1. Abisoye Babajide Richard de Neufville Michel-Alexandre Cardin
Integrated Method for Designing Valuable Flexibility In Systems Case Example: Oil Development Project
Abisoye Babajide
Richard de Neufville
Michel-Alexandre Cardin
September 2008
© 2008 Babajide, de Neufville, Cardin

2. © 2008 Babajide, de Neufville, Cardin
Purpose of Case
To present and illustrate by example
… Integrated method for designing
… Flexibility (to expand, change function, or otherwise alter)
“In” System (as part of technology)
September 2008
© 2008 Babajide, de Neufville, Cardin

3. Conceptual Take-Aways from Case
Traditional design based on fixed assumptions (or ‘requirements’)
Evaluation of this design is unrealistic – including uncertainties gives different values – often very different
Inserting proper flexibility can increase performance – often very much
September 2008
© 2008 Babajide, de Neufville, Cardin

4. © 2008 Babajide, de Neufville, Cardin
The Case
Oil recovery in Gulf of Mexico
“shallow water” ~ 100 m
Real case: numbers disguised for company confidentiality
Two fields: “Sample” and “Rother”
Reservoirs ‘fractured’ – that is, they consist of several smaller pools that each require wells to suck out oil
September 2008
© 2008 Babajide, de Neufville, Cardin

5. © 2008 Babajide, de Neufville, Cardin
Case Characteristics
September 2008
© 2008 Babajide, de Neufville, Cardin

6. Background to Design Process
Initial exploration well was promising
Later test wells confirmed promise – but gave different results
Each test well expensive (cost depends – tens if not hundreds of millions)
So few test wells – value of more not great, due to geological uncertainties
Design starts from uncertain oil quantity
September 2008
© 2008 Babajide, de Neufville, Cardin

7. Probability Mass Functions (PMFs)
Note: “Most likely” scenarios are 150 and 100
September 2008
© 2008 Babajide, de Neufville, Cardin

8. Traditional Design Process
An oil platform is a very complex system
Analysis requires great skill, complex “Oil and Gas Models” needing days to run
Time-consuming, expensive for a single set of assumptions
Analysis focuses on simple scenario:
“Most likely” assessment of oil
Price of oil set by top management
September 2008
© 2008 Babajide, de Neufville, Cardin

9. Deterministic Valuation
Values of fields, based upon “most likely” assumption
September 2008
© 2008 Babajide, de Neufville, Cardin

10. © 2008 Babajide, de Neufville, Cardin
Project looks good
However:
Is this assessment realistic?
No! Properly including uncertainties gives different values
Jensen’s Inequality – discussion later
Can we do better?
Yes! Use Flexibility to deal proactively with uncertainties
September 2008
© 2008 Babajide, de Neufville, Cardin

11. © 2008 Babajide, de Neufville, Cardin
Analysis Method
Four Steps:
1. Use traditional analysis as base case
2. Include uncertainties in base case:
Exhaustive analysis or Simulation
Consider distribution of possibilities (VARG)
3. Identify likely sources of flexibility
4. Value these possibilities – and confirm for detailed engineering analysis
September 2008
© 2008 Babajide, de Neufville, Cardin

12. © 2008 Babajide, de Neufville, Cardin
Steps 1 and 2
Step 1: Done
Step 2:
Develop probability distributions
Apply to design from traditional process
Display consequence for outcomes (VARG)
These done next
September 2008
© 2008 Babajide, de Neufville, Cardin

13. © 2008 Babajide, de Neufville, Cardin
Combined PMF
September 2008
© 2008 Babajide, de Neufville, Cardin

14. Inflexible Design with Uncertainty
Combined fields
September 2008
© 2008 Babajide, de Neufville, Cardin

15. VARG for Inflexible Design
Value-at-Risk-and-Gain – Cumulative Distribution of Values
Note: Expected NPV ~23M very different from base case ~21M!
September 2008
© 2008 Babajide, de Neufville, Cardin

16. Step 3 – Identify Sources of Flexibility
Several Methods Available
Topic of Research, best procedures not defined - presumably depend on system
Detailed presentation later
For now, recognize that base design does not enable exploitation of biggest possible fields
Flexibility: More Direct Access, Sub-Sea wells
September 2008
© 2008 Babajide, de Neufville, Cardin

17. Step 4 – Value Flexibilities
Repeat evaluation of base case design using the variants with flexibility
Find Expected Net Present Values (ENPV)
… Also Maxima and Minima
Compare along several dimensions
Define best combinations of flexibilities
Validate in detailed engineering design
September 2008
© 2008 Babajide, de Neufville, Cardin

18. Flexible Combined Fields
September 2008
© 2008 Babajide, de Neufville, Cardin

19. VARGs: Inflexible vs. Flexible
September 2008
© 2008 Babajide, de Neufville, Cardin

20. Comparison of Economic Metrics
CAPEX is the initial investment, the “capital expenditure”
Note: In general, no alternative best on all measures. Several criteria important to decision-makers, they
need to make judgment about trade-offs.
September 2008
© 2008 Babajide, de Neufville, Cardin

21. Benefit-Cost of Flexibility
Note: Absolute and Relative Value of Flexibility depends on situation
September 2008
© 2008 Babajide, de Neufville, Cardin