1. Implementing Portfolio Management: Issues, Insights, and Answers?
1999 SPE Hydrocarbon Economics and Evaluation Symposium
Implementing Portfolio Management: Issues, Insights, and Answers?
John I. Howell Portfolio Decisions, Inc.
Roger N. Anderson Columbia Enterprise Systems
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2. Three Issues for Consideration:
1. Why use Portfolio Management?
2. Who is the End User?
3. What are some Critical Success Factors for Implementing Portfolio Management?
Portfolio management can be applied in many ways. Companies who wish to implement portfolio management must be clear as to why they are embarking on this process.
Companies which have tried to initiate Portfolio Management processes to be everything to everyone usually fail.
Understanding who the end-user is will be critical to the success of an implementation program. The determination of the end user must be consistent with the answer to the first question.
Failure to synchronize the Why and Who issues will nearly always guarantee failure.
Several factors emerge as being critical to the successful implementation process. We will cite just a few in this presentation to stimulate this line of thought.
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3. Why Implement Portfolio Management?
Because Current Performances are all over the Map!
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4. 1. Why use Portfolio Management?
Quantify volatility in performance,
Test feasibility of strategies,
Identify significant and detrimental projects,
Define unique value of investments,
Evaluate investment options, &
Monitor business performance.
The ultimate perspective of a portfolio based analysis is the total performance of the company, business or business unit using the tool.
The quantitative use of uncertainty data allow us to quantitatively describe the volatility of aggregate business. The description defines performance on an annual basis for a 15 year time frame and characterizes performance in terms of the metrics which are consistent with your strategy.
The system can be used to test different strategies. Evaluations include feasibility testing, volatility under economic scenarios, and project dependence analysis.
Projects can be evaluated for significance. Strategic projects are projects which MUST be included to arrive at a feasible solution. Detrimental projects will prevent the portfolio from being feasible if they are selected. All other projects are OPTIONS which can contribute but do not have to.
Ultimately, you can use Portfolio Management as a means of monitoring you business on a regular basis.
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5. Do NOT use Portfolio Management to:
“FIND THE ANSWER”!
Instead, use it to make better Decisions,
and Improve the Probability of consistently meeting your Strategic Goals.
The ultimate use of portfolio management is to improve business performance. Improving business performance does not just mean having one good year. Improved business performance means consistently meeting performance goals year after year.
The dynamics of the global economy, the commodity nature of our product and the intense competition makes consistent business performance something many oil and gas companies simply long for.
People should not use portfolio management as the SILVER BULLET. It does not exist. Using this approach to find THE ANSWER usually lead a company to ruin.
Portfolio Management provides a way to LEARN about the dynamics of the business. The more we understand these DYNAMICS, the better prepared we are to manage our business and achieve consistent business performance.
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6. © Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
2. Who is the End User?
Portfolio Management relies on input and interaction with:
Geoscientists -Engineers
Planners -Portfolio Managers
BUT, the end user is the Decision-Maker who is responsible for managing business performance.
Portfolio management is critically dependent upon input from business and technical staff in the organization but the ultimate users is the decision maker.
Decision makers are the ones who have ultimate accountability and responsibility for the performance of their business. Most decision-makers have come from the technical and engineering ranks where they managed decisions on a project by project basis. It’s no wonder that many struggle with the challenges of managing the total business performance.
Portfolio management provides the insights decision-makers need to manage the aggregate business performance. Their decisions may reference individual projects but the impacts are assessed at the total portfolio level. Thus, the decision maker is always basing decisions on how the decision-unit will affect the ultimate performance of his business.
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7. 3. What are some Critical Success Factors?
1. Establish a Clear Portfolio Process,
2. Set Commonly understood, Clear Strategy,
3. Develop Strong Relationships among key staff (the soft side), &
4. Always aim for High Quality Decision Framing.
Portfolio Management uses lots of information generated and understood by many people. This complex system requires a systematic approach if the information is to lead to high quality decisions.
Defining a process for portfolio management is critical to getting alignment and efficiency with the analysis. Without a process, each analysis is done differently and ultimately the quality of input and decision quality deteriorates rapidly.
A companies strategy is the guiding light for portfolio analysis. The strategy characterizes how a company will ultimately “WIN”. If the strategy is not clear, then the portfolio process is like a ship on the ocean without a rudder. You will never win if you don’t know how your define victory.
The complexity of the information used in portfolio management means that the decision-maker must have a strong interdependent relationship with sources for business and technical data. Portfolio perspectives allow the decision maker to engage in dialogues with these team members which are meaningful to the final decision.
Decision Framing is a way of consistently using the complex array if results generated from the portfolio model. Without clear decision framing, the decision maker will likely revert to old habits of decision-making.
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8. Critical Success Factors: 1. The Process
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9. Critical Success Factors: 2. The Strategy
Production 50
100
150
200
1999
2002
2005
2008
2011
Reserves
500
1000
1500
2000
2500
NCF
-200
-100
300
400
Expl Expense
250
350
Net Income
600
800
Capital
Strategy is how you define success (the target bars above)!
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10. Critical Success Factors: 3. Relationships (The Soft Side)
Maps & Reservoir
Economics
Dialogue
Decisions
& Business Performance Monitoring
= Engineers and
Geo-scientists
Discussion
Strategy & Goals
= The Decision-Maker
= Planning Staff &
Portfolio Manager
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11. Critical Success Factors: 4. Decision Framing
… since Portfolio Management doesn’t give THE answer, and
… since decisions may depend on both quantitative and subjective inputs gathered from others (via relationships),
How then do you put all the information together to reach clear and consistent decisions?
Answer: By Properly Framing the Decision
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12. Critical Success Factors: 4. Decision Framing
1. Clearly Define the Problem to be solved,
2. Clearly Define the Decision Criteria,
3. Generate Realistic Options, & only then,
4. Evaluate the Options relative to the Decision Criteria, &
5. Make Decisions.
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13. © Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing 1. Clearly Define the Problem
Are you testing strategies, or defining/allocating performance targets?
Are you adjusting targets and constraints within a fixed project set?
Are you evaluating project plans, or investment/divestment options?
Are you adjusting projects to meet fixed targets and constraints?
Are you monitoring your business performance?
Are you computing probability of meeting targets with fixed projects?
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14. © Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing 2. Clearly Define the Decision Criteria
Quantitative:
Does the Investment being discussed Contribute?
Does the Project under consideration add Value?
Does the Project improve the Probability of meeting performance metrics?
How bad can “poor performance” be?
Why is the Project Valued?
Subjective:
What are the implications and tradeoffs for the investment?
What are the political/commercial impacts?
© Portfolio Decisions, Inc SPE HEES Dallas

15. © Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing 2. Clearly Define the Decision Criteria (cont)
Production 50
100
150
200
250
300
1999
2002
2005
2008
2011
Reserves
500
1000
1500
2000
2500
3000
NCF
-400
-200
400
600
800
Expl Expense
350
Net Income
-600
Capital
© Portfolio Decisions, Inc SPE HEES Dallas

16. Critical Success Factors: Decision Framing 3
Critical Success Factors: Decision Framing 3. Generate Realistic Options
Efficient Frontier
Does Project 16 contribute positive value, and how much?
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17. Critical Success Factors: Decision Framing 4
Critical Success Factors: Decision Framing 4. Evaluate Options in terms of Decision Criterion
Efficient Frontier Comparison
1200
With Project 16
1000
Original Portfolio
800
Portfolio Value
Risk
600
400
200
3000
3500
4000
4500
5000
5500
6000
Value
Does Project 16 add value? How Much?
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18. Critical Success Factors: Decision Framing 4
Critical Success Factors: Decision Framing 4. Evaluate Options in terms of Decision Criterion (cont)
Net Income
0.2
0.4
0.6
0.8 1
1999
2001
2003
2005
2007
2009
2011
2013
Net Cash Flow
Capital
Production
Original
w/ New
Acquisition
Exploration Expense
Reserves
Probability of meeting performance metrics/year?
© Portfolio Decisions, Inc SPE HEES Dallas

19. Critical Success Factors: Decision Framing 4
Critical Success Factors: Decision Framing 4. Evaluate Options in terms of Decision Criterion (cont)
© Portfolio Decisions, Inc SPE HEES Dallas
How bad can “poor performance” be?

20. © Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing 4. Evaluate Options in terms of Decision Criterion (cont)
Why is a project valued by the portfolio?
© Portfolio Decisions, Inc SPE HEES Dallas

21. Generic E&P Portfolio

22. Critical Success Factors: Decision Framing 5. Make the Decision
Quantitative Factors:
Project 16 portfolio value is $250MM in a 5.5B portfolio, +
Project 16 reduces risk for all portfolio values, +
Project 16 improves probability of meeting near-term NCF and Net Income targets, BUT
Project 16 guarantees failure to meet near term capital target,
Project 16 inclusion reduces probability of meeting mid- and long-term reserves and production targets.
Subjective Factors:
Project 16 requires we maintain operations in an area we do not currently operate in, +
Project 16 has no opportunity for expansion.
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23. Critical Success Factors 5. Make the Decision
Project 16 clearly adds value,
But, current price concerns suggest income and cash flow summaries may be optimistic,
So, near-term improvements in income and cash flow outweigh long-term degradation in production and reserves, &
Lack of expansion opportunities is overcome with reduced dependence on exploration programs, so
MAKE THE INVESTMENT!
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24. Summary: A Perfect Implementation Environment
Uses Portfolio Management to improve the probability of consistently meeting your strategic goals.
All portfolio information comes together at the Decision-Maker.
Successful implementation depends upon process, strategy, culture, and in particular, proper decision framing.
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25. Summary: A Perfect Implementation Environment
A knowledgeable and engaged Decision-Maker +
A well defined Business Strategy +
Consistently described risk and uncertainty for all investments, +
A clearly defined decision process!
© Portfolio Decisions, Inc SPE HEES Dallas