Ranking R&D Projects in the Petroleum Area: New Tools for Economic Evaluation

Abstract

Recent non-optimistic fluctuations related to the oil price1 highlight the tendency of most of the oil companies in a cost-effective policy. The technology development is one of the key factors in the cost reduction strategy. As a consequence, the strategic scenario expected for the next future in the petroleum industry is an increase in finding new innovative technology solutions. As of today in this scenario R&D activities, besides to greatly affect the strategic technologies portfolio, could have more influence than ever on the business. However, future R&D projects could have an increasing onerousity and complexity related to greater technical and financing risks. Introduction of new assessment techniques, in particular of economic and financial evaluation, might become decisive. In this paper a new tool supporting the selection of R&D project proposals related to strategical needs, expected economical benefits and expected redditivity, is shown. This is a computerised system that supports the decision-maker in the construction of the necessary estimates following an incremental procedure. R&D project are compared and ranked on the basis of a multiattribute evaluation. The economic and financial performance is evaluated on the basis of NPV, IRR and payback; probabilistic analysis and risk assessment also is carried out. Examples of ranking of R&D project proposals from internal R&D Dpt are also presented. Introduction About 30 years ago a group of researchers working for MIT and headed by Meadows published2 the results of a study on the duration of oil and gas supply for the next decades. They reported that oil reserves could last only about 31 years and gas reserve for 38 years. That forecast should have meant that at the end of the 2002 we have no longer available oil and by the end of the 2010 all the reserves of gas should be exhausted. That evaluation brought disconcert and panic amongst investitors and management. Oil companies, but also worldwide industries, were forced to face a decreasing energetic supply scenario without having valid and effective alternatives. Fortunately, statements of Meadows' report were misleading because of the constraints utilised, not so well understood by most of the economists, such as keeping constant the discovery rate and the oil and gas consumption. Presently, these statements could be considered only the results of a good academic simulation of the reality having particular boundary condition but not at all reflected the time that came. In fact, new giant discovered over the last three decades, and many other fields exploited at low cost by using new technologies not still available at the time of Meadows' study greatly increased the reserves. As of today, fields at depth not certainly considered at that time, such as 7–8 kilometre and more, can be put easily on production. Wells, 13–14 kilometre long and at most with horizontal section, can be drilled and put on production. New fields can be discovered under the seabed with 2–3 kilometre of water depth. New technology solutions opened windows in exploiting new area at that time considered not economical, increased the productivity and the recovery factor of existing area, etc. So, the ability to develop innovative technologies in order to exploit economically area before not profitable proved fundamental. Maybe, the error done by the economists at that time was to consider the evolution of this activity and the oil business as static without further changes and destined to disappear. But the reality in its globality always is dynamic and the dreadful problem of increasing the discovery rate and the reserves has been abundantly overcome by means of the new technologies mainly due to the results of R&D efforts over the last decades. Varvelli et al.3 state we still have oil and gas reserves for about one hundred years and set the end of the oil and gas supply approximately by the next 2100. Also, in his article he indicates that much hardly we will get in this end because of other energy supply, most of them already known (such as eolic, solar, biomass, hydroelectric, geothermal, etc) and others not still known, will substitute the energy from oil and gas without seeing its exhaustion, such as happened with coal supply.

Evaluating R&D Projects in Regulated Utilities: the Case of Power Transmission Utilities

“…The inclusion of uncertainties and risk evaluation is a characteristic related to R&D project selection and evaluation. Gottardi et al [193] framed the evaluation based on a computerized method that ranks R&D projects from multiple perspectives and takes into consideration NPV, IRR, and payback. In this case, the financial or economic evaluation methods have been considered inappropriate for the specific evaluation of R&D investments.…”

“…-Integer Programming [100], [191], [215], [218]- [225], [193], [194], [200], [203], [205], [208], [211], [214] [209] [212], [215], [214], [211] [97], [128], [226], [126] [227], [114] [227], [114], [169], [179],…”