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Implementing Portfolio Management: Issues, Insights, and Answers. 1999

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Abstract

Why use Portfolio Management, Who is the End User, What are some Critical Success Factors for Implementing Portfolio Management?
Implementing Portfolio
Management:
Issues, Insights, and Answers?
John I. Howell Portfolio Decisions, Inc.
Roger N. Anderson Columbia Enterprise
Systems
1999 SPE Hydrocarbon
Economics and Evaluation
Symposium
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 1999 SPE HEES
Dallas
Why Implement Portfolio Management?
Because Current Performances are all over the Map!
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.
FIND THE ANSWER
!
Instead, use it to make better Decisions,
and Improve the Probability of
consistently meeting your Strategic
Goals.
Do NOT use Portfolio
Management to:
2. Who is the End User?
Portfolio Management relies on input and
interaction with:
Geoscientists -Engineers
Planners -Portfolio Managers
BUT, the end user is the Decision-Maker
who is responsible for managing business
performance.
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 1999 SPE HEES
Dallas
Critical Success Factors: 1. The Process
Capture
Learnings
Efficient
Frontier
Investment
Options
Strategy
Project
Data
Project
Economics
Database
Decision
Feasibility
Analyze Scenarios
Business
Issues
Cultural
Issues
Feedback Loops
OUTPUT
ANALYSIS
SYNTHESIS
DECISION
ã
Copyright 1998-1999 PDI
© Portfolio Decisions, Inc. 1999 1999 SPE HEES
Dallas
Critical Success Factors: 2. The Strategy
Production
0
50
100
150
200
1999 2002 2005 2008 2011
Reserves
0
500
1000
1500
2000
2500
1999 2002 2005 2008 2011
NCF
-200
-100
0
100
200
300
400
500
1999 2002 2005 2008 2011
Expl Expense
0
50
100
150
200
250
300
350
1999 2002 2005 2008 2011
Net Income
-200
0
200
400
600
800
1999 2002 2005 2008 2011
Capital
0
50
100
150
200
250
300
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
Strategy & Goals
= Planning Staff &
Portfolio Manager
= Engineers and
Geo-scientists
Decisions
& Business
Performance
Monitoring
= The Decision-Maker
Dialogue
Discussion
© Portfolio Decisions, Inc. 1999 1999 SPE HEES
Dallas
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 1999 SPE HEES
Dallas
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.
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 1999 SPE HEES
Dallas
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 1999 SPE HEES
Dallas
Critical Success Factors: Decision Framing
2. Clearly Define the Decision Criteria (cont)
Production
0
50
100
150
200
250
300
1999 2002 2005 2008 2011
Reserves
0
500
1000
1500
2000
2500
3000
1999 2002 2005 2008 2011
NCF
-400
-200
0
200
400
600
800
1000
1999 2002 2005 2008 2011
Expl Expense
0
50
100
150
200
250
300
350
1999 2002 2005 2008 2011
Net Income
-600
-400
-200
0
200
400
600
800
1000
1999 2002 2005 2008 2011
Capital
0
200
400
600
800
1999 2002 2005 2008 2011
© Portfolio Decisions, Inc. 1999 1999 SPE HEES
Dallas
Critical Success Factors: Decision Framing
3. Generate Realistic Options
Does Project 16 contribute positive value, and how
much?
Efficient Frontier
© Portfolio Decisions, Inc. 1999 1999 SPE HEES
Dallas
Critical Success Factors: Decision Framing
4. Evaluate Options in terms of Decision
Criterion
0
200
400
600
800
1000
1200
3000 3500 4000 4500 5000 5500 6000
Value
Risk
With Project 16
Original Portfolio
Portfolio Value
Efficient Frontier Comparison
Does Project 16 add value? How Much?
© Portfolio Decisions, Inc. 1999 1999 SPE HEES
Dallas
Critical Success Factors: Decision Framing
4. Evaluate Options in terms of Decision
Criterion (cont)
Net Income
0
0.2
0.4
0.6
0.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Net Cash Flow
0
0.2
0.4
0.6
0.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Capital
0
0.2
0.4
0.6
0.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Production
0
0.2
0.4
0.6
0.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Original
w/ New
Acquisition
Exploration Expense
0
0.2
0.4
0.6
0.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Reserves
0
0.2
0.4
0.6
0.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Probability of meeting performance metrics/year?
© Portfolio Decisions, Inc. 1999 1999 SPE HEES
Dallas
Critical Success Factors: Decision Framing
4. Evaluate Options in terms of Decision
Criterion (cont)
How bad can
poor performance
be?
© Portfolio Decisions, Inc. 1999 1999 SPE HEES
Dallas
Critical Success Factors: Decision Framing
4. Evaluate Options in terms of Decision
Criterion (cont)
Why is a project valued by the portfolio?
Generic E&P Portfolio
© Portfolio Decisions, Inc. 1999 1999 SPE HEES
Dallas
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, +
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!
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.
Summary:
A Perfect Implementation Environment
Summary:
A Perfect Implementation Environment
A knowledgeable and engaged Decision-
Maker +
A well defined Business Strategy +
Consistently described risk and uncertainty
for all investments, +
A clearly defined decision process!
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