Half the Staff and Twice the Analysis
Author: Lillian Warren, Principal Consultant
What do you do when you have half the staff you need and the execs want twice the usual number of scenarios? The E&P sector has suffered over 80,000 layoffs since oil prices began to slump, yet demand for “right” decisions is high and fewer people are under more pressure to conduct accurate and rapid analysis. For over a year, this has been the “new normal.” Harnessing the power of optimization can be a lifesaver.
How much of a lifesaver? That depends on how complex your portfolio is, and the kinds of questions the executives want you to answer.
Let’s look at some different kinds of scenario analysis that we’ve seen.
With a portfolio composed of very similar assets constrained by rig count and capital, a rank table will do the trick.
Not so simple
You need to schedule the assets you’ve selected and you have constraints on cash flow. Under these conditions, optimization can come in handy. Without it, we’ve seen analysts burn the midnight oil, manually shifting schedules each time the CapEx budget changes.
Really hairy – multi-constraint, multi-objective problem
You have to meet a variety of operational and financial goals over multiple time periods. You have some variation in asset type, infrastructure, decline profile, and commercial terms. The question is not only one of schedule, but also which assets to pursue. The financial executives need to understand if additional funding is needed and in what time frame, and if the company might bump up against debt constraints. And lastly, you want to optimize on something other than NPV– perhaps production, reserves or free cash flow.
Optimization that is designed to answer these questions can be invaluable, allowing the team to quickly refine scenarios to align with evolving corporate goals and volatile markets. Without it, we’ve seen companies spend hundreds of man hours changing asset selection and shifting schedules by hand when a new question comes down from the executive suite. Sometimes the analysis team only gets half way through their work before the environment shifts and they have to start over. When they do complete the cycle, they have built a good plan, but it’s one that could have been better.
Optimization – a practical approach for scenario analysis
Optimization has long been used for operational issues, process plants, transportation, and logistics. Now it can also be used for strategic scenario analysis. The challenge is to create an analytic model to support strategy that executives will value. Here are three suggestions to optimize strategic scenario analysis
- Build a model that incorporates the financial and operational aspects of your business. It’s one thing to have an uneasy feeling that the company might need more funding, or that negative cash flow could be a problem. It’s quite another to see it quantified in black and white. How do you know which financial issues might be critical? See #3 below.
- Keep the optimization model as simple as possible, but no simpler. Resist building a model that can solve every conceivable problem. How do you know which complexities are necessary? See #3 below.
- Ask your executive team what keeps them up at night. Don’t assume. We find that planning teams are often on target with 80% of the issues that executives are concerned with, but there are usually one or two other issues that they are not aware of.
Following these suggestions and optimizing your portfolio can free you and your team to conduct analysis that truly supports strategy development for your company– even with half the staff.