1999 SPE Hydrocarbon
Economics and Evaluation
Symposium
Implementing Portfolio
Management:
Issues, Insights, and Answers?
John I. Howell
Portfolio Decisions, Inc.
Roger N. Anderson Columbia Enterprise
Systems
© Portfolio Decisions, Inc. 1999
Three Issues for Consideration:
1. Why use Portfolio Management?
2. Who is the End User?
3. What are some Critical Success Factors
for Implementing Portfolio Management?
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Why Implement Portfolio Management?
Because Current Performances are all over the Map!
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
1. Why use Portfolio Management?
• Quantify volatility in performance,
• Test feasibility of strategies,
• Identify significant and detrimental
projects,
• Define unique value of investments,
• Evaluate investment options, &
• Monitor business performance.
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Do NOT use Portfolio
Management to:
• “FIND THE ANSWER”!
• Instead, use it to make better Decisions,
• and Improve the Probability of
consistently meeting your Strategic
Goals.
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
2. Who is the End User?
• Portfolio Management relies on input and
interaction with:
– Geoscientists
– Planners
-Engineers
-Portfolio Managers
• BUT, the end user is the Decision-Maker who
is responsible for managing business
performance.
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
3. What are some Critical Success
Factors?
1. Establish a Clear Portfolio Process,
2. Set Commonly understood, Clear Strategy,
3. Develop Strong Relationships among key
staff (the soft side), &
4. Always aim for High Quality Decision
Framing.
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Critical Success Factors: 1. The Process
INPUT
ANALYSIS
OUTPUT
Capture
Learnings
Strategy
SYNTHESIS
DECISION
Business
Issues
Feasibility
Analyze Scenarios
Project
Data
Efficient
Frontier
Cultural
Issues
Investment
Options
Project
Economics
Database
© Portfolio Decisions, Inc. 1999
Dallas
Decision
Feedback Loops
1998-1999 PDI
1999 SPE HEES
ã Copyright
Critical Success Factors: 2. The Strategy
800
Net Income
NCF
500
300
400
600
250
300
400
200
200
200
0
150
100
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0
50
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Production
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Expl Expense
2002
2005
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Reserves
350
2500
300
150
Capital
250
2000
200
1500
150
1000
100
50
500
50
0
0
1999 2002 2005 2008 2011
1999 2002 2005 2008 2011
© Portfolio Decisions, Inc. 1999
Dallas
0
1999 SPE HEES
1999
2002
2005
2008
2011
Strategy is how you define success (the target bars above)!
Critical Success Factors:
3. Relationships (The Soft Side)
Maps & Reservoir
Economics
Decisions
& Business
Performance
Monitoring
= Engineers and
Geo-scientists
Strategy & Goals
= The Decision-Maker
= Planning Staff &
Portfolio Manager
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Critical Success Factors:
4. Decision Framing
• … since Portfolio Management doesn’t
give THE answer, and
• … since decisions may depend on both
quantitative and subjective inputs
gathered from others (via relationships),
• How then do you put all the information
together to reach clear and consistent
decisions?
Answer: By Properly Framing the Decision
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Critical Success Factors:
4. Decision Framing
1. Clearly Define the Problem to be solved,
2. Clearly Define the Decision Criteria,
3. Generate Realistic Options, & only then,
4. Evaluate the Options relative to the Decision
Criteria, &
5. Make Decisions.
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Critical Success Factors: Decision Framing
1. Clearly Define the Problem
• Are you testing strategies, or defining/allocating
performance targets?
– Are you adjusting targets and constraints within a fixed project set?
• Are you evaluating project plans, or
investment/divestment options?
– Are you adjusting projects to meet fixed targets and constraints?
• Are you monitoring your business performance?
– Are you computing probability of meeting targets with fixed projects?
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Critical Success Factors: Decision Framing
2. Clearly Define the Decision Criteria
• Quantitative:
– Does the Investment being discussed Contribute?
– Does the Project under consideration add Value?
– Does the Project improve the Probability of meeting
performance metrics?
– How bad can “poor performance” be?
– Why is the Project Valued?
• Subjective:
– What are the implications and tradeoffs for the investment?
– What are the political/commercial impacts?
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Critical Success Factors: Decision Framing
2. Clearly Define the Decision Criteria (cont)
1000
Net Income
NCF
1000
800
Capital
800
800
600
400
600
600
400
400
200
200
0
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-400
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-600
2002
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-400
Production
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0
3000
250
2500
200
2000
150
1500
100
100
1000
50
50
500
0
0
200
150
0
1999
© Portfolio Decisions, Inc. 1999
Dallas
2002
2005
2008
2011
1999 SPE HEES
1999
2002
2005
2008
2005
2008
2011
2008
2011
Reserves
Expl Expense
300
250
2002
2011
1999
2002
2005
Critical Success Factors: Decision Framing
3. Generate Realistic Options
Does Project 16 contribute positive value, and how
much?
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Critical Success Factors: Decision Framing
4. Evaluate Options in terms of Decision
Criterion
Efficient Frontier Comparison
1200
1000
With Project 16
Original Portfolio
Risk
800
Portfolio Value
600
400
200
0
3000
3500
4000
4500
5000
5500
6000
Value
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Does Project 16 add value? How Much?
Critical Success Factors: Decision Framing
4. Evaluate Options in terms of Decision
Criterion (cont)
1
0.8
0.6
0.4
Original
w/ New
Acquisition
© Portfolio Decisions, Inc. 1999
Dallas
Reserves
Exploration Expense
Production
1
0.8
0.6
0.4
0.2
0
1
0.8
0.6
0.4
0.2
0
1
0.8
0.6
0.4
0.2
0
0.2
0
Capital
Net Cash Flow
Net Income
1
0.8
0.6
0.4
0.2
0
1999 SPE HEES
1
0.8
0.6
0.4
0.2
0
Probability of meeting performance metrics/year?
Critical Success Factors: Decision Framing
4. Evaluate Options in terms of Decision
Criterion (cont)
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
How bad can “poor performance” be?
Critical Success Factors: Decision Framing
4. Evaluate Options in terms of Decision
Criterion (cont)
Why is a project valued by the portfolio?
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Generic E&P Portfolio
Critical Success Factors: Decision Framing
5. Make the Decision
• Quantitative Factors:
– Project 16 portfolio value is $250MM in a 5.5B portfolio, +
– Project 16 reduces risk for all portfolio values, +
– Project 16 improves probability of meeting near-term NCF and
Net Income targets, BUT
– Project 16 guarantees failure to meet near term capital target,
– Project 16 inclusion reduces probability of meeting mid- and
long-term reserves and production targets.
• Subjective Factors:
– Project 16 requires we maintain operations in an area we do
not currently operate in, +
© Portfolio Decisions, Inc. 1999
1999 SPE HEES
Dallas
– Project 16 has no opportunity for expansion.
Critical Success Factors
5. Make the Decision
• Project 16 clearly adds value,
• But, current price concerns suggest income and
cash flow summaries may be optimistic,
• So, near-term improvements in income and cash
flow outweigh long-term degradation in production
and reserves, &
• Lack of expansion opportunities is overcome with
reduced dependence on exploration programs, so
• MAKE THE INVESTMENT!
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Summary:
A Perfect Implementation Environment
• Uses Portfolio Management to improve the
probability of consistently meeting your
strategic goals.
• All portfolio information comes together at
the Decision-Maker.
• Successful implementation depends upon
process, strategy, culture, and in particular,
proper decision framing.
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES
Summary:
A Perfect Implementation Environment
• A knowledgeable and engaged DecisionMaker +
• A well defined Business Strategy +
• Consistently described risk and uncertainty
for all investments, +
• A clearly defined decision process!
© Portfolio Decisions, Inc. 1999
Dallas
1999 SPE HEES