dnl subsea value chain assessment presentation_tcm144-517772

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Value Chain AssessmentWarszawa, May 21st, 2012

Lars Harald HaugeDNV Global Governance and Development



Version 1 DNV15 May 2012

Rationale for Value Chain Assessment

(Quantitative Risk Management)




Different types of project risk management

Identify & Acquire Explore Select Define Execute Operate & Evaluate

Stage Gate

Reviews

Day-to-Day Risk Management

Time

Aggregated Risk Reviews Decision Gate Reviews

Appraise

Aggregated Risk

Reviews

•Day-to-day Risk Management. Risk management activities related to the day-to-dayidentification, assessment and control of risks

•Stage Gate Reviews. Risk management activities related to the passing of stage gate reviews

•Aggregated Risk Reviews. Risk management activities related to the aggregated assessment

of achieving project objectives




Qualitative risk management is the traditional approach

Qualitative risk management provides a semi-quantitative approach where criticalityis measured as the product of probability of occurrence and consequence

Projectgoals

Rankindividualrisks

1

2 3

4

Individual risks Consequence

P r o b a b i l i t y

Low Medium High

L o w

M e d i u m

H i g h

Critical (high priority)

Significant (medium priority)

Negligible (low priority)

Assessprobability andconsequence

Risk identification Risk assessment

Risk Criticality Action

1 Critical Not acceptable,initiate actions

4 Critical Not acceptable,initiate actions

3 Significant Acceptable,monitor

2 Negligible Acceptable

Risk ranking

1

43

2

Risks with impact on one ormore project goals areidentified

Typical goals are cost,

schedule, quality,reputation…

For each goal the risks areassessed with respect toprobability of occurrenceand consequence

A risk’s position in theprobability-consequencematrix indicate what riskmanagement strategy isrequired



But Qualitative Risk Assessment has severe weaknesses


Capex

Revenue

Opex time

$

Opex Risks

Capex

Risks

Asset &

Reservoir Risks

ScheduleRisks

• Risks will affect the revenue and cost streams throughout the project lifecycle

• Individual risk assessment and control ignores the effect of time on overall risk exposureand the relative desirability of alternative risk control strategies

The distribution of risk over time is ignored




And individual risk mitigation does not guaranteesufficient risk control

Very

High

High

Medium

Low

Very Low

VeryLow

Low MediumHigh

Very

High

**

** *****Individual riskseverity: Moderate

****

**

Each individual risk has a risk severity of moderate; hence only cost-efficient risk control is required.

However, the likelihood of at least one of the 15 risks occurring is > 50% (assuming independence)

Aggregate risk

severity: Critical

*




So; the qualitative approach comes short

Moving from qualitative to quantitative risk analysis enablesquantification of total risk exposure for all quantitative project objectives

Rank mitigating actionin terms of risk-reward

Assess the effect of mitigating actions

Rank actions based on risk-reward

Estimate the total risk exposure

Choose quantitative project objective(e.g. NPV, IRR)

Estimate the total risk exposure, i.e. theaggregate effect from all underlying risk &uncertainties

View the full probability distribution (notonly a single point estimate)

Identify and assess the effect of themajor risk and uncertainty drivers

Quantify effect of interdependenciesamong risks

Handle interdependencies between risks

Ensure mutual exclusive andcollectively exhaustive riskrepresentation (MECE)

Objective

E(x)

P90

Drivers

# risksObjective

R1

Objective

R2 R3

R1: independentR2: only if R1R3: influence all

R1R2

R3

ObjectiveAssumesindependencybetween single risks

Objective

Pre-actionPost-action A2

A1

A3

Net effect

R

R

Pre-actionPost-action




But the results from the qualitative risk analysis are still useful

Probabilistic cause-effect models represents the dependencies between performancevariables and uncertainty in underlying drivers (e.g. risk events and uncertainty estimates)

Monte Carlo simulation is used to generate numerical probability distributions forperformance variables

H i g

h

M e d i u m

L o w

Low Medium High

IMPACT

P R O B A B I L I T Y

2

1

3 4

RISK MATRIXAssess probability

and impact

PROJECTGOALS

1

2 3

4

INDIVIDUAL RISKS EVENTS

Cost BreakdownStructure

Activity Schedule

Completion date

Operationalperformance /

quality

• Probability• Consequence

Risksevents

Durationestimates

Costestimates

Aggregated (composite) risk metricsfrom Monte Carlo simulation

Completion

Date

P r o b a b i l i t yCompletion

Date


FocusFocusCost

mill NOK


Cost

mill NOK





Example Outputs from Value Chain

Assessment





Understanding the implications of the aggregate risk exposureand demonstrating sufficient risk control is a requirement atproject milestones and aggregate risk reviews

Would like information of the followingtype:

What is the aggregate risk exposurefor all the quantitative projectobjectives (cost, schedule,

reserves…)? What contingencies should be set

aside for the project?

What are the main risk drivers?

What are the effects of the different

candidate action sets?








Project Cost

Mill. USD120 125 130 135

Examples of quantitative risk analyses results






What is the aggregate risk exposurefor all the quantitative projectobjectives (NPV, cost, schedule,







What is the aggregate risk exposurefor all the quantitative projectobjectives (NPV, cost, schedule,






Project Cost

Mill. USD120 125 130 135

Budget contingency:

P75 – P50




















00354 - Fabricate Skids and Control Buildings 16%

00346 - Manufacture umbilical tubing 15%

00402 - Commission & Start-up Production System 14%

00383 - Pre-commission the topsides subsea systems 10%

00401 - Commission and Start-up Injection System 10%

00384 - Pre-commission the umbilical and subsea controls 10%

00376 - E&I Installation 9%

00373 - Mobilize Offshore Site 9%

00374 - Pumps skids Installation 9%

00366 - Install Flowlines 9%

00333 - Subsea Controls 8%

00353 - Topsides Detail Design 8%

00330 - Fabricate Manifolds in Nigeria 7%

00347 - Manufacture Umbilicals 6%

00355 - Onshore Pre-commissioning of Topsides Equipment 6%

00368 - Install Umbilicals 5%

00244 - NAPIMS/DPR Short List Approvals 5%

00241 - Technical Tender Evaluation (Lagos/US) 4%

0220 - Risk 27h 4%

00240 - Contractors develop tenders 3%

00354 - Fabricate Skids and Control Buildings 16%

00346 - Manufacture umbilical tubing 15%

00402 - Commission & Start-up Production System 14%

00383 - Pre-commission the topsides subsea systems 10%

00401 - Commission and Start-up Injection System 10%

00384 - Pre-commission the umbilical and subsea controls 10%

00376 - E&I Installation 9%

00373 - Mobilize Offshore Site 9%

00374 - Pumps skids Installation 9%

00366 - Install Flowlines 9%

00333 - Subsea Controls 8%

00353 - Topsides Detail Design 8%

00330 - Fabricate Manifolds in Nigeria 7%

00347 - Manufacture Umbilicals 6%

00355 - Onshore Pre-commissioning of Topsides Equipment 6%

00368 - Install Umbilicals 5%

00244 - NAPIMS/DPR Short List Approvals 5%

00241 - Technical Tender Evaluation (Lagos/US) 4%

0220 - Risk 27h 4%

00240 - Contractors develop tenders 3%




















Project Cost

Mill. USD100 120 140 160

Budget

Value

Budget

Value -1 0%

Budget

Value +10%

Prob (Cost >Budget + 10%)

Prob (Cost < Budget - 10%)

Project Cost

Mill. USD100 120 140 160 Budget

Value

Budget

Value -10%

Budget

Value +10%

Prob (Cost >Budget + 10%)

Prob (Cost <

Budget - 10%)





Application of Value Chain Assessment

in Oil and Gas Industry




15

Value Chain Assessment (VCA) – supporting fielddevelopment decisions under uncertainty

Time

Exploration

decision

Developmentdecision

Product ionstart

N P V ( m i l l $ )

0

200

400

600

800

1000

-400

-200

1100

M in - Max unce rtainty range

P10 - P 90 uncertainty range

Expec ted NP V (fu l l cycle)

1200

Product ion

Oil price

Reserves

C ap ital expenditures

Op erational expenditures

Schedule

NP V risk drivers

Total N PV risk exposure

Decisions are challenging because of risk and uncertainty



16

Field development life cycle and related issues

Developmentplanning

Uncertainty Accumulatedinvestments

Construction Production

Sanctioning

Re-developmentor abandonment

License (APA rounds)

Drainage strategy

Concept alternatives

Area considerations

No. & phasing of wells

Flexibility & robustness

Project CAPEX reserves

Production optimization

3rd party tie-backs

Capacity assessments

Production acceleration

Concept selectionFeasibility

Project risk mgt

Improved oil recovery

Life-extension

3rd party opportunities

New prospects anddiscoveries

Hand-over

Re-development



17

DNV’s upstream Value Chain Assessment

Developed for the oil and gas industry, as a tool for investment decisionsupport

Integrates subsurface, wells, production facilities, schedule and project

economics in one dynamic calculation model Includes risks, uncertainties and dependencies between building blocks

throughout the value chain

Applies Monte Carlo simulation to generate probabilistic output



18

The building blocks contribute to project cash flow

Export

Storage

Process

Flowlines

Subsea

Wells

Reservoir



19

VCA integrates asset disciplines in one model

Integrate subsurface,

facilities and economics

in one dynamic model

Capture risks, uncertainties

and dependencies

Deterministic and

probabilistic results

L i f e c y c l e

v a l u e

c h a i n

L i f e c y c l e

v a l u e

c h a i n

L i f e c y

c l e p r o j e

c t c a s h

f l o w

N P V

Export

Storage

Process

Flowlines

Subsea

Wells

Reservoir

L i f e c y

c l e p r o j e

c t c a s h

f l o w

N P V

L i f e c y

c l e p r o j e

c t c a s h

f l o w

N P V

Export

Storage

Process

Flowlines

Subsea

Wells

Reservoir

NPV

Tax

CAPEX OPEX

Tariffcost

Tariffincome

Economic cut-off &

abandonment

Production

profiles3rd partyresources

Oil and gas wells

Cash flow

Oil and gas reserves GOR & WC

Salesincome

Subsea, Floater,

Topside, Export

Probability of discovery

Sub-surface

FacilitiesEconomicsDependencies

Sub-surface

FacilitiesEconomicsDependenciesIn-place volumes



20

The model is used to assess and comparealternative development concepts

Compare, analyze upsides/downsides, identify risk drivers

NPV

Tax

CAPEX OPEX

Tariffcost

Tariffincome

Economic cut-off &abandonment

Productionprofiles

3rd party

resources

Oil and gas wells

Cash flow


Salesincome

Subsea, Floater,Topside, Export

Probability of discoverySub-surface

Facilities

EconomicsDependencies

Sub-surface

Facilities

EconomicsDependenciesIn-place volumes

NPV

Tax

CAPEX OPEX

Tariffcost

Tariffincome


Productionprofiles

3rd party

resources

Oil and gas wells

Cash flow


Salesincome



Facilities


Sub-surface

Facilities


NPV

Tax

CAPEX OPEX

Tariffcost

Tariffincome


Productionprofiles

3rd partyresources

Oil and gas wells

Cash flow


Salesincome



Facilities


Sub-surface

Facilities


NPV

Tax

CAPEX OPEX

Tariffcost

Tariffincome


Production

profiles3rd partyresources

Oil and gas wells

Cash flow


Salesincome



Facilities


Sub-surface

Facilities


Development concept 1







VCA applied to Field Assessment

Example



22

Project X field development

Field Y

Tie-back A

Tie-back B

Field Z

Prospects

Project X

Project X

What is the optimal development concept for the Project X field development?

Oil Company Ltd holds 25% interest in the Project X field

In addition to Project X reserves, the field development project covers theadjacent Field Z and Field Y reserves, as well as potential future prospects

in the areaProject X field

1Tie-back to A

Wellhead platform

2Tie-back to B

Processing platformDecisions

In connection with the upcoming milestone of concept selection the ProjectX licence has to select either:

1. tie-back to A with wellhead platform, or

2. tie-back to B with processing platform

In addition comes the question – does Field Y add value?

Oil Company Ltd.

The purpose of this presentation is to answer the question:

“What is the optimal development concept?”

This is accomplished by answering different sub-questions that – in sum – enables us to answer the main question

Add?



23

Questions to be answered

Field Y

Tie-back A

Tie-back B

Field Z

Prospects

Project X

Project X

Tie-back to B?

Tie-backto A?

Does increasing OTStariff impact optimal

decision?

What is the impact of

increasing pipelinelanding terminal

CAPEX tariff?

What is the Impact ofincreasing Tie-back Areinstatement costs?

Could Project X benefitfrom higher gas

capacity?

What is the probabilityof end production

before 2020?

What is the effect ofadding Field Z and

upside prospects?

2.

Does Field Y addvalue?

1.

Which concept is themost robust?

3.

4.

5.

6.

7.

8.



24


Field Y

Tie-back A

Tie-back B

Field Z

Prospects

Project X

Project X

Tie-back to B?

Tie-backto A?


decision?



CAPEX tariff?



capacity?


before 2020?


upside prospects?

2.

Does Field Y addvalue?

1.


3.

4.

5.

6.

7.

8.



25

Does Field Y add value?

Yes, Field Y adds 650 MNOK and 800 MNOK to expected NPV to the Tie-back A andTie-back B concept, respectively

Without Field Y, the Tie-back B concept is slightly ahead with an expected NPV of 2 050 MNOK

The Tie-back A concept has an expected NPV of 2 000 MNOK

Field Y has positive effect on both alternatives

The NGL split factor (NGL / rich gas) being about 50% higher inthe Tie-back B concept stands out as the main differentiator

Project X+Field Y

Field Y adds more value to the Tie-back B case mainly due to higher NGL volume

Revenue is about 700 MNOK higher in the Tie-back B concept

The change in OPEX is explained by the relationship betweenrevenue, OPEX and economic cut-off

Tie-back A

Tie-back B

Tie-back A

Tie-back B



26


Field Y

Tie-back A

Tie-back B

Field Z

Prospects

Project X

Project X

Tie-back to B?

Tie-backto A?


decision?



CAPEX tariff?



capacity?


before 2020?


upside prospects?

2.

1.


3.

4.

5.

6.

7.

8.

Does Field Y add value?

Yes, Field Z addsbetween 650 and 800

MNOK

1.



27

Which concept is the most robust?

Given Project X, Field Y and Field Z reserves, the probability fornegative NPV is more or less non-existing for both concepts

Probability for negative NPV is about zero for both concepts when including Project X and Field Y

The downside risk is about equal

P10 to P90 range is more narrow forTie-back A

Probability ofnegative NPV

0.9%0.6%

2 850

2 650

Tie-back B

Tie-back A

Tie-back A

Tie-back B

Adding Field Z slightly increases the downside risk to 1,5% and 1,2% for Tie-back A and Tie-back B

Field Z increases P(NPV<0) due to:volumeuncertainty combined with significantoperations and abandonment costs

Field Z leads to later start of production forProject X wells

3 700

3 400


1.5%1.2%

Tie-back B

Tie-back A

Tie-back A

Tie-back B

Prospects shifts the NPV distribution to the right

P(NPV<0) is non-existing


0.0% 0.0%

5 600

5 050

Materalisation of prospects shifts the NPV distribution to the right, limiting downside risk to zero

Tie-back B

Tie-back A

Tie-back A

Tie-back B



28


Field Z

Tie-back A

Tie-back B

Field Y

Prospects

Project X

Project X

Tie-back to B?

Tie-backto A?


decision?


increasing pipelinelanding terminalCAPEX tariff?



capacity?


before 2020?

What is the effect ofadding Field Y and

upside prospects?

2.

1.

3.

4.

5.

6.

7.

8.

Does Field Z add value?

Yes, Field Z addsbetween 650 and 800

MNOK

1.

Which concept is the mostrobust?

P(NPV<0) is almostnon-existing for both

concepts

3.

dnl subsea value chain assessment presentation_tcm144-517772

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