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 1980’s 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 management’s 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.