Risk and Uncertainty Management
Best Practices and Misapplications for Cost and Schedule Estimates
John P de Wardt, Susan K Peterson, James A Murtha, Society of Petroleum Engineers, Dallas, October, 2005
SPE 97269
Risk management, risk analysis, and uncertainty analysis are still-growing trends in cost and schedule estimating. Engineers and managers alike have been lead to believe that correct application of best practices will ensure that operations achieve their objectives on time and within budget.
Unfortunately, a number of misapplications, misunderstandings, and mistakes have threatened to endanger the continued useful growth of this trend. Insufficient tools and / or incorrect use of the available tools have allowed creation of a false sense of security which is shattered by loss of objectives and time / cost overruns. It is very important that the industry understands and chooses the correct applications, and has realistic expectations.
This paper presents best practices for applying risk management, risk analysis and uncertainty analysis to capital expenditure cost and schedule estimates. In addition to outlining our recommended process, we highlight current misapplications that, in our opinion, are potential barriers to the continued growth of this valuable management tool.
Deepwater Success Through Predictable and Distinctive Drilling and Completion Performance
John P de Wardt, IADC/SPE Drilling Conference Dallas, March, 2004
SPE 87117
Benchmarked results on well construction projects show that many projects incurred significant cost over runs. Half of the mega projects since 1993 have been disasters resulting in a destruction of capital for oil companies. Insufficient drilling front-end loading and inadequate team organization have been identified as preventable causes of these over runs.
Deepwater projects involve multiple challenges of new technology, geological uncertainty and, often, a fast track approach. The wells’ portion of the total project cost often exceeds 50%. The huge price for intervention activities later in the life of these wells requires that the initial completion remain in place and function as planned for a long time.
Predictable and distinctive drilling and completion performance is a must for the high cost projects that typify deepwater.
This paper will describe a methodology that has been successfully applied with repeatable best in class results in the North Sea and Gulf of Mexico. This methodology addresses the need that teams are organized to fit the project (not the other way around) and that systems integration is treated as a high priority. The results typically achieved with this methodology are in the range 20 – 23 days per 10,000 ft – best in class in both regions and 35% better than the average drilling time – with commensurate improvements in production and data acquisition. Short case histories of deepwater exploration and development wells are described – including a horizontal development well.
The paper describes:
- how the projects were organized,
- how the teams were aligned to their objective and goals,
- the processes that support these successful teams,
- how the teams were motivated to perform,
- how web based support can function to create co-location through the virtual world.
The paper also contrasts this methodology with traditional operations.
Building a World-Class Organization in a Volatile Oil Price Environment.
Part 3 – Value contracting of equipment and services, and true measurement of results are key ingredients necessary for oil companies to compete effectively in today’s business environment.
J.P. de Wardt, World Oil, April, 2000
The old adage, “you get what you pay for,” applies to contract services in the oil and gas business. From the 1970’s finance and procurement departments have driven the process to select and contract services. Through their lack of understanding of value, they have focussed organizations on contract prices. Basically – regardless of the hype surrounding the information gathering process on safety, quality, technology and the like – contracts usually are awarded on a price basis. Low bid wins the work.
What oil companies really want is often different from what they measure and what they ask for. Oil companies must recognize what the values of their businesses are for them, relate these to their operations, procurement and financial staff, and then design contracting practices and measurement methods to meet these goals. Rational thinking and the right expertise can develop a contracting strategy where oil companies can get what they need. An industry forecast is made at the end of this article.
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Building a World-Class Organization in a Volatile Oil Price Environment.
Part 2 – The ability to maintain a highly competitive performance rate will be a necessity for oil companies in the 21st century.
J.P. de Wardt, World Oil, March, 2000
Crude oil prices have taken a violent ride on the commodity exchange roller coaster, plunging from the $20/bbl range to $10 then rising again, up beyond $20. This volatility is unlikely to disappear, as traders play their perceptions of supply / demand imbalances. Aggressive oil companies are now planning their futures on being profitable at potentially low oil prices, as low as $11/bbl. This means that they will demand low finding and producing costs.
Oil companies will need to meet a string of demands, if they are to be competitive in an aggressive environment. These demands include predictable costs, lower costs than competitors, excellent results from operations, short cycle times and a reduction in unused overhead. These can, and indeed have, all been achieved through understanding the business needs, applying the correct performance measurements, breaking down boundaries between organizations and breaking through performance barriers.
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Step Change Improvement in Drilling Performance,
Repeatable Worldclass Performance is Possible,
J.P. de Wardt, A. Cook, R.W. Smook Society of Petroleum Engineers/International , Association of Drilling Contractors, New Orleans, February, 2000
IADC / SPE 59203
When depletion strategies for BP Amoco's Valhall field on Norway's continental shelf required the drilling of extended reach drilling (ERD) wells, problems appeared which threatened the project economics. Average trouble costs approached 35% and occasionally exceeded 50%, while some wells failed to reach their objectives and the projects were not completed. Sound principles for aligning the operator/supplier team were applied to a very challenging ERD well following successful applications on exploration wells in Norway and development wells in other areas. Starting with a slot recovery that historically took 29 days being completed in 18, the well concluded 31 days (30%) ahead of past performance. It is clear that re-organization of a select group of operating and service company candidates into an aligned team made the difference. This paper will describe the challenge, the transformation and the result.
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Building a World-Class Organization in a Volatile Oil Price Environment.
Part 1 – Key to success will be companies’ ability to reduce costs of their services while increasing the value delivered to clients.
J.P. de Wardt, World Oil, January, 2000
Major oil company E&P managers typically have not been held accountable for meeting performance and cost targets to the same degree as either contractors to these managers or other industries. In today’s highly competitive world, there is no room for complacency with performance. As many companies are just beginning to discern, noncompetitive performance in a volatile and low oil price environment leads to corporate failure.
True performance must be achieved in the oil industry. Consolidation, yielding improved economic and operational performance, is likely to occur in reaction to low oil prices. New entrants to the industry could rapidly emerge if the current players do not wake up.
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When “No” is the Appropriate Answer to the Customer,
J.P. de Wardt, D.M. Leggett Society of Petroleum Engineers/International, Association of Drilling Contractors, Amsterdam, February, 1999
SPE / IADC 52774
The traditional method of establishing relationships between customers and suppliers in the drilling business is very inefficient and wastes money through consuming resources without adding value. Some new processes have been introduced but low bid is still often the primary determinate of success. These are reviewed, the issues still to be addressed identified and solutions discussed. Two avenues of improvement are described: 1) suppliers evaluating their opportunity and declining where appropriate; 2) customers removing cumbersome systems from the past and using new, more intelligent and efficient methods for selecting suppliers.
Alliances: Are they effective?
J.P. de Wardt, World Oil, February, 1997
Concern is growing in the oilfield that alliances are not doing as well as they should be. Have they been adopted as a panacea without sufficient understanding of what they are or how to implement them? That question is answered in five sections. A changing industry — two key trend drivers; entering a new era of organizing and managing systems. Types of contracts — alliances versus fixed and incentive contracts; limitations of discounting. Oilfield alliances — new solutions are needed to improve the system. Change / commitment — how changes are being implemented by the innovators; how many really support it. Alliances take effort and time — why it isn’t easy to do it right.
Can Alliances Build a Brighter Future,
J.P. de Wardt, Drilling Contractor / Oil and Gas Journal, May, 1996
Alliances have been variously described as the panacea for our industry to the flavor of the month. What are they, can they be of benefit and how are they being applied? Evidence from other industries clearly shows that alliances create a more profitable environment for customers and suppliers. This same evidence shows that the path to this transformation is not straightforward, but strewn with misdirection, blind alleys and other diversions. The issues affecting change in our industry are discussed.
Operational Realities in the Nineties,
J.P. de Wardt, World Oil, February, 1996
The realities of the nineties revolve around declining oil prices, rising production costs and evolution of project economic value metrics. A traditional industry cycle of change in hostile times has been followed but will not be completed due to the evolution of a new industrial era. The route to growth is illuminated.
Strategic Alliances - Where Are We Headed,
J.P. de Wardt, World Oil, February, 1995
The history of strategic developments for alliances is discussed and answers to the key questions raised are given. The concepts of Lean Drilling™ are introduced and the need and difficulty of creating the necessary interdependencies is discussed.
Lean Drilling - Introducing the Application of Automotive Lean Manufacturing
Techniques to Well Construction
J.P. de Wardt, Society of Petroleum Engineers/International Assoc, February, 1994
Reprinted in the Journal Of Petroleum Technology, February 1995
Significant improvements in profitability can be achieved by applying the key principles of lean manufacturing to the drilling and production industry. These principles provide the framework for successfully applying the practices of alliances and partnerships. This paper provides the insight for adopting these principles through an analogy of lean manufacturing and well construction.
Drilling in the Twilight Zone - Somewhere Between Dayrate and Turnkey
J.P. de Wardt, Society of Petroleum Engineers/International Assoc, February, 1993
Modified and reprinted in the Drilling Contractor Magazine, May 1994
A significant movement has arisen towards contracts which fall between day-rate and turnkey. This is an ill defined region of contrasts in control, responsibility, accountability and pricing structures. This region requires thought and development to provide the mechanisms for successful contracts. The structure and orientation for contracting drilling operations in this region are described in this paper.
Strategies and Structures for Drilling and Service Contracts
J.P. de Wardt & J.M.I. van Gils, Society of Petroleum Engineers/International Association of Drilling Contractors, New Orleans, February, 1992
New contractual mechanisms were developed to meet the challenges raised by the “Drilling in the Nineties” initiatives which were introduced to the industry in early 1990. This paper described the strategy for integrating services, the application of “Designated Subcontracts”, the application of business process models, the development of incentive payment mechanisms and the techniques for creating co-operative customer - supplier relationships.
Drilling Contracting in the Nineties
J.P. de Wardt, Society of Petroleum Engineers/International Association of Drilling Contractors, Houston, February, 1990
Drilling in the Nineties was an initiative introduced to reduce well costs and improve the efficiency of drilling operations. The desire to increase operator efficiency lead a change from supervising the contractor to managing the contract. This paper discusses the implementation of this change and reviews the construction and content of a new contract document format selected to support this implementation. The review covers a range of items including liabilities, obligations, scope of work, specifications and equipment requirements. The application of this new format to incentive and turnkey drilling operations is described together with the implications on operator / contractor roles in the execution of these types of contracts.