Koch

Spring has sprung in Eugene, Oregon; it’s still raining (but we Oregon Ducks like being wet), and when the sun peeks through, it reminds me that by the time I write my July executive summary the weather will be warm and dry. I would like to welcome our new and continuing subscribers to the second issue of SPE Economics & Management for 2011. As I write this, the world is experiencing a number of things that serve to remind us that extreme events, though infrequent and irregular, do happen. We invite peril and disaster when we fail to plan for these infrequent but essentially certain events. Japan is suffering from the consequences of the large 8.9 magnitude quake of 11 March and the resulting destruction from the tsunamis. Here in the Pacific Northwest, people are being reminded that, although large 9+ magnitude earthquakes are very infrequent, they have occurred and will without a doubt occur again, anytime from now. On the geopolitical front, civil unrest continues to spread across Middle Eastern and North African nations experiencing growing pressure for change in leadership. All of these events increase the turbulence in global energy markets. For those of us involved in evaluating and making decisions in the oil and gas industry, there is a continuing challenge to incorporate the risk and uncertainty of disruptive events into our decision-making process. It is far too easy to fall into the trap of discounting them claiming that they are "too unpredictable to predict." Simply plugging extreme events into a decision tree or Monte Carlo simulation as high impact, very low probability events rarely provides the insights decision makers need to consider when making strategic decisions. I urge you all to reflect on how the potential effect of infrequent, high impact events are incorporated into your organization’s decision-making process and how that process could be improved. If you believe you have a great approach and would like to document it and share with others, I suggest you consider submitting a manuscript to SPE E&M.

SPE E&M covers a wide range of topics of interest to petroleum engineers, managers, and others involved in the energy business, including resource and reserve evaluation, portfolio and asset management, project valuation, strategic decision making and processes, uncertainty/risk assessment and mitigation, systems modeling and forecasting, benchmarking and performance indicators, information and knowledge management, digital energy, and petroleum economics. In this issue, we have six papers covering a range of topics from financing and credit to reserves estimation to integrated operations. We have five new peer-reviewed papers:

Credit Ratings and Cash-Flow Analysis of Oil and Gas Companies: Competitive Disadvantage in Financing Costs for Smaller Companies in Tight Capital Markets by Ruud Weijermars examines the impact that the recession in 2008/2009 had on the cash flows, credit ratings, and the ability to raise capital of a variety of oil and gas companies. The paper compares companies ranging in size from the largest oil majors to small independents and provides specific conclusions and recommendations for strategies to manage cash flow in tight capital markets.

Reserves Overbooking: The Problem We Are Finally Going to Talk About by Grant Olsen, W. John Lee, and Thomas Blasingame discusses oil and gas reserves overbooking in recent years and the consequences when those reserves were subsequently written down. The authors describe the increased need for critical examination of reserves disclosures and reserves overstatements in view of the magnitude and nature of recent overstatement cases, the relative unfamiliarity with the Security and Exchange Commission’s inner workings, and the Commission’s new reserves reporting requirements. The authors cite several case studies in detail.

Quantifying the Uncertainty in Estimates of Ultimately Recoverable World Conventional Oil Resources by Chih-Ming Tien and Duane McVay examines the uncertainty in the estimates of ultimate conventional world oil recovery using two methodologies, mathematical modeling based on historical data, and multiple-experts analysis. Their results indicate the ultimate recovery to have a P10–P90 range of 1.8–4.4 trillion bbl and a mean of 2.9 trillion, and the authors further believe that the estimate is conservative and underestimates both the mean and standard deviation. They concede that many will be uncomfortable with acknowledging such great uncertainty, but we will likely be better off in our planning and formulation of energy policy if we accept the great uncertainty in ultimate recovery and peak oil, rather than anchor on one extreme or the other.

The Implementation of a Drilling-and-Completions Advanced Collaborative Environment--Taking Advantage of Change by Steven Sarawyn, Stephen Goodwin, Andrew Deady, Colin Critchley, and Bruce Swanson, all from BP, describes how the operator implemented an advanced collaborative environment in their North Sea operations. The paper describes how BP took advantage of a move to a new building to integrate the elements of people, process, physical environment, organization, and technology to change the way people work together. If your company is considering, or is in the process of, moving to a more collaborative environment, this paper will provide you with insights into BP's approach in Aberdeen.

Proactive Maintenance in the Context of Integrated Operations Generation 2 by Ulf Skytte af Sätra, Rebecca Christensen, Adrian Tanase, Ingvar Koppervik, and Espen Rokke discusses an improved proactive maintenance system achieved by extending the integrated operations model to include integration of operating centers of operators and vendors along with heavy automation of the process in a 24/7 operation. The paper describes a pre-emptive maintenance system that monitors performance and allows earlier intervention.

In addition to our peer-reviewed papers, we are continuing our feature called "Worth a Second Look." In each issue, we include a significant paper that SPE has published in the past that we believe deserves renewed attention. Many of our current members may not be aware of these papers, or may not have read them in a long time. Although our thinking in economics, decision making, and management has evolved over the years, many of these articles have true relevance today. For this issue, we invite you to take a second look at Maximum Information at Minimum Cost: A North Sea Field Development Study With an Experimental Design by Elvind Damsleth, Asmund Hage, and Rolf Volden. This is one of the earliest papers on experimental design, a method that is becoming a standard technique for subsurface uncertainty analysis in our industry. I would like to express my thanks to Dr. Christopher White of Louisiana State University who graciously agreed to write the introduction to the paper.

As always I would like to thank and acknowledge our editorial review committee for their continuing hard work. This group is made up of a distinguished group of seven associate editors: Stephen Begg (University of Adelaide), Reidar Bratvold (University of Stavanger), Gary Citron (Rose & Associates), Jim Crompton (Chevron), John Howell (Portfolio Decisions), Omowumi (Wumi) Iledare (Louisiana State University), and Christopher Jablonowski (University of Texas at Austin).

I am happy to hear your comments and suggestions about SPE E&M; please feel free to contact me at frank@kochdecisions.com. Please note that this is a new e-mail address; my Chevron e-mail is no longer active as I have retired from Chevron after 31.619439 years (not that I was counting).

– Frank Koch