The Advocacy Approach has inherent flaws that can unnecessarily handicap decision makers.

Today’s oil and gas industry is operating in a new, high-stakes world. Financially, politically, and technically, there is more complexity and uncertainty than just 10 years ago, and the significant capital decisions that are made have greater potential impact and consequences.

To contend with this increasing complexity, help mitigate risk, and improve success rates, several companies, typically larger operators, are embracing an alternative approach to analysis and decision-making ? an approach called integrated decision management (IDM).

Traditionally the oil and gas industry uses the Advocacy Approach (AA) to decision making. This approach has inherent limitations that can unnecessarily handicap decision makers, negatively impacting the quality of decisions. The AA defines neither a process to identify viable alternatives nor a way to properly address, qualify and quantify related risks. With these limitations, the AA typically results in converging too quickly on a single solution and often an inability to make corrections when problems arise.

This first article in a three-part series highlights the primary factors that contribute to increased complexity, identifies the inherent limitations in the AA, and sets the stage for how IDM addresses those limitations and leads to better decisions.

High-impact economic decisions

The IDM process is for high-impact economic decisions where the execution risks are considerable and the outcomes can impact the viability of an organization. Examples include: assets acquisition or divestiture for divisions or even whole companies; developing or re-developing reservoirs; creating and commercializing new or existing technology; and expanding or contracting manufacturing or service capacities. One major operator requires IDM for decisions with an impact of US $500,000 or greater.

IDM is important for operators and service companies alike. Traditionally, single decisions made by service companies may not be as capitally intensive as those made by operators, but they have been growing in magnitude as their businesses have expanded to address the technology needs for increasingly challenging drilling and production activity.

Bigger bets and the 15% threshold

Capital budgets for major operators and service companies have more than tripled over the last 10 years, from approximately $33 billion to $108 billion. There is a comparable increase in spending by national oil companies (NOCs). Today, many capital investment decisions can approach 15% of a company’s market capitalization. Typically, decision makers cannot afford to make many mistakes when betting 15% of a company, and it can be difficult to recover when the wrong decision is reached.

Many factors contribute to increasing complexity in this industry. The most crucial factors include:

  • Increasing Prices. The $100-plus/bbl cost of oil is pushing demand and costs for rigs, equipment, and personnel skyward, creating even more volatility and uncertainty in the market of goods and services needed by operators.
  • Experience Drain. Many experienced decision makers will retire in the next few years, creating an experience gap at a time of unprecedented demand, development, and uncertainty. Today’s typical decision-making processes rely heavily on the experience of those retiring individuals; crucial aspects of decision making have not been codified into the work processes.
  • Changing Roles. NOCs are emerging to serve as their own operators, acquiring and developing assets worldwide, while other NOCs are relatively new to the industry. Service companies are partnering with NOCs in new ways, in some cases accepting production incentives or other conditional compensation for their products and services.

Tradition: Advocacy Approach

For many, the approach to problem solving is to propose a hypothesis, then evaluate and test it. Though appropriate for the laboratory, this method is not the best model for complex, multi-dimensional decision-making.

The initial stage in the process is typically characterized by informal and unstructured discussions of alternatives. Then, a single alternative is proposed as a potential solution. That proposal is analyzed, discount factors are applied for risk, value is calculated, and the case is presented to decision-makers.

Decision-makers interrogate the solution asking a series of “What if?” questions or “Did you consider X?” This interrogation can lead to an endless loop of evaluation, analysis, and non-decision because the AA lacks a structured process for identifying a wide range of viable alternatives and a process for properly addressing, qualifying and quantifying related risks.

The AA does not allow multiple alternative solutions to be identified and explored, which in turn inhibits innovation. Focus on a single solution typically turns what could be a wide range of possible alternatives into a binary decision: Should we do X or not?

This approach might appear to simplify the problem, but it actually masks the complexity, which eventually has to be addressed in the implementation of the solution. It leaves decision-makers with little understanding of what can be done about the risks and uncertainties, and it places them in the unenviable position of having to make crucial decisions without knowing what risks to monitor in implementing the decision and what value each risk has to the overall value of the decision.

The AA also relies on a hero, who attempts to convince the organization of the soundness of a solution. The hero is often left on an island where even the best solution cannot be implemented because the organization isn’t aligned to the hero’s solution or justification.

Using AA often results in:

  • A “No” decision because there is an uncomfortable feeling that we cannot look at everything or that we are missing something that is going to jump up and bite us, meaning that the risk is too great;
  • A decision that everyone seems to agree to, but never truly gets implemented, or proves to be the wrong choice in the long run;
  • An endless loop of evaluation, analysis, and non-decision; or
  • A leap to an action-based decision because of the convenience of the currently available alternative and the comfort zone of experience, but with little or no plan to deal with risks and uncertainties.

Case study: quick pick

An operator developing an offshore project adjacent to an exploration prospect had to evaluate the possibility of creating a development plan for both areas, which could maximize the investment and potential for profit for both. The development project alone had problems, chief among them sizing of the facilities. The exploration prospect was a complete unknown.

Though many unknowns existed, strong opposing positions quickly emerged for potential solutions. Some said the exploration prospect would result in a huge find, so a massive production facility that could handle production from both the development and exploration prospect was required. Others thought the exploration prospect was a long shot, and a minimal production facility was the answer.

Of course, these “solutions” were not much more than hunches.

Why IDM improves the odds for success

IDM requires decision-making teams to:

  • Identify an organization’s underlying objectives and create organizational alignment to those objectives;
  • Define a broad range of creative alternatives;
  • Identify, capture, and quantify complexity and risk for each alternative; and
  • Present the most valuable alternative to the decision maker along with a plan to mitigate or deal with risks that have been economically evaluated.

This approach allows decision makers to evaluate and compare alternatives (including implementation plans) and their impact on value and to understand the uncertainty and risks associated with each, which leads to more successful decisions.

IDM has been used for many years in other industries and is now being used by several major oil and gas operators.

The next article in this three-part series describes IDM, explains how it brought success to the case study project and begins to identify steps for successful implementation.