Asset Strategy Alternative
When executives of a large oil company announced plans to develop a large stranded gas/condensate field within a few years, not everyone was on board. Equally compelling arguments were made for alternative strategies.
The company commissioned SDG to evaluate the plan and possible alternatives.
SDG worked with a client team to identify and evaluate alternative strategies for monetizing the condensate field in addition to the initially announced plan. After evaluating the alternatives against the possible future scenarios, the team determined that one alternative was substantially more valuable than the proposed plan and all other alternatives. The previously announced strategy was determined to have a negative NPV, while the new alternative had a significant positive NPV.
An objective evaluation of alternatives revealed why the proposed plan initially appeared so promising: The client’s base-case analysis included overly optimistic expectations for key variables. SDG’s techniques for obtaining unbiased assessment of key project variables ensured that the client had a complete understanding of the possible states of the world that could contribute to high or low values. Consistently optimistic predictions –- those necessary to make a business plan appear viable –- often result in combinations that have an extremely low likelihood of occurring, leading to poor investment decisions.
The announced plan, while compelling, was ultimately determined to be high-risk for the client. The client now expects to reap higher shareholder value from the alternative strategy identified for the asset. Top management was so impressed with the strategic thinking and thoroughness of the work that it set up an internal team to apply SDG's decision processes for all the company’s strategic assets.
