Summary of applicable best practices and "To-Be" key performance measures • Work product: Summary of Level 2 "to be" processes, including current & proposed owners. • Deliverable: Individual project descriptions to get from “As-Is” to a commercially effective “To Be” • Deliverable: Final management presentation. What’s next.

  45. Appendix IIIReserves Management Initiative (RMI) – May 2004Work Product and Deliverable Samples Business Case Business Models Strategy – Process – Organization – Technology Other

  46. Recent Industry Events Top of mind issues for CEOs, shareholders and regulators… Announced cuts in the estimated oil and gas reserves at Royal Dutch/Shell, El Paso and other E&P companies have raised questions. How could companies suddenly have far less potential oil and gas than initially reported? The answer is in a mixture of imprecise regulations, geological guesswork and corporate culture that go into the accounting of such reserves. NYTimes 031204

  47. Regulatory Compliance Reporting Standards & Tools • Sarbanes Oxley • Internal Auditor • Financial Disclosure • External Auditor • SEC - FAS 69 • SPE/SPEE • ASC • IASC Reserve Valuation Technical Evaluation Schlumberger Core Competency Merak Core Competency • Ryder Scott • Netherland Sewell • Gaffney Cline • Gustavason Assoc • Internal Control Experts: • Jefferson Wells • Protiviti • Exploration • Static G&G Modeling • Dynamic Reservoir Simulation • Merak Team • Volts • Phoenix, Petro-Soft • DCS capabilities • Intera heritage • Tools & Techniques • Eclipse, Petrel • Etc Reserves Management: Buckets of WorkBusiness Model – Version 1… OBJECTIVE: To help advise clients on getting a consistent and repeatable process in place to routinely and effectively meet requirements of all stakeholders across the reserves management and reporting chain…

  48. Unified Reserves Management WorkflowVersion 1.0… 1 Establish Field Production Volumes (well-by-well) Estimate Recoverable Reserves (30-40 wells) 2 • Report Reserves • Operational • Compliance 4 Potential Operational Reserves Report (3P-2P-1P) Technical Volumes (Operations) Volumes External Internal Technical Volumes (Compliance) SEC / other Guidelines SEC / other Reporting Volumes 3 Value Reserves (By project) 8 • Manage Financials • Revenue • DD & A • PPE • JVs Historic Lifting Costs Economic Volumes Pro Forma Financials Results Year One ofLong Range Plan Annual Planning Cycle 5 Develop & Document Strategy (e.g., R/P vs. Cash Flow) 6 DevelopCorporate Plan(Portfolio) • Manage Portfolio Project • AFE’s • Budget 7 Bases & Assumptions Technical Business Reporting & Compliance

  49. Schlumberger Core Competency Schlumberger Core Competency Technical Evaluation & Tools Reserves Valuation Reporting Standards & Tools Reserves Management Critical in E&PThird parties involved throughout the chain… Client Challenge: Leveraging our implementation insights to help clients with a consistent and repeatable system to meet requirements of all stakeholders across the reserves management and reporting chain… Transparent Meets Regulations Compliant

  50. Set Strategy and Vision Market Dynamics Quantification of External Drivers Piers Tonge Team • E&P CXO Processes To manage the business Reserves Mgmt Process Business Planning Process Capital Allocation Process Reserves Management Improvement (RMI) Key owner for RMI shaded in grey… CXO Management Committee(s) Match Offering to Each Key Process Owner Asset Teams Reservoir Mgrs Planning Manager Corporate Planning Manager CFO Management Committee(s) • Get More Focused: • Reserves Management Improvement (RMI) is the highest priority E&P issue • The workflows in this problem have a high degree of technical content • SLB has respected heritage and position • Tool implementations gives us credibility for our APO-SBC consulting capability • These buyers do not want to be “sold” • They want teams to work with them not for them

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