Linking the Value Assessment of Oil and Gas Firms to Ambidexterity Theory Using a Mixture of Normal Distributions

Oil and gas exploration and production firms have return profiles that are not easily explained by current financial theory – the variation in their market returns is non-Gaussian. In this paper, the nature and underlying reason for these significant deviations from expected behavior are considered. Understanding these differences in financial market behavior is important for a wide range of reasons, including: assessing investments, investor relations, decisions to raise capital, assessment of firm and management performance. We show that using a “thicker tailed” mixture of two normal distributions offers a significantly more accurate model than the traditionally Gaussian approach in describing the behavior of the value of oil and gas firms. This mixture of normal distribution is also more effective in bridging the gap between management theory and practice without the need to introduce complex time-sensitive GARCH and/or jump diffusion dynamics. The mixture distribution is consistent with ambidexterity theory that suggests firms operate in two distinct states driven by the primary focus of the firm: an exploration state with high uncertainty and, an exploitation (or production) state with lower uncertainty. The findings have direct implications on improving the accuracy of real option pricing techniques and futures analysis of risk management. Traditional options pricing models assume that commercial returns from these assets are described by a normal random walk. However, a normal random walk model discounts the possibility of large changes to the marketplace from events such as the discovery of important reserves or the introduction of new technology. The mixture distribution proves to be well suited to inherently describe the unusually large risks and opportunities associated with oil and gas production and exploration. A significance testing study of 554 oil and gas exploration and production firms empirically supports using a mixture distribution grounded in ambidexterity theory to describe the value fluctuations for these firms

Development As The Continuation Of Appraisal By Other Means

This paper is part of an overall programme to investigate how to distill the massive amounts of technical information that are generated in the analysis of any upstream petroleum asset into suitable formats for use in "complete" decision tree analyses of the design, management and value of that asset. A complete decision tree analyses future flexibility in response to all dynamic uncertain variables, including prices, throughout the life cycle of the asset. The first part of the paper explains how and why we have set up this programme. The second part of the paper begins an examination of a particular issue where we need to distill technical detail for use in a complete decision tree. The upstream petroleum asset life cycle is usually divided into discrete phases. However, the actual situation is more fluid. For example, information arrives, and can be collected, throughout the life of the asset. In this sense, appraisal never stops, and, in principle, development and production activities should be tuned to take into account the value of the information that can be collected as a result of these activities. We begin to explore this by examining, in an integrated fashion, the appraisal and development phases of the asset life cycle, using a model of an offshore oil-field development lease as an example. We presume that drilling and facilities construction are the only two activities during this part of the life cycle. Drilling can give information about the asset ("appraisal drilling") or provide production capability ("production drilling") or both. Investment in production facilities begins at sanction, which can occur in any year until the end of the lease. In our initial exploration of this issue, we have found situations where an asset manager can add value by considering the option to have mixed appraisal and production drilling programmes before and after sanction. Copyright 2003, Society of Petroleum Engineers Inc

Development as the Continuation of Appraisal by Other Means

This paper is part of an overall programme to investigate how to distill the massive amounts of technical information that are generated in the analysis of any upstream petroleum asset into suitable formats for use in "complete" decision tree analyses of the design, management and value of that asset. A complete decision tree analyses future flexibility in response to all dynamic uncertain variables, including prices, throughout the life cycle of the asset. The first part of the paper explains how and why we have set up this programme. The second part of the paper begins an examination of a particular issue where we need to distill technical detail for use in a complete decision tree. The upstream petroleum asset life cycle is usually divided into discrete phases. However, the actual situation is more fluid. For example, information arrives, and can be collected, throughout the life of the asset. In this sense, appraisal never stops, and, in principle, development and production activities should be tuned to take into account the value of the information that can be collected as a result of these activities. We begin to explore this by examining, in an integrated fashion, the appraisal and development phases of the asset life cycle, using a model of an offshore oil-field development lease as an example. We presume that drilling and facilities construction are the only two activities during this part of the life cycle. Drilling can give information about the asset ("appraisal drilling") or provide production capability ("production drilling") or both. Investment in production facilities begins at sanction, which can occur in any year until the end of the lease. In our initial exploration of this issue, we have found situations where an asset manager can add value by considering the option to have mixed appraisal and production drilling programmes before and after sanction. Copyright 2003, Society of Petroleum Engineers Inc

Value of information in closed-loop reservoir management

This paper proposes a new methodology to perform value of information (VOI) analysis within a closed-loop reservoir management (CLRM) framework. The workflow combines tools such as robust optimization and history matching in an environment of uncertainty characterization. The approach is illustrated with two simple examples: an analytical reservoir toy model based on decline curves and a water flooding problem in a two-dimensional five-spot reservoir. The results are compared with previous work on other measures of information valuation, and we show that our method is a more complete, although also more computationally intensive, approach to VOI analysis in a CLRM framework. We recommend it to be used as the reference for the development of more practical and less computationally demanding tools for VOI assessment in real fields.Geoscience & EngineeringCivil Engineering and Geoscience