Joint Venture Grapples with Risk as it Seeks to Maximize the Value of a Mature Oil and Gas Asset

Situation Analysis

A large oil and gas joint venture (JV) was considering whether to make a multi-billion dollar enhanced oil recovery (EOR) investment in one of its aging assets – a project that represented the JV’s single largest organic growth opportunity. Several decisions factored into the investment ranging from the amount of surface and subsurface capital to deploy to the terms of the contract with the supplier of the EOR injectant. Several uncertainties, including future commodity prices, the recovery factor achievable, and how successfully the EOR technique could be applied to the reservoir, made it unclear what investment decisions to make.

Discovery & Solutions

Working with executives and a team of subject matter experts from across the JV and its parent companies, SDG helped to frame the effort, assess high quality information, and develop an analytical framework. Previous to the engagement, the client was struggling to make use of a highly detailed deterministic model it had created to simulate the reservoir’s characteristics and its response to the EOR technique. Because the model did not include the uncertainties that threatened the project’s economics, it did not bring clarity to the key decisions the JV’s executives faced. To address this issue, SDG used a novel approach to create a probabilistic model that integrated project economics with only the most critical elements of the subsurface model. Using this analytic framework, the decision makers could finally see a full quantification of the risk associated with each of the alternative strategies, and what was contributing to it.

Results & Impact

SDG’s work and the associated model served as the foundation for negotiations with potential suppliers of injectant by making clear the breakeven injectant cost under various deal terms such as purchase rate and contract duration. At the end of the analysis, the parent companies disagreed on whether the project should proceed. SDG identified the value drivers that were the sources of disagreement and used them to build a framework for valuing a demonstration project for breaking the impasse.