Interdependencies Among E&amp;P Projects and Portfolio Risk Management

Brashear, J.P.; Becker, A.B.; Gabriel, Steven A.

doi:10.2118/56574-ms

Cited by 19 publications

(10 citation statements)

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“…When the assumption that no correlation exists between assets in a portfolio is invalid, this may result in overestimating portfolio returns and underestimating portfolio risks (Tonnsen 2008;Begg and Bratvold 2008;Adekunle 2006;Brashear et al 1999;Campbell et al 2003). Although dependencies will complicate the portfolio-generation process, the correlation between different assets can be modeled by introducing the relevant covariances in the simulation (Walls 2004;Begg and Bratvold 2008).…”

Section: Dependencies Between Assetsmentioning

confidence: 99%

Creating Efficient Portfolios That Match Competing Corporate Strategies

Willigers¹,

Majou²

2010

SPE Economics &Amp; Management

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The process of portfolio optimization provides guidance to decision makers on how to manage an asset base given corporate objectives, market conditions, and organizational capability. Many applications in the oil and gas industry are based upon Markowitz's (1952) efficient-portfolio theory. In the standard implementation of this framework, an efficient portfolio is defined as one that yields the highest value given a specific degree of risk.A corporate decision maker will aim, however, to select a portfolio that meets several often-competing objectives (i.e., maximize portfolio value while minimizing capital expenditure). The optimal portfolio choice given one constraint is typically not optimal given one of the competing constraints. This requires the portfolio manager to identify and select those portfolios that best meet all corporate constraints. Deciding which portfolio to develop is often compounded by there being several portfolios having similar economic characteristics. However, these portfolios can generally be differentiated by strategy, which may depend on nonfinancial attributes such as the geographic location of the assets or on geological settings that might require different engineering expertise.In this study, a large set of exploration portfolios and their attributes have been simulated. Through applying a series of simple and transparent filters, a few portfolios can be identified that meet all the corporate constraints. After a shortlist has been created, the portfolios can easily be characterized by strategy, and the tradeoffs between them can be assessed.

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Section: Dependencies Between Assetsmentioning

confidence: 99%

Creating Efficient Portfolios That Match Competing Corporate Strategies

Willigers¹,

Majou²

2010

SPE Economics &Amp; Management

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show abstract

“…When the assumption that no correlation exists between assets in a portfolio is invalid, this may result in overestimating portfolio returns and underestimating their risks (Tonnsen, 2008;Begg and Bratvold, 2008;Al-Harthy and Khurana, 2006;Brashear et al, 1999;Campbell et al, 2003). Although dependencies will complicate the portfolio generation process, the correlation between different assets can be modeled by introducing the relevant covariances in the simulation (Walls, 2004;Begg and Bratvold, 2008).…”

Section: Dependencies Between Assetsmentioning

confidence: 99%

Creating Efficient Portfolios that Match Competing Corporate Strategies

Willigers¹,

Majou²

2010

All Days

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The process of portfolio optimization provides guidance to decision makers on how to manage an asset base given corporate objectives, market conditions, and organizational capability. Many applications in the oil and gas industry are based upon Markowitz's efficient portfolio theory. In the standard implementation of this framework, an efficient portfolio is defined as one that yields the highest value given a specific degree of risk.A corporate decision maker will aim, however, to select a portfolio that meets several often competing objectives, i.e., maximize portfolio value while minimizing capital expenditure. The optimal portfolio choice given one constraint is typically not optimal given one of the competing constraints. This requires the portfolio manager to identify and select those portfolios that best meet all corporate constraints. Deciding which portfolio to develop is often compounded by there being several portfolios having similar economic characteristics. However, these portfolios can generally be differentiated by strategy, which may depend on non-financial attributes such as the geographic location of the assets or on geological settings that might require different engineering expertise.In this study, a large set of exploration portfolios and their attributes have been simulated. Through applying a series of simple and transparent filters, a few portfolios can be identified that meet all the corporate constraints. After a shortlist has been created, the portfolios can easily be characterized by strategy and the tradeoffs between them can be assessed.

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“…Brashear et al (1999) distinguished between two types of uncertainties in the field of petroleum-underground and aboveground uncertainties. The underground uncertainties are related to the geological and engineering characteristics of a reservoir, while the aboveground uncertainties are related to the fluctuations in prices, changes in demand and supply, changes in regulations, and variations in estimators' judgments as estimation might vary from one estimator to another.…”

Section: Introductionmentioning

confidence: 99%

The Value of Assessing Uncertainty in Oil and Gas Portfolio Optimization

Hdadou

McVay

2014

Day 2 Tue, May 20, 2014

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It has been shown in the literature that the oil and gas industry deals with a substantial number of biases that impact project evaluation and portfolio performance. Previous studies concluded that properly estimating uncertainties will significantly impact the success of risk takers and their profits. Although a considerable number of publications investigated the impact of cognitive biases, few of these publications tackled the problem from a quantitative point of view.The objective of this study is to demonstrate the value of quantifying uncertainty and evaluate its impact on the optimization of oil and gas portfolios, taking into consideration the risk of each project. A model has been developed to perform portfolio optimization using Markowitz's theory. In this study, portfolio optimization has been performed in the presence of different levels of overconfidence and directional bias to determine the impact of these biases on portfolio performance.The results show that disappointment in performance occurs not only because the net present value (NPV) of the realized portfolio is lower than estimated, but also because the risk of the realized portfolio is higher than estimated. This disappointment is due to both incorrect estimation of value and risk (estimation error) and incorrect project selection (decision error). The results of the cases analyzed show that, for investors with high-risk-tolerance, moderate overconfidence and moderate optimism result in an expected disappointment of about 50% of the estimated portfolio. For investors with low-risk-tolerance, the same amounts of moderate overconfidence and optimism result in an expected disappointment up to 78% of the estimated portfolio. The value of reliably quantifying uncertainty is reducing the expected disappointment and the expected decision error. This can be achieved by eliminating overconfidence in project evaluation and portfolio optimization; optimism is reduced in the process. Consequently, overall industry performance can be improved because reliable uncertainty assessment enables identification of superior portfolios, with optimum reward and risk levels, and increases the probability of meeting expectations.

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Interdependencies Among E&P Projects and Portfolio Risk Management

Abstract: This paper was prepared for presentation at the 1999 SPE Annual Technical Conference and Exhibition held in Houston, Texas, 3–6 October 1999.

Cited by 19 publications

References 0 publications

Creating Efficient Portfolios That Match Competing Corporate Strategies

Creating Efficient Portfolios That Match Competing Corporate Strategies

Creating Efficient Portfolios that Match Competing Corporate Strategies

The Value of Assessing Uncertainty in Oil and Gas Portfolio Optimization

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