ROGTEC Talks Risk Analysis and decision making with Craig Ferri of Palisade, Europe

How long has Palisade been in Russia?

Palisade has been a software provider for risk and decision analysis tools for over 26 years now. Our European headquarters in London were established in 1998, this office also supports our Russian and CIS customers, as well as the rest of Europe, The Middle East and Africa.

What solutions do you provide for the region?

We provide risk and decision analysis software tools and offer training, consulting and customization services for our customers. If you are interested in learning  more about our products and services, please visit our web site at www.palisade.com.

What benefits do risk and decision analysis tools bring to operators?

The users of our software tools are able to enhance the decision making analyses they already have in place. With our software they gain a probabilistic perspective and can now see how likely certain business outcomes will be, i.e. they are able to get answers to questions such as „What is the probability that we will lose money?” or “How likely is it that our profit will exceed 10 million?”.

What cost savings do these benefits bring?

Using our software can provide enormous costs savings. Being enabled to quantify uncertainties will allow you to make better decisions. Knowing for instance that you only stand a 10% chance of generating a profit before making a considerable investment is clearly going to impact your decision making. Depending on the value of the decision the cost savings can range from thousands to millions.

Who will be at the SPE Russia show from Palisade?

Our sales and business development manager for Russia and CIS, Stephan Beeusaert. If you would like to see a demo of the software, feel free to stop by at our booth and Stephan will be more than happy to give you an overview.

Petrobras Uses @RISK for E&P Analysis

The Challenge

In terms of its market value, Petrobras, the Brazilian oil producer and refinery operator, is the eighth largest global company in the world.  Its investments amount to more than $53 billion, and these include more than thirteen thousand productive oil and gas wells and 112 production platforms.

Recently the company implemented a corporate-wide protocol for evaluating the economic risks associated with potential investments. Key risks of interest to Petrobras include those associated with: the production of oil and natural gas; the demand for derivatives; the prices of various commodities; the start dates for various operations; and changes in company capital (CAPEX) and operating (OPEX) expenditures. In performing analysis of these risks, Petrobras looks to several key indicators: expected NPV; the standard deviation of NPV to get a sense of the risk associated with the reward; the probability of a negative NPV, or of losing money; and the 95% Value at Risk (VAR) of the NPV, which is the minimum amount that Petrobras stands a 5% chance of losing.

Petrobras’s Progride System

To evaluate these risks, the Exploration and Production (E & P) section of Petrobras developed an in-house system for corporate-wide use called Progride.  For a risk analysis in Progride, analysts must construct distributions to represent ranges of possibilities for key input variables.  These include: probabilistic production curves at the site for oil, natural gas, and water as well as water injection; unit production operational capacity; distributions for deviations in each CAPEX and OPEX component; and a distribution for the operation’s start date.

From this risk analysis, Progride provides the expected NPV of the project along with a histogram and measures of dispersion, or risk, around the expected NPV.  It also estimates the probability of a negative NPV, or of losing money on the project.

Limitations of Progride

As useful as Progride is to Petrobras, it has a number of significant limitations that led the company to look to @RISK.  For one, Progride’s risk analysis does not provide user access to the simulation data, preventing analysts from getting a closer look at different probabilistic scenarios.  Furthermore, Progride cannot effectively handle more complex projects, such as those done in partnership with other companies, projects that share common infrastructure, or integrated projects with multiple concessions.

The @RISK-Progride Solution

To address this problem, Petrobras E&P brought in @RISK.  Rafael Hartke, who heads up financial planning and risk management for Petrobras’s investment operations, has developed a method to integrate @RISK with Progride, all in Excel.  This system allows him to make an accurate and comprehensive assessment of a production platform with multiple concessions—and to save a huge amount of run time.

The @RISK-Progride process can be summed up in 3 stages, 2 functions, and 1 macro.

The 3 stages of the process are:

1.     Use @RISK to model and generate probabilistic scenarios for the shared and independent risk factors.

2.     Link the probabilistic scenarios generated in @RISK to the input data of each concession’s conventional Progride analysis using the Excel’s Offset and @RISK’s RiskCurrentIter functions.

3.     Execute each Prograde conventional analysis individually in @RISK, calling the macro which executes the Progride conventional analysis after each @RISK iteration.

The two primary functions used to accomplish the integration between @RISK and Progride are:

1.     RiskCurrentIter(): This is an @RISK Statistics function which returns the value of the current iteration of the simulation while running.

2.     Offset(cell ref, rows, columns): This is an Excel function which returns the value of a cell located aspecified number of rows and columns from a particular cell reference.

Finally, there is only one macro needed in the process.  @RISK is set to run this Excel macro after each iteration recalculation during a simulation.  The macro simply runs Progride and contains the code: SendKeys “%PX”, True

Benefits of the @RISK-Progride Solution

Petrobras’s integrated solution gives the company a number of valuable benefits.  First, it permits the separation of probabilistic scenarios for shared risk factors common to the projects being analyzed.  Second, the use of @RISK allows the analysis of projects undertaken with partners.  Similar to the above example, a separate Progride analysis is done for each partner, treating the fiscal aspects individually, but sharing the project risk factors.  Third, as we’ve just seen, this approach enables the analysis of integrated projects with multiple concessions, with a separate Progride analysis for each concession that treats the fiscal and depreciation aspects individually while sharing project risk factors.  Similarly, projects that share infrastructure with other, separate projects or concessions can now also be modeled in the same manner. Lastly, @RISK helps Petrobras reduce the calculation time for projections that used to take thousands of hours to a single day.  If you multiply the saved hours by staff pay rates, you can get a pretty good picture of some huge cost savings.