Burlington Resources
Canada-MIT Alliance
By: Chen-Wen Huang
& David Miller
Client: Burlington Resources Canada
„
BRC is headquartered in Calgary with a staff of 700 employees. It is one of
the major producers in the Western Canadian Sedimentary Basin, which
provides about 15% of North America’s natural gas.
„
Major acquisition in 01 and 02, 800 wells planned for 03, and 5%~8%
growth rate target.
„
The basin is maturing, which means declining reserve. Yet profitability is
still healthy due to high gas prices and improving technology
„
Q: proactive measures that can help them weather possible
limitation to growth in the near future
(Courtesy of Burlington Company. Used with permission.)
Our Contacts
„
The People
„
„
„
„
„
„
„
George: Consultant and system dynamicist
Roy:
Manager, Reserves
Jeff:
Head of Planning
Colleen: Commercial Analyst
Rob:
Head of Engineering
Tom:
Management Team
The Process
„
Weekly conference call, along with web-based conferencing
(Courtesy of Burlington Company. Used with permission.)
The Most Valuable Pieces of Information
BRC walks away with:
„
To increase the number of licenses for
drilling, you need to apply for fewer
licenses.
„
The more months of inventory you try to
create, the fewer resources you need to
do so.
What are they afraid of?
Fear
F&D Costs
Revised
Hope
“Don't see fear really happening … WCSB
still has ‘a sh*tload’ of gas economically
recoverable (90 Trillion Cubic Ft).
(Courtesy of Burlington Company. Used with permission.)
But, how hard will it be to obtain
licenses to drill?
BRC makes mistakes and
increased barriers erode
competitive advantage
Fear
Hope
Expect
Barriers to Development
(e.g. effort per well to get license)
BRC continues to follow
industry average
1950
2004
BRC substantially
outperforms industry
2020
More or Better?
„
„
„
Burlington has $15+ Million to invest in “improvement
activities”
„ Where/how to invest it?
Choices:
„ Opportunity DevelopmentÆgreater inventory of
potential sites ready for license application
„ Process ImprovementÆbetter internal process for
license application
Which would lead to lower Barrier to Development?
(reduced effort per well to receive license)
(Courtesy of Burlington Company. Used with permission.)
Loop Description of the Problem
Rig-Ready Shortage
-
++
Desired
Application Rate
R
error delaying
approval
Resource
Capacity
--
Rig-Ready
Inventory
-
-
++
-
Desired Resource
Utilization
Licensing Time
+
R
+
error reducing
capacity
+
+ Error Rate
-
Error Count
+
+
Policy lever: ‘Diligence’
„
First discussed in detail during 6th week
„
„
„
“Each non-diligence increases enforcement
regulation”
“As you exceed company’s capacity, errors increase”
‘Diligence’ is about quality over quantity
„
„
Taking more time to do environmental studies
Working slower, but better
Loop Description of Strategy #1:
Rig-Ready Shortage
-
++
Desired
Application Rate
R
error delaying
approval
Resource
Capacity
++
-
Rig-Ready
Inventory
-
-
Desired Resource
- - Utilization
Licensing Time
-++
R
error reducing
capacity
Diligence
--
++
Error Count
Error Rate
+
+
++
-
Reputation
Seasonality in Drilling Schedule
„
3 month
inventory
monthly
drilling
schedule
500
150
400
w ells
wells
300
100
200
50
100
00
JanFeb
FebMarMar
Oct Dec
Nov Dec
Jan
AprApr
MayMay
Jun Jun
Jul Jul
Aug Aug
Sep Sep
Oct Nov
„
The number of wells
drilled depends strongly
on season. (ground
condition, soil condition,
environmental
regulations)
This translates to
fluctuation in the RigReady Inventory
Loop Description of Strategy #2:
Desired
Rig-Ready
Inventory
Time to
fulfill
shortage
+
--
++
Rig-Ready
Shortage
+
Desired
Application Rate
License
Expiration
+
-
R
error delaying
approval
Resource
Capacity
-
Rig-Ready
Inventory
-
+
Desired Resource
Utilization
Licensing T ime
+
R
-
error reducing
capacity
Diligence
-
+
Error Count
Error Rate
+
+
Reputation
BRC Takes the Advice to Heart:
„
“Never, ever, ever decrease your diligence, esp.
when under pressure”
„
“Appropriate for licensing group to have rules
oriented culture”
„
“Have to be very cognizant of forward look to get
inventory where you want it”
„
“I want to go show this to x in service”
Consulting Process:
Standard Method
Standard Method
Standard Method
Standard Method
Standard Method
Standard Method
Standard Method
Standard Method
Standard Method
Standard Method
Standard Method
Standard Method
Standard Method
Standard Method
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·
·
Reserve Distribution (over time)
Oil Company Profits
Commodity Price
Production Decline
Royalties
Drilling cost per meter
Completion Technologies
Drilling Technology
Seismic Technique
Visualization Technologies
Proven Reserves
Drilling Rig Availability
Gas Storage Potential
Transportation Cost
Pipeline Capacity
Infrastructure Cost over time
Infrastructure Density
Environmental Considerations
Public Opinion
Access Difficulty
Approval Time
Price of byproducts
Kyoto
Federal & Provincial Politics
Carbon Taxes
Tax incentives
Alternate Methane Sources
US/Can Exchange Rate
US Protectionism
Demand for Natural Gas
Seasonality
Cost of Substitutes
Geographical Distribution of remote reserves
Concentration of mineral rights
Industry concentration
Area concentration
Explore vs.. Harvest mentality
Rate of Acquisition
Finding & Development Cost
Cost of LNG
M
e
r
o
a
h
t
n
e
n
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Capital Stock turnover
Climate Change
Market perception
Skilled labour supply
Public Opinion (for investment)
Resources for R&D
Resources for Marketing
Resources for…..
Regulatory overhead (&oversight)
Terrorism
Alternate Energy supply & cost
Non-hydrocarbon energy sources
Conservationism
Price volatility
Deregulation
Basin connectivity
Switching Cost
Diversion of Natural Gas from Market to Oil Production
Energy Efficiency Technologies
Public expectation of comfort
Geopolitical forces
Cost of Mineral Rights
Cost of finding reserves vs. buying companies
Barriers to Development
Global Impact
Cost of Steel
Cost of waste disposal
Water Consumption
Process Efficiency
General & Administrative Costs
Share Price
Cost of Capital
Company Revenue
Company Profit
ROCE
Corporate Structure
Nationalism
Security of Supply
Market share of Natural Gas for Energy vs.. Petrochem feedstock
Fuel Switching
g
u
o
a
v
h
b
a
ri
…
s
le
The Ever-Evolving Reference Mode—modification
made after tracing the causal loops constructed
Feb 25
Profits
Expected
Profits have been healthy,
but cyclical due to
commodity cycle
1950
March 15
Profits spike due to short term
high prices, then a profitability
squeeze caused by demand
decline and high F&D costs
2004
2020
Strategic investments
secure high & relatively
stable profits
BRC Profits from
WCSB
Hope
Expected
BRC in WCSB and its
predecessors POCO and Cdn
Hunter
BRC suffers setbacks, falls
behind local competitors,
exits WCSB
Fear
2004
2020
Big Servings of Spaghetti !!!
demand
Typefor
ofgas
Development+
Cost of providing
substitutes
-
(e.g.
Sour Gas)
Activity
Level
demand for
Demand/Production
services
+
Required
+
-
Oilco employment
Infrastructure
Development
demand
econ
Oilco Lobbying
+ Cost for services
-
Company Image
Perceived impact on
people & environment
Substitute
profusion
Substitutes for gas
+
-
Capital Generation
AB Economic
Activity
Political Support
+
Appetite for risk
supply
econ
Basin Maturity
Regulations
(environmental)
Investor
Oilco
Operating
Perception
Diligence
Royalty Revenues
Basin Maturity 0
+
+
Number
of
Supply
of gas
reserves found
Profit &
Cost
+
Profits
-
Profits 0
- Development
General Economic
Activity
+
Delays
Finding
- Gov't Incentives
Cost
+ D&A Costs
accepta
+
nce
Finding
Cost
+ 0
-+
+ Costs
+
Degree of
Psychological
+
Regulation
cost
Acceptance of higher
+
accept
ance
costs
Unit Costs
PsychologicalIndividual Company
+ Operational
Regulatory Scrutiny
Acceptance
of higher
+
costs 0Activity
-
Demand for Gas
Weather
+
Finding Cost
cost
Rate of
Development
Declining
Resource
+
Oilco Costs
+ Technology
advances
T ech to
the
rescue
Technology/
+
Efficiency
Gas Prices
Capacity
Utilization
Political
Support.
B - Prof
Avg experience of
it balan
workers
cing
Profit
balanci
ng
-Accident rate
Total Costs 0
Homemade Remedy to Complexity—Rank the
Importance of the Sub-Loops Bringing the Clients Back to
Focus
Technology to the rescue
Investor Perception
Reinforcing Costs
Psychological acceptance of higher costs
Activity Level
+
Demand/Production
Appetite for
riskDemand/Production
4 +
Required
Required 1
Technology/
Efficiency
Capacity
Utilization
Profits 0 3
Capital Generation
-
Appetite for risk
Activity Level 1 +
Technology/Efficiency
1
Investor
Perception
Capital
Generation 1
Basin Maturity 0
Number of
reserves found
+
+ of
Number
reserves found 1
R
Finding Cost 0 1
+
Finding Cost 0
cost
Technology/Efficiency
4
Profits 0
-
+
Raccept
ance
+
+
cost
accept
ance
+
Psychological
Acceptance of higher
costs 0
Psychological
Finding Acceptance of higher
Cost costs 0 1
B - Prof
it balan
cing
Finding Cost 0 2
-
+
Total Costs 0 4
Total Costs 0
Investor
Perception 1
-
10
8
8
6
9
9
7
6
9
9
8
7
Rating
28
26
23
19
Investor Perception reinforcing costs
Technology to the rescue
Basin Maturity
Profit Balancing Costs
Declining Area Dynamics
Activity Level
Psych acceptance of higher costs
Capacity Utilization Balancing Costs
5
7
7
6
9
8
9
7
8
10
5
8
6
9
7
7
5
10
6
8
8
7
5
8
27
24
23
22
22
21
18
18
Royalty Revenues
Environmental Impact
Economic Activity
Oilco Costs
Regulatory Scrutiny
Operating Diligence
8
8
7
6
6
8
8
9
7
5
8
7
7
6
10
5
7
8
24
23
23
23
21
16
Reference Mode
Profits & Costs
Profits & Costs
Profits & Costs
Profits & Costs
Sub-Loop
Supply and Demand
Effects of the supply and demand
Substitute Profusion
Operational Costs
Finding
Finding
Finding
Finding
Finding
Finding
Finding
Finding
Political
Political
Political
Political
Political
Political
Costs
Costs
Costs
Costs
Costs
Costs
Costs
Costs
Support
Support
Support
Support
Support
Support
George
Roy
Jeff
ct
s
of
th
e
Su
bs
d
an
d
an
tit
u
pl
y
pp
ly
su
p
Su
de
De
m
an
d
ve
st
o
O
te ma
n
pe Pr o d
f
r
rP
us
at
io
er
na ion
ce
lC
pt
io
os
Te n r
ts
c h ei n
no
fo
r
lo
gy cing
to
c
th ost
e
s
Ba r e
Pr
s
of
s
c
De it B in M ue
al
cli
at
a
ni
ur
Ps
ng nc i
it y
n
yc
g
Ar
Co
Ca h a
ea
s
c
pa
D
yn ts
c i ce p
ty
a
ta
nc A ct mic
U
tili
ivi
e
za
ty s
of
tio
Le
hi
g
n
ve
B a he
l
rc
la
os
nc
ts
in
g
Co
st
Ro
s
y
a
En
lt y
vir
on Re v
m
en
e
E c nta ues
l
on
om Imp
ac
ic
Ac t
tiv
Re
O
gu ilco ity
la
C
to
os
O
pe ry
t
Sc s
ra
t in
ru
ti
g
Di ny
li g
en
ce
In
Ef
fe
Sub-Loop Rankings
29
27
Combined
Ranking
25
23
21
19
17
15
It became clear that our clients had their focus on factors which they
could not control; this brought everyone’s attention back to relevant
AND controllable policy levers against errors !!!
We Learned from the Client Reception of the
Different Generations of Models that…
„
Model need not reflect operational details of
client. In fact, our clients resisted model version
1.0 initially due to too much operational detail.
„
At the end, we had to remind the clients that the
model is not reality and should not be used to
generate magical numbers for policy-making.
Finally…
It's hard letting go of our baby at the end!
Last but not Least…
“I would like your mailing addresses so we
can send you a small token of
appreciation.”
-George Coppus
May 12th, 2004