Applications of System Dynamics Burlington Resources

Client: Burlington Resources Canada „ BRC is headquartered in Calgary with a staff of 700 employees. It is one of the major producers in the Western Canadian Sedimentary Basin, which provides about 15% of North America’s natural gas. „ Major acquisition in 01 and 02, 800 wells planned for 03, and 5%~8% growth rate target. „ The basin is maturing, which means declining reserve. Yet profitability is still healthy due to high gas prices and improving technology „ Q: proactive measures that can help them weather possible limitation to growth in the near future Our Contacts „ The People „ „ „ „ „ „ „ George: Consultant and system dynamicist Roy: Manager, Reserves Jeff: Head of Planning Colleen: Commercial Analyst Rob: Head of Engineering Tom: Management Team The Process „ Weekly conference call, along with web-based conferencing The Most Valuable Pieces of Information BRC walks away with: „ To increase the number of licenses for drilling, you need to apply for fewer licenses. „ The more months of inventory you try to create, the fewer resources you need to do so. What are they afraid of? Fear F&D Costs Revised Hope “Don't see fear really happening … WCSB still has ‘a sh*tload’ of gas economically recoverable (90 Trillion Cubic Ft). But, how hard will it be to obtain licenses to drill? BRC makes mistakes and increased barriers erode competitive advantage Fear Hope Expect Barriers to Development (e.g. effort per well to get license) BRC continues to follow industry average 1950 2004 BRC substantially outperforms industry 2020 More or Better? „ „ „ Burlington has $15+ Million to invest in “improvement activities” „ Where/how to invest it? Choices: „ Opportunity DevelopmentÆgreater inventory of potential sites ready for license application „ Process ImprovementÆbetter internal process for license application Which would lead to lower Barrier to Development? (reduced effort per well to receive license) Loop Description of the Problem Rig-Ready Shortage - ++ Desired Application Rate R error delaying approval Resource Capacity -- Rig-Ready Inventory - - ++ - Desired Resource Utilization Licensing Time + R + error reducing capacity + + Error Rate - Error Count + + Policy lever: ‘Diligence’ „ First discussed in detail during 6th week „ „ „ “Each non-diligence increases enforcement regulation” “As you exceed company’s capacity, errors increase” ‘Diligence’ is about quality over quantity „ „ Taking more time to do environmental studies Working slower, but better Loop Description of Strategy #1: Rig-Ready Shortage - ++ Desired Application Rate R error delaying approval Resource Capacity ++ - Rig-Ready Inventory - - Desired Resource - - Utilization Licensing Time -++ R error reducing capacity Diligence -- ++ Error Count Error Rate + + ++ - Reputation Seasonality in Drilling Schedule „ 3 month inventory monthly drilling schedule 500 150 400 w ells wells 300 100 200 50 100 00 JanFeb FebMarMar Oct Dec Nov Dec Jan AprApr MayMay Jun Jun Jul Jul Aug Aug Sep Sep Oct Nov „ The number of wells drilled depends strongly on season. (ground condition, soil condition, environmental regulations) This translates to fluctuation in the RigReady Inventory Loop Description of Strategy #2: Desired Rig-Ready Inventory Time to fulfill shortage + -- ++ Rig-Ready Shortage + Desired Application Rate License Expiration + - R error delaying approval Resource Capacity - Rig-Ready Inventory - + Desired Resource Utilization Licensing T ime + R - error reducing capacity Diligence - + Error Count Error Rate + + Reputation BRC Takes the Advice to Heart: „ “Never, ever, ever decrease your diligence, esp. when under pressure” „ “Appropriate for licensing group to have rules oriented culture” „ “Have to be very cognizant of forward look to get inventory where you want it” „ “I want to go show this to x in service” Consulting Process: Standard Method Standard Method Standard Method Standard Method Standard Method Standard Method Standard Method Standard Method Standard Method Standard Method Standard Method Standard Method Standard Method Standard Method • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · Reserve Distribution (over time) Oil Company Profits Commodity Price Production Decline Royalties Drilling cost per meter Completion Technologies Drilling Technology Seismic Technique Visualization Technologies Proven Reserves Drilling Rig Availability Gas Storage Potential Transportation Cost Pipeline Capacity Infrastructure Cost over time Infrastructure Density Environmental Considerations Public Opinion Access Difficulty Approval Time Price of byproducts Kyoto Federal & Provincial Politics Carbon Taxes Tax incentives Alternate Methane Sources US/Can Exchange Rate US Protectionism Demand for Natural Gas Seasonality Cost of Substitutes Geographical Distribution of remote reserves Concentration of mineral rights Industry concentration Area concentration Explore vs.. Harvest mentality Rate of Acquisition Finding & Development Cost Cost of LNG M e r o a h t n e n · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · Capital Stock turnover Climate Change Market perception Skilled labour supply Public Opinion (for investment) Resources for R&D Resources for Marketing Resources for….. Regulatory overhead (&oversight) Terrorism Alternate Energy supply & cost Non-hydrocarbon energy sources Conservationism Price volatility Deregulation Basin connectivity Switching Cost Diversion of Natural Gas from Market to Oil Production Energy Efficiency Technologies Public expectation of comfort Geopolitical forces Cost of Mineral Rights Cost of finding reserves vs. buying companies Barriers to Development Global Impact Cost of Steel Cost of waste disposal Water Consumption Process Efficiency General & Administrative Costs Share Price Cost of Capital Company Revenue Company Profit ROCE Corporate Structure Nationalism Security of Supply Market share of Natural Gas for Energy vs.. Petrochem feedstock Fuel Switching g u o a v h b a ri … s le The Ever-Evolving Reference Mode—modification made after tracing the causal loops constructed Feb 25 Profits Expected Profits have been healthy, but cyclical due to commodity cycle 1950 March 15 Profits spike due to short term high prices, then a profitability squeeze caused by demand decline and high F&D costs 2004 2020 Strategic investments secure high & relatively stable profits BRC Profits from WCSB Hope Expected BRC in WCSB and its predecessors POCO and Cdn Hunter BRC suffers setbacks, falls behind local competitors, exits WCSB Fear 2004 2020 Big Servings of Spaghetti !!! demand Typefor ofgas Development+ Cost of providing substitutes - (e.g. Sour Gas) Activity Level demand for Demand/Production services + Required + - Oilco employment Infrastructure Development demand econ Oilco Lobbying + Cost for services - Company Image Perceived impact on people & environment Substitute profusion Substitutes for gas + - Capital Generation AB Economic Activity Political Support + Appetite for risk supply econ Basin Maturity Regulations (environmental) Investor Oilco Operating Perception Diligence Royalty Revenues Basin Maturity 0 + + Number of Supply of gas reserves found Profit & Cost + Profits - Profits 0 - Development General Economic Activity + Delays Finding - Gov't Incentives Cost + D&A Costs accepta + nce Finding Cost + 0 -+ + Costs + Degree of Psychological + Regulation cost Acceptance of higher + accept ance costs Unit Costs PsychologicalIndividual Company + Operational Regulatory Scrutiny Acceptance of higher + costs 0Activity - Demand for Gas Weather + Finding Cost cost Rate of Development Declining Resource + Oilco Costs + Technology advances T ech to the rescue Technology/ + Efficiency Gas Prices Capacity Utilization Political Support. B - Prof Avg experience of it balan workers cing Profit balanci ng -Accident rate Total Costs 0 Homemade Remedy to Complexity—Rank the Importance of the Sub-Loops Bringing the Clients Back to Focus Technology to the rescue Investor Perception Reinforcing Costs Psychological acceptance of higher costs Activity Level + Demand/Production Appetite for riskDemand/Production 4 + Required Required 1 Technology/ Efficiency Capacity Utilization Profits 0 3 Capital Generation - Appetite for risk Activity Level 1 + Technology/Efficiency 1 Investor Perception Capital Generation 1 Basin Maturity 0 Number of reserves found + + of Number reserves found 1 R Finding Cost 0 1 + Finding Cost 0 cost Technology/Efficiency 4 Profits 0 - + Raccept ance + + cost accept ance + Psychological Acceptance of higher costs 0 Psychological Finding Acceptance of higher Cost costs 0 1 B - Prof it balan cing Finding Cost 0 2 - + Total Costs 0 4 Total Costs 0 Investor Perception 1 - 10 8 8 6 9 9 7 6 9 9 8 7 Rating 28 26 23 19 Investor Perception reinforcing costs Technology to the rescue Basin Maturity Profit Balancing Costs Declining Area Dynamics Activity Level Psych acceptance of higher costs Capacity Utilization Balancing Costs 5 7 7 6 9 8 9 7 8 10 5 8 6 9 7 7 5 10 6 8 8 7 5 8 27 24 23 22 22 21 18 18 Royalty Revenues Environmental Impact Economic Activity Oilco Costs Regulatory Scrutiny Operating Diligence 8 8 7 6 6 8 8 9 7 5 8 7 7 6 10 5 7 8 24 23 23 23 21 16 Reference Mode Profits & Costs Profits & Costs Profits & Costs Profits & Costs Sub-Loop Supply and Demand Effects of the supply and demand Substitute Profusion Operational Costs Finding Finding Finding Finding Finding Finding Finding Finding Political Political Political Political Political Political Costs Costs Costs Costs Costs Costs Costs Costs Support Support Support Support Support Support George Roy Jeff ct s of th e Su bs d an d an tit u pl y pp ly su p Su de De m an d ve st o O te ma n pe Pr o d f r rP us at io er na ion ce lC pt io os Te n r ts c h ei n no fo r lo gy cing to c th ost e s Ba r e Pr s of s c De it B in M ue al cli at a ni ur Ps ng nc i it y n yc g Ar Co Ca h a ea s c pa D yn ts c i ce p ty a ta nc A ct mic U tili ivi e za ty s of tio Le hi g n ve B a he l rc la os nc ts in g Co st Ro s y a En lt y vir on Re v m en e E c nta ues l on om Imp ac ic Ac t tiv Re O gu ilco ity la C to os O pe ry t Sc s ra t in ru ti g Di ny li g en ce In Ef fe Sub-Loop Rankings 29 27 Combined Ranking 25 23 21 19 17 15 It became clear that our clients had their focus on factors which they could not control; this brought everyone’s attention back to relevant AND controllable policy levers against errors !!! We Learned from the Client Reception of the Different Generations of Models that… „ Model need not reflect operational details of client. In fact, our clients resisted model version 1.0 initially due to too much operational detail. „ At the end, we had to remind the clients that the model is not reality and should not be used to generate magical numbers for policy-making.