VOI: Value of Information (or Very Opaque Inferences?) Pete Naylor - PowerPoint PPT Presentation

VOI: Value of Information (or Very Opaque Inferences?) Pete Naylor SPE Evening Meeting, 27 November 2012

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Aims of this presentation To provide an understanding of „value of information‟ (VOI) analysis • When? • Why? • How? 3

Aims of this presentation To provide an understanding of „value of information‟ (VOI) analysis • When? • Why? • How? 4

When might VOI analysis be valuable? • Facing a number of decisions • Outcomes are uncertain • Opportunity to acquire additional information • Information costs money or time Is the additional information worth the cost? 5

Why might VOI analysis be valuable? • The additional information might reduce future uncertainties • Decisions might change in the light of the new information If the VOI analysis indicates that no decision changes, then do not waste the money & time in acquiring the new information 6

Key questions • How much does the information cost? – Acquisition – Analysis – Delay to development • How reliable is the information? – Will the measurement fail? – False results (imperfect information) • How useful is the information? – How significant is the parameter(s) to be measured? – What difference will the information make? VOI analysis can address these questions before investing in the information 7

How do I undertake a VOI analysis? • Case example – Should an appraisal well be drilled in the North Extension? – Should the North Extension be developed? • A new user took < two hours to learn the software & complete this analysis 8

Influence diagram Reserves = COS * GIIP * RF KEY Decision Chance Value Actual COS RF Reserves Actual GIIP A useful thinking tool to assemble the „components‟ of the problem 9

Decision tree n Actual Actual - RF COS GIIP Low Low Yes NPV,Reserves,PI,Capex Nominal Nominal a No NPV,Reserves,PI,Capex High High NPV,Reserves,PI,Capex n - a Abbreviated form of decision tree, full tree contains 2x3x3 = 18 branches 10

Base case: reserves for North Extension 100% 90% 80% 70% Probability that reserves less than... 60% 50% D 40% Deterministic 30% = 78MMboe 20% 10% 0% 0 10 20 30 40 50 60 70 80 90 100 110 Reserves (MMboe) Beware that this is not the basis of your business case 11

Risk profile: reserves for North Extension 100% Probability of not 90% finding hydrocarbons is 80% (1 – 0.65) = 0.35 70% Probability that reserves less than... 60% 50% D 40% Expected value 30% = 40MMboe 20% 10% 0% 0 10 20 30 40 50 60 70 80 90 100 110 Reserves (MMboe) Illustrates our best estimate of the range of possible reserves 12

Influence diagram Reserves = COS * GIIP * RF KEY Decision Chance Value Actual COS RF Reserves Actual GIIP A useful thinking tool to assemble the „components‟ of the problem 13

Influence diagram: extended to include appraisal Reserves = COS * GIIP * RF KEY Decision Chance Value Actual Measured COS COS Sanction Initial develop- RF Reserves decision ment? Actual Measured GIIP GIIP The measured information depends on the actual state of nature 14

Conditional probabilities: chance of success perfect information Yes Measured Yes COS 1 No Actual .65 COS 0 Yes Measured 5 No COS 0 No .35 1 Captures the reliability of the measurement 15

Conditional probabilities: chance of success no information Yes Measured Yes COS .65 No Actual .65 COS .35 Yes Measured 5 No COS .65 No .35 .35 Captures the reliability of the measurement 16

Conditional probabilities: chance of success imperfect information Yes Measured Yes COS .8 No Actual .65 COS .2 Yes Measured 5 No COS .1 No .35 .9 Captures the reliability of the measurement 17

Influence diagram: extended to include appraisal Reserves = COS * GIIP * RF KEY Decision Chance Value Actual Measured COS COS Sanction Initial develop- RF Reserves decision ment? Actual Measured GIIP GIIP The measured information depends on the actual state of nature 18

Conditional probabilities: gas initially in place Low .8 Measured Low GIIP Nominal .15 High .05 Low .1 Actual Measured GIIP Nominal GIIP Nominal .8 High .1 Low .05 Measured High GIIP Nominal .15 High .8 Captures the reliability of the measurement 19

Decision tree n Actual Actual - RF COS GIIP Low Low Yes NPV,Reserves,PI,Capex Nominal Nominal a No NPV,Reserves,PI,Capex High High NPV,Reserves,PI,Capex n - a Abbreviated form of decision tree, full tree contains 2x3x3 = 18 branches 20

Decision tree: extended to include appraisal Sanction Measured Measured Actual Actual develop- RF COS GIIP COS GIIP ment? Initial decision Low Low Low Yes Yes Yes NPV,Reserves,PI,Capex Appraise_now Nominal Nominal Nominal a No No No NPV,Reserves,PI,Capex High High High NPV,Reserves,PI,Capex Sanction develop- ment? Yes Develop_now a No Sanction develop- ment? Yes Walk_away a No Captures the time order of events 21

Influence diagram Reserves = COS * GIIP * RF KEY Decision Chance Value Actual Measured COS COS Sanction Initial develop- RF Reserves decision ment? Actual Measured GIIP GIIP The measured information depends on the actual state of nature 22

Influence diagram: extended to include economics Reserves = COS * GIIP * RF KEY NPV = Reserves*(NPV/boe) - Capex Decision Chance Value Actual Measured COS COS Sanction Initial develop- RF Reserves NPV decision ment? Actual Measured GIIP GIIP Appraisal Develop- NPV per cost ment cost boe Which decision options give the best NPV? 23

NPV risk profile: develop now 100% 90% Develop @ $300MM & find 80% no hydrocarbons 70% Probability that NPV less than... 60% Appraise_ 50% Develop_ 40% Expected value 30% = $60MM 20% 10% 0% -300 -200 -100 0 100 200 300 400 500 600 700 800 Net Present Value Illustrates the range of possible outcomes 24

NPV risk profile: develop now 100% 90% 80% 70% Probability that NPV less than... 60% Appraise_ 50% Develop_ 40% 30% 20% 10% 0% -300 -200 -100 0 100 200 300 400 500 600 700 800 Net Present Value Illustrates the range of possible outcomes 25

NPV risk profile: appraise, no information 100% 90% 80% 70% Probability that NPV less than... 60% Appraise_ 50% Develop_ 40% 30% NPV decreased by 20% $40MM 10% 0% -300 -200 -100 0 100 200 300 400 500 600 700 800 Net Present Value Spend the money on appraisal but get no information 26

NPV risk profile: appraise, perfect information 100% 90% 80% 70% Probability that NPV less than... 60% Appraise_ 50% Develop_ 40% 30% 20% 10% 0% -300 -200 -100 0 100 200 300 400 500 600 700 800 Net Present Value ($MM) Perfect information means field is only developed when there is a net gain 27

NPV risk profile: appraise, imperfect information 100% 90% 80% 70% Probability that NPV less than... 60% Appraise_ 50% Develop_ 40% 30% 20% 10% 0% -300 -200 -100 0 100 200 300 400 500 600 700 800 Net Present Value ($MM) Imperfect information means that sometimes you get it wrong 28