Tip of the Week #23 Tip Index

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"Best Evaluation Practices in Project Evaluation and Influence on Company Performance"

by John Schuyler was the "Management" feature article in the August, 1997, issue of Journal of Petroleum Technology (JPT), Society of Petroleum Engineers.

Abstract

How do respected petroleum companies perform their project evaluations? Do better project evaluation practices and decision policies lead to better company performance? As an initial step to find out, a "Decision and Evaluation Best Practices Survey" has been conducted. Twenty-one companies participated in the initial round, providing a cross section of the petroleum industry. The survey results form a nascent "best practices" database. The author reflects upon the survey data and his experience to describe characteristics of good evaluation management. Because resource allocation decisions are so important, policy and evaluation practices should receive attention comparable to the other technical disciplines. Recent trends in evaluation techniques are discussed, including an increase in the use of decision analysis.

"Geology is science, but exploration is business."

— Marlan Downey, ARCO

Key Findings

PV (or EMV) and IRR are approximately tied for first place as the most popular decision criteria. Other responses included: meeting targets, minimum potential reserve additions, payout, return-on-investment (ROI), and discounted ROI.
Decision trees and Monte Carlo simulation are widely employed in exploration, but much less so in production and downstream areas. Option theory appears largely unused at present.
About half of the companies, each, are using commercial economics software vs. in-company models. About 45% of companies responding are using spreadsheets for evaluation economics.
Only 3 of 20 companies indicated using two or more price scenarios weighted with probabilities.

Reprints of the article can be ordered from SPE by calling 800-456-6863 or accessing their web page at www.spe.org. Please contact with comments or questions.

—John Schuyler, August 1997