The process of portfolio optimization provides guidance to decision makers on how to manage an asset base given corporate objectives, market conditions, and organizational capability. Many applications in the oil and gas industry are based upon Markowitz’s efficient portfolio theory. In the standard implementation of this framework, an efficient portfolio is defined as one that yields the highest value given a specific degree of risk.
A corporate decision maker will aim, however, to select a portfolio that meets several often competing objectives, i.e., maximize portfolio value while minimizing capital expenditure. The optimal portfolio choice given one constraint is typically not optimal given one of the competing constraints. This requires the portfolio manager to identify and select those portfolios that best meet all corporate constraints. Deciding which portfolio to develop is often compounded by there being several portfolios having similar economic characteristics. However, these portfolios can generally be differentiated by strategy, which may depend on non-financial attributes such as the geographic location of the assets or on geological settings that might require different engineering expertise.
In this study, a large set of exploration portfolios and their attributes have been simulated. Through applying a series of simple and transparent filters, a few portfolios can be identified that meet all the corporate constraints. After a shortlist has been created, the portfolios can easily be characterized by strategy and the tradeoffs between them can be assessed.