Management: Using Composite Modeling as a Means to Maximize Profitability

Topics: Asset/portfolio management
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Oil companies exist to make money. Many companies too often focus solely on maximizing current production when they should really be focusing on maximizing profitability. A holistic, total asset modeling process is needed to reorient the focus of digital oilfield systems to make the net present value (NPV) of every project the centerpiece of all decisions.

Digital oil field providers have spent the past decade enabling a growing variety of specific workflows to automate isolated engineering tasks. These efforts have significantly reduced nonproductive time and costs. Nevertheless, transformational productivity increases will be required for operators to thrive in a prolonged, low oil price environment. For this reason, digital oil fields must become less about workflow orchestration and more about financial optimization.

A variety of metrics are used in the industry to measure financial performance or to make capital budgeting decisions. In addition to NPV, the metrics may include internal rate of return (IRR), real options analysis, or payback period. Among these, payback fails to account for the time value of money, IRR does not return a unique solution in cases where positive and negative cash flows alternate over time, and real options analysis can be shown to be equivalent to the NPV method if risk is properly accounted for.*

Less formalistic measurements may also come into play, particularly where projects involve national oil companies for whom politics, short-term cash flow pressures, and regulatory frameworks can exert large influences over the selection of a project.

Without a significant loss of generality, we claim that if a business activity is not expected to increase NPV, then it should not be undertaken. Under this assumption, well-intentioned, but NPV-reducing, programs of activity that are proposed to improve a technical metric should be reconsidered. For example, reservoir engineers will always try to improve their recovery factors, but economic limits will dictate the scenarios in which oil should be left in the reservoir.

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Management: Using Composite Modeling as a Means to Maximize Profitability

Tom Ortiz, Halliburton

09 October 2015

Volume: 67 | Issue: 11