11th May 2012 at 1:56pm
Exploration opportunities are risky. They are subject to a complex tangle of uncertainties: subsurface, costs, commercial terms, partner behaviour and infrastructure availability. Decisions often have to be made quickly and with imperfect information. Most importantly, resources can only be committed to exploration, if a clear and credible growth pathway/potential is identified upfront. Budget-holders want to hear a compelling, complete and well-articulated story before they commit.
A set of attractive targets and specific goals may gain initial buy-in. However it is only by clearly communicating the risks, upsides and context of the opportunity that long-term commitment to the strategy can be secured. A complete exploration strategy clearly outlines both (i) the size of the prize and commitment and (ii) the risks/upsides associated with it.
(i) Defining the size of the prize and commitment
- Setting the scene and being explicit about what can we win in our target areas and why. Companies that have followed a statistical ‘numbers game’ have often ended–up spreading their expertise too thinly, and delivered less success than more focused approaches. Opportunities that are championed based on a compelling argument of the company’s ‘right-to-win’ and its unique capabilities that can support success (e.g. expertise in deepwater exploration), have a higher potential of gaining buy-in. Also setting these opportunities within the business context of the competition and infrastructure constraints etc., gives more confidence to leadership in making decisions.They can decide, from a common level of understanding, which opportunities/challenges the environment offers and how these shape the size of the ‘prize’ in terms of new volumes, costs, etc.
- Illustrating how the exploration opportunities align with the overall country strategy across functions. In some cases different functions (production, exploration, BD) prioritise opportunities according to their own agendas (e.g., EOR and exploration only in existing licences vs. focus on new area entry). Such conflicting and fragmented views can become an obstacle in effective evaluation and resource planning and will inevitably make leadership less confident to commit.
- Allowing leadership to challenge and test changes to assumptions and choices. For example, an exploration strategy with the objective of ‘early-mover in a new accessible area’ is highly dependent on when and how much the government will open up for exploration. This is a ‘moving target’ that directly impacts the timing and size of new volumes. Flexibility to test and re-asses such uncertainties as new information comes in, makes the evaluation more robust and helps set realistic timeframes and expectations on key outcomes.
- Identifying the necessary resources required to implement.Making a strategy decision has resource implications. The more explicit this link, the easier it is to prevent falling in the trap, where others are tasked to implement the strategy. It becomes clear to leadership that along with their commitment to a strategy they are asked to commit to the resources required to make it happen. As such, they will want to see a resource plan that outlines exactly what this commitment entails and the contingencies implicit in key uncertainties.
- Focusing the discussion on the uncertainties that affect value the most. Often attention can be falsely directed towards uncertainties that seem intuitively important. However there are a large number of uncertainties to be considered such as timing and access to acreage (opening up of new areas or probability of success in license awards/acquisitions), infrastructure/rig availability, access to market, partnering opportunities, etc. Implications of these uncertainties are complex and wide-ranging. Evaluating and presenting uncertainties in a comparable and quantifiable manner, helps focus on the key value drivers.
- Highlighting trade-offs in terms of value metrics important to leadership. Describe the opportunity in the context of corporate portfolio goals, such as booked reserves, production volumes, ENPV, IRR etc. to allow leadership to directly compare against opportunities on the global portfolio.
(ii) Bringing insight to key risks and upside
Bringing a well-structured story to stakeholders, that defines the opportunity within its full context of uncertainty, positions the conversation at a much more constructive starting point. Focus does not linger simply on the outcomes and targets but on the upsides and risks. Leadership gains a better understanding of what uncertainties drive the value and is in a better position to commit to the strategy for the longer-term.