Abstract

The titles of papers given at industry conferences over the last couple of years suggest a significant rise in the level of awareness of the potential for decision and risk analysis (D&RA) techniques to impact portfolio-related decisions, from exploration acreage acquisition through drilling and development decisions to transportation and downstream issues.

This may well be a function of the increase in the number and complexity of upstream partnerships and alliances and that, combined with a tightening of money markets, leads to greater difficulties in reaching agreement on portfolio-related decisions.

These portfolio management decisions include those that relate to:

  1. which assets should be in, or out of, the portfolio?

  2. what are the appropriate equity levels in each asset?

  3. when is the best time to start, or continue, investing in each asset?

The increase in interest might also be a result of competitive pressures: if some companies are seen to be using techniques which appear or promise to give them a competitive advantage - smarter decisions leading to more efficient portfolios - then other companies will quickly feel the need to do the same.

This paper presents a model for portfolio management strategy formulation which starts with the application of the latest D&RA tool developments to individual asset value assessments, continues through the generation and analysis of potential portfolios, and ends with the incorporation of the insights thus generated into a strategy formulation and implementation stage.

The paper argues that the ultimate objective of D&RA is to optimize a company's portfolio of assets, that the use of sophisticated D&RA tools is a critical foundation necessary for achieving that objective, and that the industry still has some work to do before some potentially very important techniques, such as real options valuation, are practical working tools which everyone can and should use.

Introduction

The term "portfolio management" is one that is both used and mis-used in a variety of ways in the industry. In its broadest sense it is usually taken to mean a set of processes that allows decision makers to design strategies and take actions designed to maximize the value of the assets owned by a company, within the constraints imposed by that company's goals, objectives and resources. This set of processes can be thought of in terms of four major sections:

  1. asset valuations;

  2. the definition of goals, objectives and resource related constraints,

  3. the generation and analysis of possible portfolios; and

  4. the incorporation of the insights gained from this analysis into the formulation of portfolio management strategies (see Figure 1).

In all of these stages, and particularly the analysis in stage 3, a multi-disciplinary peer review, and an embracing of the interactive and iterative nature of the process, is extremely important in terms of quality control. It has the additional benefits of ensuring the capture of peripheral consequences and constraints, and of encouraging lateral thinking.

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