Optimizing Investments to

Achieve Corporate Growth

Objectives

Corporate Growth

“The ideal situation”

Optimum programs and processes in place

Ideal risk/prize profile

Predictable results supported by opportunity inventory

Investment initiatives meet Corporate goals and objectives

Key Considerations

Strategy & Alignment

Investments aligned with Corporate goals

and objectives?

Goals supported by historic performance?

Opportunity inventory sufficient to meet

growth objectives?

New growth focus areas?

Competitive advantages relative to market

opportunities

Key Considerations

Work Processes

Organisation and portfolio management best

practices?

Predictable, reliable and sustainable results?

Appropriate measurement and stewardship

processes?

Key Considerations

Capabilities and Execution

The optimum organization?

- people, structure, work processes

Five Steps for Successful Growth

1. Develop & validate opportunity plans and

inventory

2. Selections based on Corporate needs

3. Assess risks/results of project outcomes

4. Address growth shortfalls

5. Ensure alignment, optimum work processes,

organizational capabilities and structure to

deliver results

Materiality (Reserves Potential)

Economic Attractiveness (Profit Potential,

Play Investment Efficiency)

Timing Considerations

Competitive Position

Risk Profile of Opportunities

2. Selection Based on Corporate Needs

Subjective Composite Ranking

Economic

Potential

Reserve

Potential

Play Invest

Efficiency

Timing/Risk

Factors

Competitive

Position

40% 10% 20% 15% 15%

Building a Business Model for Play Ranking

Parameters & Weightings

Determined by Company Needs

Subjective Composite Ranking

Economic

Potential

Stakeholder

Impact

Invest

Efficiency

Timing/Risk

Factors

Competitive

Position

% % % % %

Criteria to Rank and Select Projects/Plays

Parameters & Weightings

Determined by Company Needs

Example showing typical projects

Project 1 – Modest size but low risk and short cycle

time

Project 2 – Medium size, moderate risk but cost

plus technology challenges

Project 3 – Large size, medium risk but timing and

cost uncertainties

Project 4 – Largest size but highest cost and risk

Portfolio Ranking CriteriaProject selection is dependent on company situation

Ranking

Highest

Lowest

Ranking

Best

Worst

Project Impact Materiality (PV)

Project Investment Efficiency (PVPI)

Risk Aversion

Total Size

$ PV

Project Size

Risked Size

$ at Risk

Risked $ PV

$ at Risk

$ per

opportunity

Program

COS

$ at Risk

Technical, Commercial, Political Risk

4 4 4 3 3 1 1 1 1 3 3 3 4 2 2 2 2 4

2 2 2 2 4 3 3 3 3

1 1 1 1 1 4 4 4 2

Program

Size Program

$ PV Average

Size Impact

Risked Size

$ at Risk (walk away exposure)

Risked $ PV

$ at Risk

$/Unit Cost

Chance of

Program Success

Total $ Exposed

(walk away)

Commerciali-zation or

Political Risk

3. Assess Project OutcomesResults based on 12 opportunites with risks of 5 to 20%

Revenue Forecast

Rev

enu

e p

er d

ay

0

100

200

300

400

500

600

700Growth Gap

Probability of Success (or failure) vs number of wells drilled

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 5 10 15 20 25 30 35 40

at least one success

First 5 wells have Chance of success =

10%,20%,5%,15%,10%

All additional wells Chance of success = 20%

at least two successes

failure - all dry holes

Probability of SuccessHow do we assess our chance of success ?

three

discoveries

three

discoveries

at least four

successes

Exploration Probability of Success @ 5-20% Success Rate

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

5 10 15 20 25 30 35 40 45

Number of Wells

Overa

ll P

rob

ab

ilit

y

Total Failure Chance of 1 Discovery Chance of 2 Discoveries

Chance of 3 Discoveries Chance of 4 Discoveries Chance of 5 Discoveries

at least three successes

Program Summary and AssessmentExample shows shortfall of existing inventory

Plan requires 3 new successes to meet growth targets

– 12 unit program has only a 35% chance of 3 discoveries

– 22 unit program required for 80% confidence

Inventory Shortfalls

Given high risk per project, requires 10 more projects to achieve acceptable

chance of success

Existing program has late revenue startup

4. Address Growth Shortfalls

1) Build a Corporate Opportunity Inventory

“Inventory allows choice & selectivity”

New Growth Area Considerations

1. Business Fundamentals

2. Industry Historic Performance

3. Business Environment

4. Company Financial Situation

5. Competitive Factors

6. Your Company’s Strengths versus Area Success Factors

7. Entrance Strategies

Portfolio management prerequisites

Consistent quality input

All opportunities assessed utilizing “best

practices”

Quality control “support” system

Corporate-wide selectivity process

Multiple performance indicators

Variable selection criteria

Performance based on delivering inventory &

results

Average initial productivity

Productivity (10

3m

3/d) 3

3

0

5

10

15

20

25

30

35

40

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Portfolio Inventory Examples

Development Inventory

•Recent exploration discoveries

•Static resources

•Possible resources

•Enhanced recovery inventory

•Probable reserves

•Proven undeveloped reserves

Exploration Inventory

• New basins/plays potential

•Risked prospects/ leads

•Land base

•Drill ready risked locations

•Present year drilling program

Corporate Inventory

•Corporate/property

acquisition inventory

•Exploration inventory

•Development inventory

•Production Inventory

•Other growth inventory

•Strategic plan

4. Address Growth Shortfalls

2) Improve Quality of Inventory

Review project inventory / quality / ranking for all growth

opportunities

– Funding requirements

– Ongoing staff training

– Formal project review process

3) Expand Inventory to Meet Growth Targets

Utilize Corporate-wide inventory for ranking , risk balance

Add new opportunities after testing against existing inventory

and ranking criteria

Expanding the InventoryNew Growth Area Considerations

i. Investment Fundamentals

ii. Industry Historic Performance

iii. Business Environment

iv. Company Financial Situation

v. Competitive Factors

vi. Your Company’s Strengths versus Area Success Factors

vii. Entrance Strategies

i. Business Fundamentals

- Existing project, remaining growth potential

and project maturity

(total potential/specific item, maturity, etc.)

- Identified new opportunities and average

revenue per opportunity

ii. Industry Historic Performance

- What has industry accomplished?

- Is this acceptable?

- Can you do better?

iii. Business Environment

- Spending patterns, revenue and profit adds and

costs

- Commodity prices and area specific netbacks

- Resulting economics

iv. Company Financial Situation

- Financial strength and available capital

- Short term cash flow needs

- Earnings pressure

- Long term reserves needs

- Shareholder risk tolerance

v. Competitive Factors

- Key players in area

- Area activity levels

- Infrastructure access

– Availability

– Etc.

vi. Your Company Strengths versus

Area/Play Success Factors

- Do you have what it takes to succeed in this new

area/opportunity?

vii. Entrance Strategies

Internal growth strategies

- Company sales, joint ventures

Acquisition driven growth strategies

- Corporate, opportunity based

Proactive versus opportunistic?

- Lower risk by capitalizing on quick pay out

opportunities

- Best opportunities often result from financial

problems with opportunity owner

-Integration opportunities can give competitive

advantage

5. Test Strategy & Alignment

Alignment Align opportunities with Corporate needs

Achievable Evaluate growth inventory including size, risk, and

ranking criteria

Test Corporate goals & objectives with track record, financial capabilities, competitive position plus growth inventory

Alternatives Compare new opportunities with existing opportunities

5. Test Work Process

Evaluate existing processes and practices for

“best risking and assessment practices” and for

consist use

Evaluate overall risked success of portfolio –

minimize variability of outcomes while

optimizing potential

Apply portfolio approach to investments ensuring

quality input and consistency for selection,

pursuit and exit decisions

Monitor performance against targets

5. Test Organizational Design

Functional Model

Benefits: technical excellence, career

development, portfolio prioritization

Issues: handoffs between functions, differing

performance indicators, cycle time

5. Test Organizational Design

Business Unit Model

Benefits: integrated multi-disciplined teams, shared performance indicators, reduced cycle time, improved financial performance

Issues: narrow focus, risk aversion, technical quality, portfolio management of people and $ investments, career development and mentoring

Conclusions

Increased competition is driving higher costs and lower netbacks

Emerging new players are changing the game

Understand our competitive position

- capitalize on our advantages

- address our problem areas

Understand area specific potential and industry results and trends

- focus on attractive areas for new growth

How and where do we add economic value?