It’s time for smaller O&G firms to benefit from Decision Quality
For several decades the larger firms in O&G have seen the benefits, more so than in many other industries where only around a quarter of larger firms in general have a formal, company-wide decision making process.
In the O&G industry the last few years has seen a lot of uncertainty and volatility. At the same time we’re also seeing small and medium sized companies taking on larger roles as operators in larger projects. While this is a well-deserved opportunity, it’s not an endeavour that can be completed without caution. Smaller companies have less risk capacity and so their decisions need to be of high quality, perhaps even a higher quality than the supermajors.
For the teams working on each project, there’s also a personal reason to invest in DQ. To have the confidence to know they made the right decisions with the hand they were dealt, even if the final outcome is bound to carry uncertainties.
Smaller companies might baulk at the idea of weighing down their nimble-by-necessity ways of working – even for the sake of better outcomes. But the advantages of DQ go far beyond this and play directly into the priorities of companies that need to manage tighter margins: DQ also enables them to stay efficient, focus on what matters, and avoid rework.
So it’s time to leave ad-hoc or inconsistent approaches to decision making. We’ve seen these first-hand lead to widely varying outcomes that you will find difficult to understand and respond to. At Rockflow we often step in to diagnose a situation when it has gone awry, but we would sooner see firms gain mastery over their own decision making and learning. Implementing DQ is a skill that takes time to hone, and it’s not necessarily a skill that’s easy to acquire, but it’s certainly worth investing in. Many E&P firms have sought independent outside help to guide quality decision making, particularly in situations where the stakes are high, it’s difficult to get internal alignment or previous attempts to decide have failed.
Why do firms make poor quality decisions?
Should we have known better? It’s hard to tell if your team approaches each major decision in a unique or ad-hoc way. The factors involved in decision making are often hidden by a lack of process that could have made it clear how and why the decision was made.
The ability of any firm to make poor decisions can seem paradoxical, given the wealth of data, talent, and analytical tools at their disposal. Nevertheless, inherent biases, organisational dynamics and governance quirks will still conspire to throw your decision-making process off course. The same is true for any team, no matter how impressive they are.
The main factors that can lead you to make sub-optimal decisions are:
We don’t always know or agree on the questions we need to answer:
Any major project or large capital investment will involve interrelated decisions.
If you don’t involve the right people and fully explore and agree on the scope and purpose, your team can end up addressing only a part of the problem or the wrong problem entirely.
Just think of how many times a decision process has had to restart because a key expert or decision maker was not involved at the beginning. Inevitably if they bring an important new dimension later in the process, you’re forced into significant rework.
We believe that because we’re aware of cognitive biases, we’ve overcome them:
Many studies and extensive empirical evidence have confirmed that everyone, no matter how expert, is prone to cognitive biases. One of the most known collections of this evidence was compiled by Danial Kahneman, psychologist and Nobel Prize winner in economics.
The catch is this: even being aware of these biases has little impact on peoples’ susceptibility to them or their ability to directly address them. You need more than personal awareness; you need a structure and process to challenge and protect against them.
People are only advocating for a single way forward:
If you invite a project team to pitch a case for their preferred solution, objectivity may be sidelined.
For the team, it’s possible they’ll risk ignoring relevant information or being selective with the scenarios in order to support the option they’re advocating.
For the decision makers, they may only ever hear this one case. The choice becomes one of accepting or rejecting a single option rather than comparing and trading-off the pros and cons of alternatives.
We’ve seen this in acquisitions where there can be a motivation for the team to ‘make the case’ or ‘close the deal’. With this driving them, they start to advocate how the acquirer can make it work, perhaps saying “we can do things differently and add value”.
People start with a preconceived idea of the best solution:
Any strong view can dramatically distort the starting point for decision making if it’s left unchecked.
A strong opinion might arise from a person’s recent experience in ‘similar’ projects, and whether positive and negative, it’s a form of bias. We’ve heard many comments along the lines of, “We tried that technology on a field last year and it was unreliable, so we shouldn’t consider it for this development.”
“Anchors of any kind will prevent decision makers and project teams from stepping back and taking time to think through the bigger picture”
And so we first need to develop a fresh and coherent business context to help everyone start with a more objective mindset. Objective evidence helps challenge pre-conceived perceptions and biases.
Leadership are expected to provide the answer:
Executives often join a new project with views on the way forward. You may have done this yourself and with good reason – it’s an expectation that goes with the role, especially if they’re the person with the most experience in the room. The team may look to them to come up with a plan, or the executive may feel compelled to use their experience to make a judgement call based on the work a team has already done.
Just as strong opinions can anchor people’s thinking, a leader’s views can dramatically distort the starting point for decision making. We’ve known executives to make passing comments that everyone overhearing interpreted as a directional mandate from on high, rather than as the executive originally intended: as an option to explore.
All of these factors might appear to produce simplicity and clarity initially, but the impact they have to distort or derail is real. Decisions get made without the most relevant information, high value alternatives might not get developed or considered, and decision makers don’t realise they’re not seeing the full picture.
You may have employed great resources to the project, with a team that brings an incredible depth of expertise. But without the right framework to guide you, you can still fail to consider all that you should.
The Decision Quality framework at a glance
According to DQ, there are six requirements that must be fulfilled to make a good quality decision.
1. Clear and appropriate frame
The underlying principle: You must ensure all key stakeholders fully understand and are aligned on the purpose, perspective, and scope of the decision(s) being made.
When key people aren’t involved early or there’s no alignment, you may need to recycle the decision-making process later or risk the opportunity fizzling out with no decisions made. Or you might start the process without considering all relevant interdependencies and opportunities.
2. Creative and doable alternatives
The underlying principle: The quality of your decision is only as good as the best of the options you consider.
For example, if you only consider one seemingly attractive option and two poor options, you will opt for the only apparent winner. Whereas if you consider three competitive alternatives, your ability to make a better decision will likely increase.
3. Meaningful and reliable information
The underlying principle: Having accurate and meaningful information is key to making a high-quality decision.
Decision makers need to have confidence in the reliability of the information going into the evaluation.
4. Agree clear values, preferences and trade-offs
The underlying principle: Understanding what matters most to your business in the decision-making process is crucial to discern between options.
5. Logically correct reasoning
The underlying principle: The decision-making process must be rational and coherent so the decisions and assessed uncertainties have a clear link to the evaluated outcomes.
6. Commitment to action
The underlying principle: you need to ensure every decision maker is fully committed to implementing the decision that is ultimately made.
Why getting DQ right is difficult
On initial inspection the six elements of DQ are clear and they might even look fairly straightforward to achieve.
But in a demanding and dynamic organisational setting where the stakes are high and the decision is complex, it can quickly become difficult to achieve quality throughout the DQ chain.
And it’s not enough to fulfil five out of six requirements. The quality of a decision is only as good as the weakest of the six links in the DQ chain. So, what can companies do to achieve quality throughout? We’ll dive into the details throughout the rest of this paper.
A few important prerequisites
You’ll need to exercise judgement to make sure DQ is applied in an efficient way based on the scope of the situation. The DQ framework is also very helpful in smaller, less complex situations if you can pare the process back accordingly.
You’ll need to exercise judgement to make sure DQ is applied in an efficient way based on the scope of the situation. The DQ framework is also very helpful in smaller, less complex situations if you can pare the process back accordingly.
In the next section, we’ll refer to issues from a case where an operator needed to make a decision about an infill drilling program for a large offshore asset. This multi-hundred million dollar drilling program will illustrate the value of DQ in a large, complex, high-stakes decision.
1. Clear and appropriate frame
The first element of decision quality is to define the context, objectives, and constraints of a decision in a way that captures every relevant factor. For instance:
- The purpose: why is the decision needed, why now and what makes it difficult to decide?
- The scope: which decisions need to be considered, and which will not?
- The perspective: what assumptions do we agree on, what should we take as given, who will be involved and what are their roles?
Answering these with enough clarity and detail can take more time and iteration than you’d expect. It’s not uncommon for the early discussions to reveal the scope is wider than everyone thought, and you might need more people in the conversation than you first planned.
It’s important that agreement is reached. That said, it can’t be a half-hearted agreement. If you gloss over differences at this stage, it can come back to derail the process later. The person tasked with leading the decision process should own the quality of the frame. When they see decision makers or experts with different views, it’s important for them to make time to sort out these differences early.
A good way to achieve this is to facilitate a working session with all those involved to discuss and nail down the final draft. All issues should be fully discussed and agreed, even if you need an additional piece of work to address a question.
How does this translate into a useful framework in practice? One fundamental tool that helps is the decision hierarchy (see example in figure 2 below). We’ve found it to be very effective for facilitating discussion and landing agreement on clear and explicit decisions.
In the example, the framing process for the infill drilling project helped the team understand the full scope of interrelated decisions that needed considering. . The apparently ‘simple’ matter of deciding on an infill drilling plan quickly expanded to encompass many interrelated decisions once the framing discussion began.
Not everything needed doing, but it did all need to be properly considered and evaluated. Discussing and agreeing on the ‘givens’ (decisions that won’t be opened up in the later project) will help you to avoid debating issues that are ultimately an unnecessary diversion.
2. Creative and doable alternatives
If you want your decision-making process to be robust, you must generate and consider a range of courses of action.
Optimising one solution isn’t optimal at all
Too often decision makers simply approve or reject a proposal from a project team, usually supported by sensitivity analysis and risk mitigation plans. Senior managers are often very successful in their ability to harness a team to find the best solution to a problem or make the case for a way forward. But while both can be very effective in many situations, they are frequently a source of failure in complex decision making.
There are two main reasons why it doesn’t work:
- One response we see too often is “we now know all the decision levers, so this is a case of optimisation to find the best solution”. There are two big weaknesses in this. First, it risks bypassing the critical thinking that’s essential to really understand the interdependencies between the decisions and choices. Second, it’s not feasible (or meaningful) to assess the inputs to cater for all the permutations.
- As we mentioned above, quickly landing on a vision and then making the case for it is a recipe for a huge, missed opportunity. How do we know a much better alternative isn’t out there if a good range hasn’t been explored and compared?
When decision makers’ options are simply to go ahead with a single plan or not, it isn’t a real choice. The solution presented to them may appear to be well prepared and rigorously evaluated, but it narrows their focus, shutting down their awareness of what else is possible.
How can the decision makers have confidence there isn’t something better? How can the risk-reward trade-offs be understood in isolation?
How to consider alternatives
Having two viable alternatives will allow you to make a meaningful choice between them. And when you have a set of three or more creative and compelling alternatives, it allows the full solution space to be explored and compared. The process of evaluating and comparing alternatives helps the team overcome biases, and learn what drives value.
A powerful first step you can take is to populate a strategy table from the decision hierarchy (see figure 3 below: if you aren’t aware this is a good example of an options table. The options are strung together to make a ‘concept’. Note, it does not encompass how uncertainty influences any of the decisions – primarily but not exclusively subsurface.)
This sets out a range of distinct alternatives and the combinations of decisions that would be made in each case. This can be done with the wider project team over the course of a workshop, which provides an opportunity to test whether the choices are distinct, clear and explore the full breadth of opportunity. A good and complete frame will typically have 4-8 decision levers.
The table below shows the strategy table worked up for our infill drilling example. Each decision lever has a range of choices. It’s important to involve the right people to flesh out the choices to make sure each one is realistic and doable, and the range is broad enough to encompass a full and rich set of choices.
By working top-down, starting with a champions statement e.g. “a long-term turnaround will enable us to get maximum value from infill drilling” – this captures the overarching beliefs motivating the alternative in a nutshell – and weaving it through the choices in the strategy table, you’ll avoid the pitfall of attempting to cover all the bases. We’ve seen it work well when a team brainstorms a range of champion statements, thinking through what would actually be done in each case, as well as what they’ll learn by evaluating it.
To motivate real debate and useful comparison, all the alternatives need to be compelling. Creating straw man alternatives to be stood up for comparison against a ‘reference case’, sets the process up to fail. Decision makers need to be confident the alternatives satisfy the elements set out in the table below.
To avoid leaving value on the table it’s important that together they test the full range of possibilities, while also satisfying the criteria in figure above.
There is a risk that teams will constrain themselves to what they believe will be acceptable to senior management. Yes, alternatives need to be compelling and doable, but you can only really understand where unseen value may lie by testing the limits with more ‘extreme’ cases.
3. Meaningful and reliable information
Once we have our alternatives, what do we need to know to select between them? First, we need meaningful and reliable information.
The importance of reliable information is obvious. Decisions in the oil and gas industry involve very large irreversible investment commitments and long timelines, so the quality of information is critical. This information might include the recoverable resource, production profiles, costs and schedule. If this isn’t sufficiently reliable, decision makers can’t be confident when they compare and make trade-offs between alternatives.
The importance of meaningful information is a matter of focus. It can be demanding for the project team to work up high-quality assessments for each alternative, so you can’t assess everything. An iterative process will help your team to quickly understand which assessments and uncertainties will drive value, ensuring they focus effort on the most decision-relevant information.
Biases easily creep in at this stage. There are debiasing techniques to mitigate this: one Harvard Business Review piece highlights the importance of thinking twice, using premortems, seeking advice, and taking an outside view.[1]
Making uncertainties comparable
Your teams will usually approach assessments with the intent to describe uncertainty ranges. The E&P business has seen the value of this for a long time, and many companies have developed a rich set of principles and guidelines.
You’ll find comparing the impact of these uncertainties, both between key assessments and between alternatives, is far more insightful if the end members of the ranges are equally likely.
To take the infill drilling example, the average incremental oil recovery per well from the infill program might be assessed as 4mmbbl on the low-side, 6.5mmbbl in the mid-case and 8.3mmbbl on the high-side – this is the uncertainty in the average across the whole program; individual wells might have a wider range of uncertainty. And the uncertainty of the average capex per well might be $22M, $25.5M and $31M – again this is not the variation between individual wells, but factors such as the weather and the following future rig rates may drive the uncertainty around the total cost of the drilling program.
Weighing up the trade-offs between alternatives requires that the uncertainties are directly comparable. For this, the low and high assessments must be equally likely for all the parameters. A chance of 90% is normal industry practice – the chance that the outcome will be equal to or greater than the low-case (P90), or 10% chance that it will be equal to or larger than the high-case (P10). Using ±20% for sensitivities will not help decision makers if for one assessment +20% (say production) is far more likely to occur than +20% for another (say cost). It is worth the additional effort to make the P90 and P10 assessments so the impact they have on the evaluated results can be compared on a like-for-like basis.
4. Clear values and trade-offs
Decisions often involve balancing short-term profits against longer-term production, reserve additions or value. If you’re clear on your business objectives and what metrics represent a good outcome, you can be clear on the trade-offs.
It’s vital for decision makers to be engaged early. They need to discuss which value metrics they would like to see from the evaluation before investing resources. We’ve found a ranking of the metrics will drive rich discussion here.
If you can get agreement on the three or four metrics that really matter at the framing stage, it’ll help in three ways:
- To challenge decision makers to commit to what the investment needs to deliver
- To avoid juggling value metrics later to favour an alternative
- To guide the project team to design the economic evaluation model.
5. Logically correct reasoning
Flawed reasoning can lead to disastrous outcomes in the oil and gas industry, so logically sound reasoning is essential for making decisions that hold up under scrutiny.
The three previous links in the DQ chain show us what can be done, what we value and what we know about the choices.
At one end of the scale, decision makers need to be confident that the rigorous analysis is sound, so they can say how the reservoir and facilities will perform under different development concepts and operating conditions. This is also true for economic analysis of the costs, commercial terms and fiscal regime.
At the other end of the scale, for decision makers to draw conclusions, they need to compare the key qualitative factors. These will range from regulatory timescales, uncertainty around the fiscal regime, partner approvals and the outcome of commercial negotiations.
If people work through the potential regrets of committing or not committing to an alternative, it’ll force them to think more rigorously about the longer term.
In the infill drilling case, if a new subsea template isn’t installed now, will the opportunity be missed as it’s unlikely to be viable later in the field life? Or, if we drill the full portfolio of infill opportunities in one campaign, will we have missed the chance to learn and drill fewer wells for higher (individual well) recovery from two campaigns?
6. Commitment to action
A decision is only as good as the commitment to act on it. In the oil and gas industry, where projects are often subject to delays, cost overruns, and shifting political landscapes, a lack of commitment can turn a sound decision into a missed opportunity.
Lingering questions or doubts will have a great impact here. To avoid this, diagnosing the decision and drawing up the frame with the decision makers and project team needs to happen early on.
The project team is responsible for the quality of the information, evaluation and insights, but the decision makers must support the DQ approach and be responsible for the quality of the decision, including that the organisation is aligned to deliver it.
Has everyone had the opportunity to ask difficult questions? Is everyone confident their idea has been seriously considered? You’ll want to take a structured approach to make sure all the key stakeholders are engaged throughout the process (see figure 5). The framing and alternatives stages should explore open ended questions and ideas, but keep the process structured so agreements are reached and recorded.
As Kahneman, Lovallo and Sibony explain, “We form our mental models rapidly, often on the basis of limited evidence at the start of the process, and we alter our models slowly as new facts emerge”. This theory reinforces the importance of using a structured process to open decision makers’ thinking to a wide range of alternatives up-front, avoiding seeking preferences until the evaluation is complete.
If each of the other elements of the DQ framework have been done well, then you should be in a good position to get the commitment you need.
Some final thoughts on DQ
We’re not good at making decisions until our process can prove otherwise
Should we have done what we did? The danger of basing our answer purely on an outcome is that luck can skew our perspective. It might have worked out well last time, but unless we hone our decision quality, we risk relying far too much on unearned confidence.
The HBR article An Organization-Wide Approach to Good Decision Making states:
“Without a proven, organization-wide approach, there may be, at best, isolated pockets of high-quality decision-making where individual leaders have elected to take a rigorous, transparent approach. Otherwise, the organization is at the mercy of the biggest bias of all: the perception that it is good at making decisions”.
Even the best-laid plans can go awry when decision quality falters. Each of the DQ elements is vulnerable to the distortions of cognitive and motivational biases, which can lead in the worst instances to catastrophic outcomes, but often to huge value left on the table. And as HBR puts it, we cannot afford to succumb to the bias that we are simply “good at making decisions”.
In the oil and gas industry, the stakes are immense. Multi-billion-dollar projects, complex regulatory landscapes, and volatile market conditions mean that decisions must be made with the utmost care. Improving decision quality is not just a strategic advantage – it’s a necessity.
It’s worth noting that the Decision Quality framework itself is not necessarily the holy grail, and it’s only a part of what makes for best practice. That said, it’s a critical part.
DQ is a process that can be learned, but you might need help
Decision quality is not an obvious or inherent skill for most project leaders or decision makers. It’s not a capability you can pick up simply by reading a manual, nor is it necessarily a natural extension of a project leader’s skillset.
People can be trained to guide and lead complex decisions, but most mid-sized companies won’t have the resources to hire a permanent DQ specialist. Instead they may need to rely on external support.
Even most of the largest E&P companies we listed in the introduction will have used external DQ experts to help with demanding decisions; though they have also trained decision makers and decision experts to drive DQ through the organisation.
The reality is that, for the most significant decisions, it’s almost always helpful to bring in an external DQ expert who can bring an unbiased perspective on contentious issues. We’ve found they take the pressure out of the conversation, are able to ask difficult questions, and let the team focus on the work and the decisions. They can bring fresh ideas to the table that people are less likely to be predisposed against. And with an intermediary providing some structure, it’s easier to get everyone involved and find traction.
If you’re concerned you might not be able to get buy-in from your peers, an advisor can start by playing a very small initial role: having discussions with a few key people and setting out a recommended approach. You can then have internal discussions on whether to go ahead with the next step, your colleagues now having worked with the advisor first hand.
Should we have known better? It’s hard to tell if your team approaches each major decision in a unique or ad-hoc way. The factors involved in decision making are often hidden by a lack of process that could have made it clear how and why the decision was made.
