Unformatted text preview: ese tools in the upstream are
• Portfolio theory Awareness of portfolio theory in the upstream is low and its usage is even lower.
Only three of the organisations interviewed fully endorse the use of portfolio theory.
However, most companies had an intuitive grasp on its fundamental principles. This
is well illustrated by this quote where the interviewee unwittingly describes the
difference between diversifiable and non-diversifiable risk:
“Portfolio Theory … Do we do that? Not as such. To a certain extent. I mean
one of the things at the moment is with the oil price being so low and gas
prices perhaps still holding up there’s a shift from oil to gas in the portfolio.
So on that level yes. Do we look at individual projects and say, “umm that’s
risky, better have a safe one?” No. I would say not. You can get rid of some
of the risks but ones like oil price, exchange rate much less likely to be able to
mitigate those.” (N2) 137 As such, some respondents reported that while prospects are not analysed according
to the rigors of portfolio theory, before drilling a prospect, it is “screened” to see if it
fits with various organisational criteria. For example, some companies will only
operate in areas where there is low political risk whereas others prefer only to explore
where they know they will be the only operators. The following two quotes are
indicative of current practice:
“The starting point, if you like, is that we have identified and review
periodically, so-called core areas in particular core countries. There are
certain areas of the world, for the sake of argument, South East Asia which we
have elected to not invest ourselves in because we are fully occupied
elsewhere and we think get better returns elsewhere. If we want to enter a new
country one of our responsibilities in [the] commercial [department] is to
maintain what we call country evaluations. So within our areas of interest, we
keep more or less current evaluations of countries from the point of view of
political, economic stability, working environment etc. So the first point of
call if the explorationist want to go for the sake of argument Ethiopia, then we
would need to consider the overall climate in the country and the technical
prospectivity and combining those two we then put a broad brush proposal to
our Chief Executive. And this is going into a new country because he has to
sign off on any venture of that sort.” (P),
“We at this moment, I can only speak for what we are doing here in the U.K.,
there has been a sort of strategic decision made beforehand about where we
should operate and how we should operate and so within that framework is
where we are now currently working. That’s mainly in the southern gas base.
So that is where we stand. So yes. There are strategic decisions and we sort
of try to test the waters every now and then to see what head office feels about
us going into certain directions.” (G)
In the literature, some authors (Simpson et al., 2000) argue that portfolio theory is
particularly applicable to small companies...
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This document was uploaded on 03/30/2014.
- Summer '14
- The Land