Integrated Method for Designing Valuable Flexibility in Oil Development Projects
- Abisoye Babajide (Shell) | Richard de Neufville (Massachusetts Institute of Technology) | Michel-Alexandre Cardin (Massachusetts Institute of Technology)
- Document ID
- Society of Petroleum Engineers
- SPE Projects, Facilities & Construction
- Publication Date
- June 2009
- Document Type
- Journal Paper
- 3 - 12
- 2009. Society of Petroleum Engineers
- 4.2.4 Risers, 4.3.4 Scale, 7.1.9 Project Economic Analysis, 4.6 Natural Gas, 4.8 Facilities and Construction Project Management, 5.6.3 Deterministic Methods, 4.1.2 Separation and Treating, 3 Production and Well Operations, 4.5.2 Platform Design, 4.1.5 Processing Equipment, 4.5 Offshore Facilities and Subsea Systems
- 1 in the last 30 days
- 473 since 2007
- Show more detail
- View rights & permissions
|SPE Member Price:||USD 5.00|
|SPE Non-Member Price:||USD 35.00|
This paper presents an integrated method for identifying and inserting valuable flexibility into major projects. It builds upon recent work that (1) documents how errors in estimates can bias the selection of design concepts, (2) shows how concept flexibility can improve the project performance, and (3) usefully illustrates the probability distribution of outcomes. It involves: (1) developing and evaluating a base case design, (2) exploring the outcomes this design might generate, (3) identifying opportunities for flexible design, and (4) evaluating and selecting the most valuable flexibility to incorporate into the design. It embodies a paradigmatic change in the way designers deal with uncertainty: instead of basing a design on fixed assumptions and then testing its sensitivity to risks, the approach recognizes risks in the design process and thereby develops valuable flexibility that increases the expected value of projects. A case study of an oil platform development in the Gulf of Mexico demonstrates the method.
Standard Design Process Leads to Losses. As observed in practice, the standard approach to the design of major development projects is a deeply technical process that focuses on the highly complex physical arrangement of the system. Indeed, the major elements of the platform, the risers, the tiebacks, and so on can be combined in literally millions of ways, sizes, and locations at different times. Both to simplify this process, and because physical design focuses on engineering, the usual approach assumes that major parameters are known. Most obviously, the design process normally takes the price of oil as given; in fact, senior management typically requires that designers across the company all use the same value for oil in their evaluations. Equally important, the design process typically works with a best estimate of the original oil in place (OOIP). In short, the standard approach to design is a technical process that generally does not explore in detail the consequences of the major variations in two of the prime drivers of value of any project.
The actual conditions that prevail, however, almost never equal point forecasts that have been assumed for design, whether one refers to the price of oil, the amount in the reservoir, the time and cost of construction, etc. The general rule, as demonstrated by experience in many fields of design, is that the "forecast is 'always' wrong" as demonstrated by observation of the discrepancies between prior point estimates and subsequent reality (de Neufville and Odoni 2003). Note that this fact is not inconsistent with the notion of a most likely estimate, which represents a balance between the possible upside and downside values of a parameter. A ‘most likely' set of parameters may correctly represent some middle or average value and yet be unlikely to occur in practice.
|File Size||919 KB||Number of Pages||10|
Babajide, A. 2007. Real options analysis as a decision tool in oil fielddevelopments. MS thesis, Massachusetts Institute of Technology, Cambridge,Massachusetts (February 2007), http://ardent.mit.edu/real_options/Real_opts_papers/Babajide_Thesis_FINAL.pdf.
Bartolomei, J. 2007. Qualitative knowledge construction for engineeringsystems: Extending the design structure matrix methodology in scope andperspective. PhD dissertation, Massachusetts Institute of Technology,Cambridge, Massachusetts (June 2007), http://ardent.mit.edu/real_options/Real_opts_papers/Bartolomei%20Thesis.pdf.
Begg, S., Bratvold, R., and Campbell, J. 2002. The Value of Flexibility in ManagingUncertainty in Oil and Gas Investments. Paper SPE 77586 presented at theSPE Annual Technical Conference and Exhibition, San Antonio, Texas, USA, 29September-2 October. DOI: 10.2118/77586-MS.
de Neufville, R., de Weck, O., Lin, J., and Scholtes, S. 2008. Identifyingreal options to improve the design of engineering systems. Revised draft(unpublished), http://ardent.mit.edu/real_options/Real_opts_papers/nembhard%20final%20draft.pdf.
de Neufville, R. and Odoni, A.R. 2003. Airport Systems: Planning, Design,and Management. New York: Aviation Week Books, McGraw-Hill.
Hassan, R. and de Neufville, R. 2006. Design of engineering systems underuncertainty via real options and heuristic optimization. Proc., 10th AnnualReal Options Conference, New York City, 14-17 June, http://ardent.mit.edu/real_options/Real_opts_papers/Hassan_deN_ROG_submitted.pdf.
Hayashi, S.H.D., Ligero, E.L., and Schiozer, D.J. 2007. Decision-Making Process inDevelopment of Offshore Petroleum Fields. Paper SPE 107737 presented at theLatin American and Caribbean Petroleum Engineering Conference, Buenos Aires,15-18 April. DOI: 10.2118/107737-MS.
Jablonowski, C., Wiboonkij-Arphakul, C., and Neuhold, M. 2008. Estimating the Cost of Errors inEstimates Used During Concept Selection. SPE Proj Fac &Const3 (1): 1-6. SPE-110191-PA. DOI:10.2118/110191-PA.
Kalligeros, K. 2006. Platforms and real options in large-scale engineeringsystems. PhD dissertation, Massachusetts Institute of Technology, Cambridge,Massachusetts (June 2006), http://ardent.mit.edu/real_options/Real_opts_papers/Kalligeros%20Dissertation.pdf.
Suh, E.S. 2005. Flexible product platforms. PhD dissertation, MassachusettsInstitute of Technology, Cambridge, Massachusetts (September 2005), http://esd.mit.edu/people/dissertations/eun_suk_suh.pdf.
Wang, T. 2005. Real options "in" projects and systemsdesign—Identification of options and solutions for path dependency. PhDdissertation, Massachusetts Institute of Technology, Cambridge, Massachusetts(May 2005), http://ardent.mit.edu/real_options/Real_opts_papers/tao%20dissertation.pdf.