Portfolio Growth (Inorganic): Importance of Development Engineering in Value Creation through M&A : Part-2 

By Tariq Siddiqui

In Part-I of this article, we focused on how the development engineering team helps the exploration team in creating value during the entire value chain of exploration process; from regional studies till discovery. In the Part-2, here, we focus on the role of Development Engineers and support team role during the inorganic portfolio growth through Mergers & Acquisitions. M&A team (more generally, New Business Development or NBD team) spans through ‘Opportunity Identification’ and ‘Deal Delivery’. The M&A support team (Development engineers) play critical role in both phases. There are many similarities in the roles and responsibilities between Exploration support team and M&A support team but there are significant differences.

First, the inorganic growth through discovered opportunities entails significantly more data, therefore size of M&A support team is comparatively larger. This also involves substantial amount of data review in the real or virtual data rooms. The available data set size may vary, depending on the maturity of the asset; from a small data set for stranded discovered onshore resource with few wells and no production to multi-field, multiplatform offshore brown field with large production with hundreds of wells. Accordingly, team size and effort are scalable depending on data availability, headline size and the complexity of opportunity.

Secondly, the volume of data allows appreciably more detailed analysis to assess the value proposition of the opportunity (due diligence). The size and scope of multi-disciplinary development support team is much broader; workflows are more detailed and evaluation tools are much more sophisticated. The use of 3D geological and simulation models and history matching of data prior to forecasting is not entirely unknown for a field with a sizeable production history. Analogues and benchmarks still play an important role but more for reliability check then to provide the missing data in a sparsely explored basin. Accuracy in cost (CAPEX/OPEX) and schedule estimates are level higher and risk assessment more comprehensive. Furthermore, discovered asset may have several associated projects that need assessment for the development such as; appraisal wells, infill development, near-field exploration prospects, cluster projects and late life compression to mention a few.

Third, the integration between ‘Development support’ team and ‘Deal Delivery’ team is critical. Development Manger not only integrates all the development/technical functions, but also actively works with deal team in commercial negotiations with the vendors in understanding the commercial drivers and developing the value proposition. In larger deals (headline size > USD $100 Million), the development support team acts as operational improvement team, and serves as a critical link between deal delivery team that is focused on financial, legal and taxation issues and the portfolio team (asset team) focused on the portfolio issues. This dialogue driven process between the Development team (in operational improvement role) and portfolio team goes much beyond decision review board meetings and helps portfolio team with solutions to the challenges faced by them allowing deal delivery team to focus on more important strategy issues.

Fourth, unlike the exploration team that deals only with undiscovered volumes, the development support team in M&A is responsible for sizeable contingent resources and reserves evaluation of discovered and undiscovered volumes. This requires development team to organize integrated technical/commercial reviews and reserve assurance review requiring significant stakeholder management and ability to influence key stakeholders without formal authority and manage significant risk and uncertainty.  

Finally, in contrast to exploration support team, that plays no role after successful lease acquisition or a discovery, the development support team actively works with portfolio team after the acquisition and during the transition of project from New Business Development organization (or Deal delivery team) to the development organization.  The team organizes strategy framing workshops, helps prepare 100 day plans, long-term road maps, stakeholder and risk management plans. Similar to exploration, the large companies with a sizable M&A portfolio, have a dedicated development engineering team that is embedded and co-located with NBD team and helps in developing the value proposition of the opportunity. 

For the inorganic growth in identify phase, the ‘NBD team is in the driving seat and responsible for opportunity identification, negotiations and deal delivery. The ‘Development support’ (or operational improvement) team provides equally critical support in developing a value creation and value protection. Without development support, a credible binding bid cannot be made; there is a risk of loss in hundreds of millions of dollars!

Portfolio Growth (Organic): Importance of Development Engineering Team in  Value Creation in Exploration: Part-1

BY: Tariq Siddiqui

Development engineers play a critical role in the maturation of opportunity after the discovery; from assessing the feasibility of various scenarios to selecting the most optimum development concept. This is the traditional and more well-known role of Development Engineering team, managed by a ‘Development Manager’ during ASSESS and SELECT phase of opportunity maturation for a capital project. 

There is less defined but equally important role for ‘Development Engineers’ in the preceding phase (IDENTIFY), where the opportunities are brought in portfolio, either organically through exploration or inorganically through Mergers and Acquisitions (M&A).

In this article, we focus on the role of ‘Development Engineers’ during the exploration phase. Exploration team identify and mature the volumes and the development team helps convert them to value. The exploration team identify opportunities through regional studies, assess them and bid for them in the lease sale, then high-grade acquired lease acreage through prospect evaluations and rank them, finally leading to the drilling of the prospect by an exploration well. 

In large companies with sizable exploration portfolios, a dedicated development engineering team is embedded and co-located with explorers that help them develop the value proposition of the opportunity. The size of the team is scalable according to the size of the portfolio and consists of full time reservoir engineers, development planners and part-time concept engineers, facility engineers, well/completion engineers, cost engineers and schedulers.

The development engineering team, also referred as exploration support team relies heavily on analogue data and benchmarks for the evaluation of acreage and prospects. Reservoir engineers develop fluid correlations that relate subsurface volumes to stock tank volumes that underpin the development type i.e. oil, dry gas or retrograde gas field. They estimate recovery factors based on the drive mechanisms, estimate well count, well-spacing, assess initial well potential and develop a production function using integrated production models or other appropriate tools depending on data availability. 

Development planners integrate the information on well/completion design and costs from well-engineers and facility and development layout and costs from concept engineers into a credible development scenario that is used by reservoir engineers in their models for developing production function. Team may evaluate more than one scenario, to either maximize the value or high grade the most affordable scenario, depending on available time, complexity and the headline size.  The schedulers help to build the realistic development timeline. The economist and the development team use the forecast, costs and schedule to develop a value proposition (Expected Monetary Value or EMV). Details of the tools, workflows and databases have been omitted here for the sake of brevity, but all companies follow some exploration workflows or methodologies and a way to assure the technical workflows.

In identify phase, exploration team is in the driving seat and responsible for determining the volumes and de-risking the play. Exploration support team (Development Engineers) provides critical support in maturing the volumes to value and identify the technology to unlock these volumes. In the absence of this value creation support, a good opportunity may either be missed or a poor opportunity may be selected or worse a good opportunity may be inadequately understood taking much longer time in appraisal during the development phase depreciating the value of opportunity significantly.

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Global Exploration Trends Summary (2007 -2016)

BY Tariq K. Siddiqui
Feb 11, 2018

Need to Rethink Exploration Strategy going Forward 2018

Exploration is critical component of corporate strategy, and 'play maturity' is critical element of exploration. Despite downturn, frontier plays have still remained attractive. The number of wells drilled in unproven frontier is small but average discovery size is > 300 MMboe (highest). 

According to Wood Mackenzie (Ref-1), 'the recent downturn has not ended industry appetite for frontier exploration. The share of exploration an appraisal (E&A) spend in such plays peaked at 48 % in 2016. Only 2 % of exploration wells are in in uproven frontiers, but their impact is far larger'. Play maturity is defining element of exploration portfolio and strategy. There are are four basic type of plays in terms of maturity; Frontier plays (unproven & proven), Emerging Plays (Early & late), Established Plays and (Mature Plays (Early and Late). The figure below shows each play and prevailing trends in E&A spend, E&A wells drilled, discovery size and cost of discovery ($/boe) between 2007 and 2016.

Exploration benchmarks and metrics are presented below for each play as well as global averages. Following observation can be made.

• Exploration spend ($/well) is lowest in Established and Mature plays and highest in the Frontier and Early Emerging plays.

• Number of discoveries are smallest in Unproven plays and increases with play maturity. Its highest in Mature plays. Frontier plays maybe risky but they add the largest volumes (large discovery size). The mature plays offers the least risk and accesss to existing infrastructure but add the least volumes

• Number of discoveries is smallest in Frontier play and highest in the mature plays

• Frontier plays have lower than average cost. maximum cost is in the Mature plays due to highinfrastucture costs (example offshore and/or deepwater)

• Frontier plays offer above average returns, possibly due to their large size (volumes discovered) to help economics

References:

1. WoodMackenzie: 'Exploration Trends -Benchmarking by Play Maturity' (Nov 2017)

Decommissioning & Restoration in Oil/Gas Industry

Challenges in Next Five Years. (2018 - 2022)
By Tariq Siddiqui - Jan 6, 2018

Oil and gas Industry is facing tsunami of Decommissioning & Restoration D&R. According to Wood Mackenzie, US$32 billions in D&R spend is expected in next 5 years. The top 10 companies (Incl. Shell, XOM and Total) will spend 50% of this. The mature region facing D&R are UKCS, GOM and Malaysia. It is still an emerging industry, with lots of opportunity for supply chain industry, but the oil price collapse, has hurt the industry

So, what are the challenges in costs, strategies, regulations and funding? D&R cost involves; cost after ceasing production, platform & pipeline removal, wells P&A etc. There is a lack of D&R data and experience in forecasting costs, but it could be reduced through; lessons learned from previous D&R, new technologies, especially cluster D&R in UK or divesting the asset altogether or asset swaps

GOM has most experience with 55 D&R fields. The D&R strategies are; rig-to-reef scheme, some require complete dismantling others in East-Africa you can walk away without consequences so far. Regulations will have huge impact on cost. Some regulatory issues are scope of D&R;

 tax relief if any, liabilities/ownership issues. The supply chain industry has lot of opportunities, but there are still some major challenges ahead that need tackling.