Integrated Method for Designing Valuable Flexibility In Oil Development Projects

Abstract

Summary This paper presents an integrated method for identifying and inserting valuable flexibility into major development projects. It builds upon and ties together recent work that (1) documents how errors in estimates can bias the selection of design concepts, (2) shows how concept flexibility can improve the performance of projects, and (3) presents useful ways to present the probability distribution of outcomes. The proposed approach is an outcome of long-term work on the improvement of design methods. It involves four complementary steps: (1) the development and economic evaluation of a base case standard design, (2) the exploration of the range of outcomes this design might generate, so that it is possible to proceed to (3) the identification of opportunities for flexible design, and then (4) the evaluation and selection of the most valuable kinds of flexibility to incorporate into the design concepts. This approach embodies a paradigmatic change in the way designers deal with uncertainty: instead of designing based on fixed assumptions and then testing the sensitivity of the design to risks; the proposed process recognizes risks in the design process, and thereby develops valuable flexibility that increases the expected value of projects. A case study of the development of an oil platform in the Gulf of Mexico demonstrates the proposed method.