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The Actuary The magazine of the Institute & Faculty of Actuaries

Decisions from the midst of uncertainty

Pete Naylor, an expert in decision risk analysis, talks to Cintia Cheong and Richard Purcell about the challenges of making business decisions in the oil and gas industry


Oil Donkey Head
If we are to avoid power cuts and potential civil unrest, there are some difficult choices to be made at a governmental level, and I believe DRA is an approach
we can use to help optimise energy policy

Investing in oil and gas involves many risks and uncertainties. To analyse and manage these, the sector often uses decision risk analysis (DRA), a structured process to help stakeholders optimise their decision making.

Pete Naylor, head of DRA at BG Group, has more than 35 years of experience in applying science and engineering to the energy sector. Perhaps a physicist at heart, he also has a PhD in chemical engineering, so is a bit of an all-rounder. After six years in the nuclear industry, he moved to oil and gas in 1985 as a project manager at UK Atomic Energy Authority’s Petroleum Engineering Laboratory.

Naylor moved to AEA Technology in 1989 and, after a variety of roles, became a decision analyst in 1999. Fast-forward to 2011, he joined BG Group, now part of Shell, where he is head of DRA.

Can you describe your current role?
We have established a DRA centre of excellence within the company, and my team is involved in supporting business units to optimise their decision-making, taking risks and uncertainties into account.
We are also involved in developing appropriate standards and guidelines and training colleagues in DRA.

When we are trying to decide how to develop an oil field, there are lots of choices to make. We need to identify the optimum way forward, even though we do not know everything we would like to know. For example, how much hydrocarbon (if any) is underneath the ground? How long is it going to take to build the facilities? How long will this design of well last?

There are all sorts of things that we don’t know well enough, but rather than being paralysed into inaction or, worse still, exposing our company to big risks, we need to optimise the way to move forward.

What techniques do you use to help businesses make decisions?
There are three key steps. The first is framing the opportunity; what is in scope and what is out of scope? This may involve facilitating workshops, talking to experts, understanding the situation and getting buy-in from stakeholders. This is all common sense, but often people don’t do it particularly well, and rely on intuition when analysis is required.

Having established the frame, we can move to step two, which is: Now we understand the problem, how are we going to optimise the way forward? We have to work out what tools are needed, how much and where we are going to put our efforts.

One of the key skills for a decision analyst is to be able to talk to all sorts of professionals about things you personally are not an expert in, but you need to understand what it is they are saying.
Step three is to do some analysis. Quite often the problem is such that we need to build a quantitative model of the business opportunity. Frequently, we need to build a life-of-asset model, which includes not only the science and engineering but also the constraints in terms of cashflows, legislation, commercial, environment and safety. It is a fit-for-purpose model of the opportunity.

Having built a model, we may need to repeat steps one to three several times to ensure it incorporates the concerns of all stakeholders. This is a crucial ‘consensus-building loop’ to get buy-in from everybody involved so we can agree on the optimised decision and are able to clearly articulate why it is the best way forward.

What’s been your most challenging project in your current role?
Each project that we get involved with is challenging, but that is what makes the job so interesting. A common feature is the need for significant investment before we know what
the return will be, so we may be considering investment in a development before we know how much hydrocarbon is recoverable.

It may be possible to drill an appraisal well, but we need to determine whether the information gained from an appraisal is worth the associated cost and delay. The answer often depends on the decision-maker’s ‘risk appetite’.

We may need to consider undertaking activities that have never been done before – for example, drilling a high-pressure, high-temperature well with a record-breaking length. Such challenges can fall into the category of ‘unknown-unknowns’.

These infamous risks or uncertainties are neither ‘identified’ nor ‘quantified’ and the result is that we have great difficulty in estimating how long such a well may take to drill. In such cases it can be helpful to ask: “How long would the drilling have to take before we changed the optimum decision?”

Another challenge is building consensus among stakeholders with conflicting value measures. One party may wish to maximise the local content of a project, while another party might want to maximise the net present value.

One of the benefits of a quantitative model is that it can enable the views of different stakeholders to be represented and help to identify win-win strategies.

What are the biggest challenges in the oil and gas sector today?
A big challenge is that most of the easy-to-access hydrocarbons have been found and it is a lot harder, and costs more, to find and develop the remaining resources.

At the moment, oil is relatively low-priced, so finding economic developments is even more difficult. Another challenge is, of course, climate change. The role of companies is to provide a sustainable return for their shareholders, and so there is a drive towards alternative sources of energy, and oil and gas companies are expanding their involvement in lower-carbon energy sources. These companies have got the right skills to make them well placed to evolve into broader energy companies.

DRA skills can contribute to developing a sustainable energy future. In my view, DRA is a key tool to help identify a 50-year, cross-party energy policy that will meet the needs of the nation. We need affordable, secure energy, but progress towards this is hampered because pressure groups petition against climate change, nuclear waste and fracking.

If we are to avoid power cuts and potential civil unrest, there are some difficult choices to be made at a governmental level, and I believe DRA is an approach we can use to help optimise energy policy and reach consensus amongst stakeholders with diverse value measures. Perhaps this is my next challenge.

Can DRA be used outside the oil and gas sector?
DRA is a generic process that can be applied to any decision-making, so, yes, it can be used outside the oil and gas sector. It is already applied in pharma, bio, military, health and telecoms to name but a few. Wherever you have choices to make and there are risks and uncertainties, my advice is you should be using DRA. It may be sad, but I have used DRA for many personal decisions, albeit in a scaled-down version.

What skills are key for your role?
When undertaking step one (framing), you need ‘soft’ interpersonal skills and to be able to listen and relate to people.

Step two (how am I going to solve this?) involves talking to experts in different disciplines, and you need to be able to understand what they are saying and be able to ask probing questions. So you do need a technical understanding of the tasks.

When it comes to step three (doing some analysis), it is very useful if you are an Excel ‘ninja’. These ‘hard’ analytic skills are also skills I understand actuaries are good at.

People with both ‘soft’ and ‘hard’ skills are difficult to find and we often recruit internally because our people have the technical background.

I think for actuaries looking at the energy sector, it would be key for them to demonstrate that they have that balance of both hard and soft skills and a sufficient technical understanding.

Hear more from Peter Naylor...
You can hear more on decision risk analysis from Peter Naylor at the IFoA Pensions, Risk and Investment Conference on 2 June 2016 at the EICC, Edinburgh.