HBB was a petroleum exploration company funded principally by
the Lauder cosmetic interests of whom Este Lauder is the founder.
The company was active in the early to mid 1980s developing a series
of oil and gas exploration projects that were then farmed out to other
larger companies for varying levels of participation and operating interest.
One of the major problems that arise when petroleum exploration
programs are being funded by those not familiar with the business
is the time frame necessary to develop and test a number of exploration
concepts. Methods must be used to communicate the progress while
reflecting the inherent risks involved. Most exploration done by
smaller companies is executed under agreements based on a complex
set of relationships established to share the risk, cost, and
ultimately the returns of the project. Reporting and budget development
must, therefore, take into consideration the value of the targets sought,
the uncertainty associated with each exploration project, and the
sharing agreements that distribute the costs, risks, and benefits
to the participants.
IMS Quantum (then Fletcher Associates) was tasked to develop a
budging methodology that would yield a net value for the portfolio
of projects. The approach used involved the assessment of the expected
value of each project based on the potential value of the target and
the probability of hitting that target. As seismic and stratigraphic
data improved during the project, both the potential size of the target
and the probability of hitting it changed. If new participants entered
the project, the net return to the company could also change. Depending
on the cost sharing arrangements stipulated in the operating agreement,
the net to the company could also change as the project progressed.
Each project, therefore, had associated with it a model that utilized
these relationships to yield a net expected value of the project to
the company. The sum of these expected values gave the expected value
of the portfolio of projects.
Using this approach, clear quantitative pictures could be developed
to communicate managements assessment of where the entire exploration
program was at any point. While considerable subjectivity was involved
in assessing both target size and probabilities, the making of those
estimates explicit allowed considerable focused dialogue to take place
regarding the progress of the overall program. This quantitative
picture became the budgeting and planning tool that was used to allocate
resources to those projects that showed the greatest expected value.
Managing such a complex set of changing relationships required
a budgeting and planning tool able to integrate a variety of information
that could influence the ultimate success of the exploration effort.
IMS Quantum specializes in developing such tools for management to
chart courses into unknown territory that maximize the potential for success.