VOI: Value of Information (or Very Opaque Inferences?) Pete Naylor - - PowerPoint PPT Presentation

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VOI: Value of Information (or Very Opaque Inferences?) Pete Naylor SPE Evening Meeting, 27 November 2012 Legal notice Certain statements included in this presentation contain forward-looking information concerning BG Group plcs strategy,

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VOI: Value of Information (or Very Opaque Inferences?)

Pete Naylor

SPE Evening Meeting, 27 November 2012

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Legal notice

Certain statements included in this presentation contain forward-looking information concerning BG Group plc‟s strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors or markets in which BG Group plc operates. By their nature, forward-looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which are within BG Group plc‟s control or can be predicted by BG Group plc. Although BG Group plc believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differ materially from the guidance given in this presentation for a number of reasons. For a detailed analysis of the factors that may affect our business, financial performance or results of

  • perations, we urge you to look at the “Principal risks and uncertainties” included in the BG Group plc

Annual Report & Accounts 2011. Nothing in this presentation should be construed as a profit forecast and no part of this presentation constitutes, or shall be taken to constitute, an invitation or inducement to invest in BG Group plc or any other entity, and must not be relied upon in any way in connection with any investment decision. BG Group plc undertakes no obligation to update any forward-looking statements. No representation or warranty, express or implied, is or will be made in relation to the accuracy or completeness of the information in this presentation and no responsibility or liability is or will be accepted by BG Group plc or any of its respective subsidiaries, affiliates and associated companies (or by any of their respective officers, employees or agents) in relation to it.

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Aims of this presentation

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To provide an understanding of „value of information‟ (VOI) analysis

  • When?
  • Why?
  • How?
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SLIDE 4

Aims of this presentation

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To provide an understanding of „value of information‟ (VOI) analysis

  • When?
  • Why?
  • How?
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SLIDE 5

When might VOI analysis be valuable?

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  • Facing a number of decisions
  • Outcomes are uncertain
  • Opportunity to acquire additional information
  • Information costs money or time

Is the additional information worth the cost?

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SLIDE 6

Why might VOI analysis be valuable?

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  • The additional information might reduce future uncertainties
  • Decisions might change in the light of the new information

If the VOI analysis indicates that no decision changes, then do not waste the money & time in acquiring the new information

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SLIDE 7

Key questions

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VOI analysis can address these questions before investing in the information

  • How much does the information cost?

– Acquisition – Analysis – Delay to development

  • How reliable is the information?

– Will the measurement fail? – False results (imperfect information)

  • How useful is the information?

– How significant is the parameter(s) to be measured? – What difference will the information make?

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SLIDE 8

How do I undertake a VOI analysis?

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  • Case example

– Should an appraisal well be drilled in the North Extension? – Should the North Extension be developed?

  • A new user took < two hours to learn the software & complete this

analysis

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SLIDE 9

Influence diagram

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A useful thinking tool to assemble the „components‟ of the problem

Reserves Actual GIIP RF Actual COS

Reserves = COS * GIIP * RF

Value Chance Decision KEY

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SLIDE 10

Decision tree

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Abbreviated form of decision tree, full tree contains 2x3x3 = 18 branches

Low NPV,Reserves,PI,Capex Nominal NPV,Reserves,PI,Capex High NPV,Reserves,PI,Capex Low Nominal High RF Yes No Actual GIIP a Actual COS n

  • a

n

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SLIDE 11

Reserves (MMboe) Probability that reserves less than... D 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 10 20 30 40 50 60 70 80 90 100 110

Base case: reserves for North Extension

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Beware that this is not the basis of your business case Deterministic = 78MMboe

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Risk profile: reserves for North Extension

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Illustrates our best estimate of the range of possible reserves

Reserves (MMboe) Probability that reserves less than... D 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 10 20 30 40 50 60 70 80 90 100 110

Expected value = 40MMboe Probability of not finding hydrocarbons is (1 – 0.65) = 0.35

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SLIDE 13

Influence diagram

13 Reserves Actual GIIP RF Actual COS

Reserves = COS * GIIP * RF

Value Chance Decision KEY

A useful thinking tool to assemble the „components‟ of the problem

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Influence diagram: extended to include appraisal

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The measured information depends on the actual state of nature

Reserves Value Actual GIIP RF Actual COS Measured COS Measured GIIP Chance Initial decision Sanction develop- ment? Decision KEY

Reserves = COS * GIIP * RF

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Conditional probabilities: chance of success perfect information

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Captures the reliability of the measurement

Yes 1 No Yes Measured COS Yes No 1 No Measured COS Actual COS

.65 5 .35

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Conditional probabilities: chance of success no information

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Captures the reliability of the measurement

Yes .65 No .35 Yes Measured COS Yes .65 No .35 No Measured COS Actual COS

.65 5 .35

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SLIDE 17

Conditional probabilities: chance of success imperfect information

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Captures the reliability of the measurement

Yes .8 No .2 Yes Measured COS Yes .1 No .9 No Measured COS Actual COS

.65 5 .35

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SLIDE 18

Influence diagram: extended to include appraisal

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The measured information depends on the actual state of nature

Reserves Value Actual GIIP RF Actual COS Measured COS Measured GIIP Chance Initial decision Sanction develop- ment? Decision KEY

Reserves = COS * GIIP * RF

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Conditional probabilities: gas initially in place

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Captures the reliability of the measurement

Low .8 Nominal .15 High .05 Low Measured GIIP Low .1 Nominal .8 High .1 Nominal Measured GIIP Low .05 Nominal .15 High .8 High Measured GIIP Actual GIIP

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SLIDE 20

Decision tree

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Abbreviated form of decision tree, full tree contains 2x3x3 = 18 branches

Low NPV,Reserves,PI,Capex Nominal NPV,Reserves,PI,Capex High NPV,Reserves,PI,Capex Low Nominal High RF Yes No Actual GIIP a Actual COS n

  • n
  • a
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Decision tree: extended to include appraisal

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Captures the time order of events

Low NPV,Reserves,PI,Capex Nominal NPV,Reserves,PI,Capex High NPV,Reserves,PI,Capex Low Nominal High RF Yes No Actual GIIP Yes No a Actual COS Low Nominal High Sanction develop- ment? Yes No Measured GIIP Appraise_now Measured COS Yes No a Develop_now Sanction develop- ment? Yes No a Walk_away Sanction develop- ment? Initial decision

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Influence diagram

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The measured information depends on the actual state of nature

Reserves Value Actual GIIP RF Actual COS Measured COS Measured GIIP Chance Initial decision Sanction develop- ment? Decision KEY

Reserves = COS * GIIP * RF

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Influence diagram: extended to include economics

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Which decision options give the best NPV?

Reserves Appraisal cost Develop- ment cost NPV per boe NPV Value Actual GIIP RF Actual COS Measured COS Measured GIIP Chance Initial decision Sanction develop- ment? Decision KEY

Reserves = COS * GIIP * RF NPV = Reserves*(NPV/boe) - Capex

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NPV risk profile: develop now

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Illustrates the range of possible outcomes

Net Present Value Probability that NPV less than... Appraise_ Develop_ 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

  • 300
  • 200
  • 100

100 200 300 400 500 600 700 800

Expected value = $60MM Develop @ $300MM & find no hydrocarbons

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NPV risk profile: develop now

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Illustrates the range of possible outcomes

Net Present Value Probability that NPV less than... Appraise_ Develop_ 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

  • 300
  • 200
  • 100

100 200 300 400 500 600 700 800

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NPV risk profile: appraise, no information

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Spend the money on appraisal but get no information

Net Present Value Probability that NPV less than... Appraise_ Develop_ 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

  • 300
  • 200
  • 100

100 200 300 400 500 600 700 800

NPV decreased by $40MM

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NPV risk profile: appraise, perfect information

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Perfect information means field is only developed when there is a net gain

Net Present Value ($MM) Probability that NPV less than... Appraise_ Develop_ 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

  • 300
  • 200
  • 100

100 200 300 400 500 600 700 800

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NPV risk profile: appraise, imperfect information

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Imperfect information means that sometimes you get it wrong

Net Present Value ($MM) Probability that NPV less than... Appraise_ Develop_ 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

  • 300
  • 200
  • 100

100 200 300 400 500 600 700 800

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SLIDE 29

Actual COS [-50] Yes Actual COS [-40] No Sanction develop- ment? 30% [-40] Low Actual COS [206] Yes Actual COS [-40] No Sanction develop- ment? 41% [206] Nominal Actual COS [368] Yes Actual COS [-40] No Sanction develop- ment? 30% [368] High Measured GIIP 56% [181] Yes Measured GIIP 44% [-40] No Measured COS [83] Appraise_now Actual COS [60] Develop_now Actual COS [-0] Walk_away Initial decision [83]

Policy tree: identifies the optimum decisions

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Note the appraisal information alters the development decision

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SLIDE 30

30 Net Present Value ($MM) Probability that NPV less than... Appraise_ Develop_ 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

  • 300
  • 200
  • 100

100 200 300 400 500 600 700 82.7 59.6

NPV risk profile: appraise, imperfect information

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Development cost ($MM) Appraisal cost ($MM) 100 180 260 340 420 500 580 660 740 10 20 30 40 50 60 70 80 90 100 110 120

Two-way rainbow diagram

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Green indicates where appraisal give highest expected NPV Develop now Appraise now Walk away

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32 Net Present Value ($MM) Probability that NPV less than... Appraise_ Develop_ 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

  • 300
  • 200
  • 100

100 200 300 400 500 600 700 82.7 59.6

NPV risk profile: appraise, imperfect information

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SLIDE 33

Risk appetite: which choice would you make if appraisal cost $80MM?

33 Net Present Value ($MM) Probability that NPV less than... Appraise_ Develop_ 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

  • 400
  • 300
  • 200
  • 100

100 200 300 400 500 600 700 800 42.7 59.6

How much expected NPV would you sacrifice to avoid the downside?

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Summary: Value of information

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  • When?

– Facing a number of decisions – Outcomes are uncertain – Opportunity to acquire additional information – Information costs money or time

  • Why?

– The additional information might reduce future uncertainties – Decisions might change in the light of the new information

  • How?

– Invest two hours and get a Decision Analyst to show you how

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“What the hell is always the right decision!”

Marilyn Monroe (1926-1962)

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May have worked for Marilyn, but your management will require more analysis

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