Value of Information in Business Development
Description: Value of Information in Business Development Opportunities Todd Jonas DA Coordinator Chevron Europe, Eurasia and Middle East Exploration Production Limited London, 26 October 2010 When does information have value? When the benefit of the
Related Topics
Download Presentation
"Value of Information in Business Development" is the property of its rightful owner. Permission is granted to download and print the materials on this website for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Presentation Transcript
slide1. Value of Information in Business Development Opportunities Todd Jonas
DA Coordinator
Chevron Europe, Eurasia and Middle East Exploration & Production Limited
London, 26 October 2010<br>
slide2. When does information have value? When the benefit of the information is worth more than the cost. When it improves decision-making by reducing, removing, or resolving uncertainty.
Value of Information can be calculated by subtraction.
Value With Information
- Value Without Information
Value of Information 2 £ info<br>
slide3. The information has benefit only if it improves your decision-making. A die is rolled, but the result is hidden under a cup. You get £600 if you correctly call the side facing up (1-6).
Expected value without information is £100.
What if I was willing to tell you that the roll was odd or even before you made the call? How much is that information worth?
Expected value with information is £200.
Value of information = £200 - £100 = £100.
If the odd/even information cost £150 then you should prefer not to purchase that information because the net expected value after paying for it is less than the value of the game without buying the information (£50 < £100). 3<br>
slide4. You must obtain the information before making the decision. And you must be willing to change or update your decision based on the new information. What if I was willing to tell you odd/even only after you already made your call (and you can’t change your call)?
The information is too late to have any benefit.
What if despite telling you odd/even you decided to call your lucky number 4 anyway?
The information doesn’t improve your odds of a correct call. 4<br>
slide5. In bidding situations the main decision is how much to bid. A variety of tools can help. There’s not always enough time to reduce uncertainty much. The effort is directed towards creating a state of knowledge about the asset before making a bid. 5 Bid Amount Value 0 Discount Rates 1 2 3 Bid Amount IRR Threshold IRR 0<br>
slide6. Now consider this hypothetical opportunity. You have been to the data room. Experts have assessed a success case. How much would you be willing to pay to get to FID? 6 Small upfront bonus followed by 4 years of appraisal. But the amount of the bonuses have not been negotiated.
You want the right but not the obligation to develop following the appraisal period.
Larger bonus will be due at the time the final investment decision is made to develop the project. Bonus 1? Bonus 2? Appraisal
(information gathering) Development & Production Final Investment Decision (FID)<br>
slide7. We can quantify the benefit of information by assessing how reliably the appraisal program will recognize the true state of the reserves. 7 State of Nature Appraisal Program Results after 4 years of 10 cost units/year or 40 total cost units Ask the experts to assess the reliability of the appraisal program in this order.
We can use Bayes’ Rule to place the uncertainties in chronological order.<br>
slide8. Now it’s time to work our DA magic and build a decision tree. 8 Develop Development
Size Reserves Appraisal Results Price Cost Low
Mid
High Low
Mid
High Small
Medium
Large Small
Medium
Large Small
Medium
Large Yes
No Bonuses are not included.
But 40 appraisal cost units are included in all cases.
Value of information is a sensitivity to the node order in the decision tree.<br>
slide9. Value of Perfect Information is 607-584 = 23 9 If we make the development decisions in 4 years based on our current state of knowledge (no additional information)…<br>
slide10. 10 Value of Imperfect Information
=587-584=3 If we make the development decisions in 4 years based on what we learn during the appraisal period (imperfect information)… Decision has been improved in this case.<br>
slide11. 11 Value of Perfect Information
=607-584=23 If we could make the development decisions with perfect information about reserves… Decision improved in this case Decision improved in this case<br>
slide12. Added a small Bonus 1. Added a large Bonus 2 to make the small development unattractive. Reran the analysis. The appraisal program as proposed costs much more than the anticipated benefit of the imperfect information.
Recall that the appraisal period includes 40 cost units.
There’s an opportunity to scale back the appraisal program and accelerate the development.
The value of information from the appraisal program depends on the commercial parameters or the bonuses. 12<br>
slide13. It’s never too early to build robust decision models with probabilistic assessments. Sometimes commercial parameters are negotiated long before robust models are built based on a single, deterministic success case.
We can use probabilistic models to understand how likely the success case will occur.
We can use probabilistic models to map future exit points. How likely will the development occur and under what circumstances?
Estimating the cost of obtaining information is usually a straight-forward exercise.
To quantify the benefit of information examine relationship between the information and the true state of nature.
How likely will the information recognize the true state of the uncertainty? 13<br>
slide14. Any questions or comments? 14<br>
DA Coordinator
Chevron Europe, Eurasia and Middle East Exploration & Production Limited
London, 26 October 2010<br>
slide2. When does information have value? When the benefit of the information is worth more than the cost. When it improves decision-making by reducing, removing, or resolving uncertainty.
Value of Information can be calculated by subtraction.
Value With Information
- Value Without Information
Value of Information 2 £ info<br>
slide3. The information has benefit only if it improves your decision-making. A die is rolled, but the result is hidden under a cup. You get £600 if you correctly call the side facing up (1-6).
Expected value without information is £100.
What if I was willing to tell you that the roll was odd or even before you made the call? How much is that information worth?
Expected value with information is £200.
Value of information = £200 - £100 = £100.
If the odd/even information cost £150 then you should prefer not to purchase that information because the net expected value after paying for it is less than the value of the game without buying the information (£50 < £100). 3<br>
slide4. You must obtain the information before making the decision. And you must be willing to change or update your decision based on the new information. What if I was willing to tell you odd/even only after you already made your call (and you can’t change your call)?
The information is too late to have any benefit.
What if despite telling you odd/even you decided to call your lucky number 4 anyway?
The information doesn’t improve your odds of a correct call. 4<br>
slide5. In bidding situations the main decision is how much to bid. A variety of tools can help. There’s not always enough time to reduce uncertainty much. The effort is directed towards creating a state of knowledge about the asset before making a bid. 5 Bid Amount Value 0 Discount Rates 1 2 3 Bid Amount IRR Threshold IRR 0<br>
slide6. Now consider this hypothetical opportunity. You have been to the data room. Experts have assessed a success case. How much would you be willing to pay to get to FID? 6 Small upfront bonus followed by 4 years of appraisal. But the amount of the bonuses have not been negotiated.
You want the right but not the obligation to develop following the appraisal period.
Larger bonus will be due at the time the final investment decision is made to develop the project. Bonus 1? Bonus 2? Appraisal
(information gathering) Development & Production Final Investment Decision (FID)<br>
slide7. We can quantify the benefit of information by assessing how reliably the appraisal program will recognize the true state of the reserves. 7 State of Nature Appraisal Program Results after 4 years of 10 cost units/year or 40 total cost units Ask the experts to assess the reliability of the appraisal program in this order.
We can use Bayes’ Rule to place the uncertainties in chronological order.<br>
slide8. Now it’s time to work our DA magic and build a decision tree. 8 Develop Development
Size Reserves Appraisal Results Price Cost Low
Mid
High Low
Mid
High Small
Medium
Large Small
Medium
Large Small
Medium
Large Yes
No Bonuses are not included.
But 40 appraisal cost units are included in all cases.
Value of information is a sensitivity to the node order in the decision tree.<br>
slide9. Value of Perfect Information is 607-584 = 23 9 If we make the development decisions in 4 years based on our current state of knowledge (no additional information)…<br>
slide10. 10 Value of Imperfect Information
=587-584=3 If we make the development decisions in 4 years based on what we learn during the appraisal period (imperfect information)… Decision has been improved in this case.<br>
slide11. 11 Value of Perfect Information
=607-584=23 If we could make the development decisions with perfect information about reserves… Decision improved in this case Decision improved in this case<br>
slide12. Added a small Bonus 1. Added a large Bonus 2 to make the small development unattractive. Reran the analysis. The appraisal program as proposed costs much more than the anticipated benefit of the imperfect information.
Recall that the appraisal period includes 40 cost units.
There’s an opportunity to scale back the appraisal program and accelerate the development.
The value of information from the appraisal program depends on the commercial parameters or the bonuses. 12<br>
slide13. It’s never too early to build robust decision models with probabilistic assessments. Sometimes commercial parameters are negotiated long before robust models are built based on a single, deterministic success case.
We can use probabilistic models to understand how likely the success case will occur.
We can use probabilistic models to map future exit points. How likely will the development occur and under what circumstances?
Estimating the cost of obtaining information is usually a straight-forward exercise.
To quantify the benefit of information examine relationship between the information and the true state of nature.
How likely will the information recognize the true state of the uncertainty? 13<br>
slide14. Any questions or comments? 14<br>