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Risk assessment and portfolio management

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This document discusses risk assessment in the context of portfolio management and decision making for resource classification. It outlines key concepts around geological versus economic chance of success and whether chance of success is an uncertain variable. The impact on defining risk and uncertainty is discussed, as well as how this affects portfolio management and optimization based on discovered volumes using geological chance of success versus economic volumes using economic chance of success or chance of development. Taking the mean of the economic chance of success distribution, rather than the most likely, is recommended for optimization when multiple uncertain variables are involved.

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Risk Assessment in the Context of Portfolio Management and Decision Making Graeme Simpson Bernie Vining Fiona Macmillan AAPG International Conference and Exhibition, Perth, November, 2006
Outline Role of risk and uncertainty assessment in resource classification Geological versus economic chance of success Is chance of success an uncertain variable? What is the impact on portfolio management and decision making?
Risk, Uncertainty and Resources SPE/WPC/AAPG Reserves On Production Low Discovered Commercial 1P 2P 3P Under Development Proved Prov+Prob Prov+Prob+Poss Planned for Development Development Pending Discovered Contingent Resources Noble plans $300m notes offering Sub- Development On Hold Risk Commercial Low Best High Development not Viable Prospect Prospective Resources Undiscovered Lead Low Best High Play High Uncertainty P90 P50 P10 Project Status
Risk really matters Jason McVean (2000) in The Significance of Risk on Portfolio Selection, SPE 62966, quote: The definition of risk can significantly affect portfolio selection.
Risk and uncertainty are defined as Risk (or, better, chance) the probability of a discrete event occurring (and so one minus the risk is the chance that the discrete event will not happen). Uncertainty the (usually continuous) range of possible outcomes if the discrete event happens.
Risk, Uncertainty and Resources SPE/WPC/AAPG Reserves On Production Low Discovered Commercial 1P 2P 3P Under Development Proved Prov+Prob Prov+Prob+Poss Planned for Development Development Pending Discovered Contingent Resources Noble plans $300m notes offering Sub- Development On Hold Risk Commercial Low Best High Development not Viable Prospect Prospective Resources Undiscovered Lead Low Best High Play High Uncertainty P90 P50 P10 Project Status
Risk and uncertainty are defined as Risk (or, better, chance) the probability of a discrete event occurring (and so one minus the risk is the chance that the discrete event will not happen). Uncertainty the (usually continuous) range of possible outcomes if the discrete event happens. But its actually not quite that simple
Risk and uncertainty Figure 17, page 32, from Rose (2001) Should risk measurement be Pg / GCoS or Pe / ECoS?
Hypothetical Prospect GCoS = 30% Sample volumes for economic analysis
Minimum Economic Volume 200 150 100 NPVx 50 0 0 20 40 60 80 100 -50 -100 MMBbls Zero crossing on x-axis gives Minimum Economic Volume
ECoS = 20% Portion of curve above Minimum Economic Volume gives ECoS
So a potential source of confusion is A discrete event can be the achievement of at least a certain value on a continuous distribution
Risk, Uncertainty and Resources GCoS Approx GCoS % Reserves On Production Low 100 Discovered 100 Commercial 1P 2P 3P Under Development Proved Prov+Prob Prov+Prob+Poss Planned for Development 100 Development Pending 100 Discovered Contingent Resources Noble plans $300m notes offering Sub- Development On Hold Risk 100 Commercial Low Best High Development not Viable 100 Prospect 10-50 Prospective Resources Undiscovered Lead 0-15 Low Best High Play N/A High Uncertainty P90 P50 P10 Project Status
Risk, Uncertainty and Resources ECoS Approx ECoS % Reserves On Production Low 100 Discovered 100 Commercial 1P 2P 3P Under Development Proved Prov+Prob Prov+Prob+Poss Planned for Development 90-100 Development Pending 50-95 Discovered Contingent Resources Noble plans $300m notes offering Sub- Development On Hold Risk 20-80 Commercial Low Best High Development not Viable 0-30 Prospect 5-25 Prospective Resources Undiscovered Lead 0-10 Low Best High Play N/A High Uncertainty P90 P50 P10 Project Status
Risk, Uncertainty and Resources Reserves On Production Low Discovered Commercial 1P 2P 3P Under Development Proved Prov+Prob Prov+Prob+Poss Planned for Development CoD Development Pending Discovered Contingent Resources Noble plans $300m notes offering Sub- Development On Hold Risk ECoS Commercial Low Best High Development not Viable GCoS Prospect Prospective Resources Undiscovered Lead Low Best High Play High Uncertainty P90 P50 P10 Project Status
Is Chance of Success an uncertain variable? Yes, but does it matter? No, if uncertainty is symmetrical, for the distribution acts as if it is the mean, and the mean = the most likely (the mode) Maybe GCoS estimates ought to have symmetric uncertainty ranges, so using the most likely estimate is fine But ECoS is a function of economic assessment, that is multiplicative calculations involving independent variables So the Central Limit Theorem suggests uncertainty in ECoS should tend towards being lognormally (i.e. asymmetrically) distributed So the most likely does not equal the mean, and hence the most likely deterministic and the probabilistic methods give different results
Hypothetical Case Percentiles: Forecast values P100 0.00 P90 0.00 P80 0.00 P70 0.00 Deterministic P60 0.00 P50 0.00 GCoS = 40% P40 0.00 P30 217.22 P20 245.51 P10 276.26 P0 505.38 Percentiles: Forecast values P100 0.00 P90 0.00 Probabilistic P80 0.00 P70 0.00 Symmetrical P60 0.00 P50 0.00 GCoS P40 0.00 P30 216.91 ML = 40% P20 244.50 P10 276.45 P0 481.46 Percentiles: Forecast values P100 0.00 P90 0.00 Probabilistic P80 0.00 P70 0.00 Asymmetrical P60 0.00 P50 0.00 GCoS P40 207.96 P30 233.96 ML = 40% P20 256.35 P10 286.08 P0 445.28
Risk and uncertainty Figure 17, page 32, from Rose (2001) Floating, uncertain event Fixed, binary event Should risk measurement be Pg / GCoS or Pe / ECoS?
Alternative Definitions GCoS is the probability of a Prospective Resource maturing into a Contingent Resource ECoS is the probability of a Prospective Resource maturing into a Reserve And the chance of a Contingent Resource maturing into a Reserve is usually less than 100%. We call this the Chance of Development, CoD
And the impact on Portfolio Management and Decision Making is To optimise on discovered volumes, use GCoS To optimise on economic volumes, use ECoS / CoD To optimise on value, use ECoS / CoD When using ECoS / CoD, take the mean of the distribution, not the most likely, or perform the calculation probabilistically, using the whole distribution
Thank you questions?
Back-up 際際滷s
Objective of Resource Management is to Maximise value of a portfolio of assets by: Optimising, relative to goals and constraints, in terms of: Asset content and timing Identification, by product type, portfolio performance, including resource maturation Hence identify options and opportunities for improving resource management performance
Portfolio Management Schematic 1 2 3 4 Standalone asset Decision making/ Portfolio Analysis Strategy valuation formulation Robust, coeval, Full under- under- Generation Incorporation of consistent, standing and and analysis insights gained into technical & clear expression of possible portfolio management commercial of organisations portfolios: strategy formulation analysis, goals, objectives, and implementation: on asset by targets and asset basis: constraints: Volumetrics Metrics Optimisation Qualitative inputs Dev Plng Risk measures Incremental Strategic thinking Economics value/risk Risk & Uncertainty Options Standalone value
Risk assessment and portfolio management
GCoS calculation Min ML Max Reservoir 0.7 0.8 0.9 Source 0.4 0.5 0.6 Timing 0.3 0.4 0.5 Trap and seal 0.7 0.8 0.9 Multiply, to get .
GCoS distribution Best fit is an asymmetric Beta distribution

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Risk assessment and portfolio management

  • 1. Risk Assessment in the Context of Portfolio Management and Decision Making Graeme Simpson Bernie Vining Fiona Macmillan AAPG International Conference and Exhibition, Perth, November, 2006
  • 2. Outline Role of risk and uncertainty assessment in resource classification Geological versus economic chance of success Is chance of success an uncertain variable? What is the impact on portfolio management and decision making?
  • 3. Risk, Uncertainty and Resources SPE/WPC/AAPG Reserves On Production Low Discovered Commercial 1P 2P 3P Under Development Proved Prov+Prob Prov+Prob+Poss Planned for Development Development Pending Discovered Contingent Resources Noble plans $300m notes offering Sub- Development On Hold Risk Commercial Low Best High Development not Viable Prospect Prospective Resources Undiscovered Lead Low Best High Play High Uncertainty P90 P50 P10 Project Status
  • 4. Risk really matters Jason McVean (2000) in The Significance of Risk on Portfolio Selection, SPE 62966, quote: The definition of risk can significantly affect portfolio selection.
  • 5. Risk and uncertainty are defined as Risk (or, better, chance) the probability of a discrete event occurring (and so one minus the risk is the chance that the discrete event will not happen). Uncertainty the (usually continuous) range of possible outcomes if the discrete event happens.
  • 6. Risk, Uncertainty and Resources SPE/WPC/AAPG Reserves On Production Low Discovered Commercial 1P 2P 3P Under Development Proved Prov+Prob Prov+Prob+Poss Planned for Development Development Pending Discovered Contingent Resources Noble plans $300m notes offering Sub- Development On Hold Risk Commercial Low Best High Development not Viable Prospect Prospective Resources Undiscovered Lead Low Best High Play High Uncertainty P90 P50 P10 Project Status
  • 7. Risk and uncertainty are defined as Risk (or, better, chance) the probability of a discrete event occurring (and so one minus the risk is the chance that the discrete event will not happen). Uncertainty the (usually continuous) range of possible outcomes if the discrete event happens. But its actually not quite that simple
  • 8. Risk and uncertainty Figure 17, page 32, from Rose (2001) Should risk measurement be Pg / GCoS or Pe / ECoS?
  • 9. Hypothetical Prospect GCoS = 30% Sample volumes for economic analysis
  • 10. Minimum Economic Volume 200 150 100 NPVx 50 0 0 20 40 60 80 100 -50 -100 MMBbls Zero crossing on x-axis gives Minimum Economic Volume
  • 11. ECoS = 20% Portion of curve above Minimum Economic Volume gives ECoS
  • 12. So a potential source of confusion is A discrete event can be the achievement of at least a certain value on a continuous distribution
  • 13. Risk, Uncertainty and Resources GCoS Approx GCoS % Reserves On Production Low 100 Discovered 100 Commercial 1P 2P 3P Under Development Proved Prov+Prob Prov+Prob+Poss Planned for Development 100 Development Pending 100 Discovered Contingent Resources Noble plans $300m notes offering Sub- Development On Hold Risk 100 Commercial Low Best High Development not Viable 100 Prospect 10-50 Prospective Resources Undiscovered Lead 0-15 Low Best High Play N/A High Uncertainty P90 P50 P10 Project Status
  • 14. Risk, Uncertainty and Resources ECoS Approx ECoS % Reserves On Production Low 100 Discovered 100 Commercial 1P 2P 3P Under Development Proved Prov+Prob Prov+Prob+Poss Planned for Development 90-100 Development Pending 50-95 Discovered Contingent Resources Noble plans $300m notes offering Sub- Development On Hold Risk 20-80 Commercial Low Best High Development not Viable 0-30 Prospect 5-25 Prospective Resources Undiscovered Lead 0-10 Low Best High Play N/A High Uncertainty P90 P50 P10 Project Status
  • 15. Risk, Uncertainty and Resources Reserves On Production Low Discovered Commercial 1P 2P 3P Under Development Proved Prov+Prob Prov+Prob+Poss Planned for Development CoD Development Pending Discovered Contingent Resources Noble plans $300m notes offering Sub- Development On Hold Risk ECoS Commercial Low Best High Development not Viable GCoS Prospect Prospective Resources Undiscovered Lead Low Best High Play High Uncertainty P90 P50 P10 Project Status
  • 16. Is Chance of Success an uncertain variable? Yes, but does it matter? No, if uncertainty is symmetrical, for the distribution acts as if it is the mean, and the mean = the most likely (the mode) Maybe GCoS estimates ought to have symmetric uncertainty ranges, so using the most likely estimate is fine But ECoS is a function of economic assessment, that is multiplicative calculations involving independent variables So the Central Limit Theorem suggests uncertainty in ECoS should tend towards being lognormally (i.e. asymmetrically) distributed So the most likely does not equal the mean, and hence the most likely deterministic and the probabilistic methods give different results
  • 17. Hypothetical Case Percentiles: Forecast values P100 0.00 P90 0.00 P80 0.00 P70 0.00 Deterministic P60 0.00 P50 0.00 GCoS = 40% P40 0.00 P30 217.22 P20 245.51 P10 276.26 P0 505.38 Percentiles: Forecast values P100 0.00 P90 0.00 Probabilistic P80 0.00 P70 0.00 Symmetrical P60 0.00 P50 0.00 GCoS P40 0.00 P30 216.91 ML = 40% P20 244.50 P10 276.45 P0 481.46 Percentiles: Forecast values P100 0.00 P90 0.00 Probabilistic P80 0.00 P70 0.00 Asymmetrical P60 0.00 P50 0.00 GCoS P40 207.96 P30 233.96 ML = 40% P20 256.35 P10 286.08 P0 445.28
  • 18. Risk and uncertainty Figure 17, page 32, from Rose (2001) Floating, uncertain event Fixed, binary event Should risk measurement be Pg / GCoS or Pe / ECoS?
  • 19. Alternative Definitions GCoS is the probability of a Prospective Resource maturing into a Contingent Resource ECoS is the probability of a Prospective Resource maturing into a Reserve And the chance of a Contingent Resource maturing into a Reserve is usually less than 100%. We call this the Chance of Development, CoD
  • 20. And the impact on Portfolio Management and Decision Making is To optimise on discovered volumes, use GCoS To optimise on economic volumes, use ECoS / CoD To optimise on value, use ECoS / CoD When using ECoS / CoD, take the mean of the distribution, not the most likely, or perform the calculation probabilistically, using the whole distribution
  • 21. Thank you questions?
  • 23. Objective of Resource Management is to Maximise value of a portfolio of assets by: Optimising, relative to goals and constraints, in terms of: Asset content and timing Identification, by product type, portfolio performance, including resource maturation Hence identify options and opportunities for improving resource management performance
  • 24. Portfolio Management Schematic 1 2 3 4 Standalone asset Decision making/ Portfolio Analysis Strategy valuation formulation Robust, coeval, Full under- under- Generation Incorporation of consistent, standing and and analysis insights gained into technical & clear expression of possible portfolio management commercial of organisations portfolios: strategy formulation analysis, goals, objectives, and implementation: on asset by targets and asset basis: constraints: Volumetrics Metrics Optimisation Qualitative inputs Dev Plng Risk measures Incremental Strategic thinking Economics value/risk Risk & Uncertainty Options Standalone value
  • 26. GCoS calculation Min ML Max Reservoir 0.7 0.8 0.9 Source 0.4 0.5 0.6 Timing 0.3 0.4 0.5 Trap and seal 0.7 0.8 0.9 Multiply, to get .
  • 27. GCoS distribution Best fit is an asymmetric Beta distribution