Logical Fallacy: How False Precision Affects Business Planning
How Fixating on Irrelevant Data Affects Decision Making
False precision is one of the oil and gas sector’s pet peeves.
With more data, businesses are supposed to be better at analyzing multiple situations, forecast profitability on potential projects and protect current investment assets. But for many energy companies, a significant amount of focus – when it comes to Business Planning – is on granularities that may not really matter, for the amount of time and energy they take in exchange.
Grade school arithmetic taught us about significant numbers, but this far in the game, it’s worth asking ourselves if we, as an industry sector, have forgotten those lessons.
How granular is too granular?
Data science has been equated as The New Oil on many occasions, and for good reason. It has shaped the oil and gas industry, allowing decision makers to obtain more foresight than ever to help navigate the sector’s ever-changing climate.
But as it became easier to capture data with the advent of the Internet of Things, a new challenge many upstream oil and gas companies face is having to figure out how to deal with and find a use for all the new, valuable information they can harness.
With petabytes of data to play with today, it can be easy to get caught up in too much detail that it becomes hard to see the forest for the trees. So what is false precision, and why does it matter?
False precision (also known as over precision or fake precision) is when better precision is implied than it is justified, due to the way numerical data is presented. This often leads to overconfidence in accuracy, and precision bias. It is often believed that greater precision implies greater accuracy, however precision is actually a limit to accuracy.
What does false precision look like?
To paint a picture of what overprecision is like, let’s talk about Client A.
Client A is particularly focused on precision. With production data from Aries in tabular form, they expected to replicate the data in esi.manage exactly. For a well with an IP of 100 bbls per day with a 35% exponential decline, the first month’s production was exactly 3,044.013303 bbls. The last “3” in this figure represents 3 millionths of a bbl, or about one cup.
That kind of precision would be great, but not if it’s physically impossible to even measure actual production to a precision of +/- one cup per month, let alone forecast it.
When multiplying values together, your result can only be as good as your coarsest value. In the example above, the input value of 100 bbls per day has one significant figure. You might stretch that to 2 if you believe you can really forecast that it wouldn’t be as low as 90 or as high as 110. Being generous, the significant figures in the monthly volume are the first “3” and “0”.
All you can say with any real precision is that it’s not as low as 2900 and not as high as 3100.
In pursuit of (false) precision
Many, many hours are wasted by professionals in the upstream sector chasing false precision. Our forecasts are typically derived from raw data like porosity, water saturation, pay height; these are usually expressed in 2 significant figures at most.
We then modify them with “risk” values, usually expressed in single decimal precision. Using those coarse inputs, we then seek to calculate royalties to be correct to 3 or 4 decimal places and are confused if they don’t match.
All of this focus on precision is wasteful, and in the long run, it holds the modern oil and gas organization back from innovating, becoming more efficient and improving its operational capability.
In planning and strategy work particularly, failure to simplify your problem (with an attendant loss in alleged precision) will make it more challenging to extract true insight from your business planning process. It will slow down the data collection, modeling, and calculation processes, and increase the time spent reconciling.
The problems we have now are, of course, a result of the technological advancement the industry has enjoyed. We deserve to be proud of our applications and their ability to rapidly perform millions of calculations (often with double precision floating point binary calculations that support up to 17 significant digits).
However, the issue here is that, while we can mathematically generate very long and seemingly accurate numbers, the focus should be to make better business decisions. Spending hours looking at insignificant data is simply put, a waste of time and resources.
Using precision to your advantage
It is easy to understand how precision is something Oil and Gas companies would prefer to have in excess, rather than need more of. However, the primary objective is to make the best choices for investment, protect existing assets and ensure that current and future project lifecycles generate profitability. The data and how precise it is, should facilitate that, not be fixated upon to no end.
Organizations that are currently evaluating their business planning functions should consider the type and source of information that goes into a round of decision making, and understand the proper scope of information that is relevant to the decision being made. This way, it is easier for planners and analysts to contextualize the precision and make a fairer call.
By extension, if you’re looking at investing in solutions that can improve the data visibility in your firm, consider if you’re getting more useful data or just more data in general.
The energy industry may still have some ways to go in refining the way we use and manage the data capabilities we now have, but if we are mindful of information overload and false precision, we can recover more of our precious time and attention, while making higher quality decisions.
Plan with integrated data to make better decisions
Aucerna Planning Solutions helps to integrate the right data across today’s forward-thinking energy organizations, empowering planners and senior executives to make accurate investment decisions.
Get in touch with us to learn more about how to get the data you need to improve your next planning cycle or Book a Demo today.