Point of View: UT center advancing real asset risk management science

Dec. 16, 2002
Finance theoreticians 50 years ago defined portfolio optimization, the first methodology of real asset risk management technology, and the emerging science gained recognition in the last 30 years. But it's only now becoming practical with high-speed computing.

Finance theoreticians 50 years ago defined portfolio optimization, the first methodology of real asset risk management technology, and the emerging science gained recognition in the last 30 years. But it's only now becoming practical with high-speed computing.

In the last 2 decades, the oil and natural gas industry has used tools including Monte Carlo simulation, real options valuation, and risk analysis, but technical shortcomings have yet to be resolved.

Jerry P. Brashear, an oil and natural gas consultant for over 30 years, is provisional director of an emerging interdisciplinary research and development center being formed at the University of Texas to help energy executives boost returns while reducing risk.

"Contemporary methods tend to overstate value, understate risk, and misallocate capital through uncompensated, avoidable risk. Many so-called advanced decision-analysis techniques—as widely advocated and often applied—only slightly help these problems but often really don't solve them," Brashear said.

The promise for advancing the technology is great, he said, adding that the research that is needed is more profound than can be done from the base of a consulting firm or from an exploration and production company.

He explained that his title is provisional in the sense that the Center for Petroleum Asset Risk Management exists, but its future depends upon players from research, industry, and government becoming partners and funding its budget.

Several major companies and government agencies already have expressed interest in the center, Brashear said. Ironically, he sees his biggest career challenge as not soliciting partners but rather explaining the value and importance of real asset risk management.

"Most people in this industry are trained to think about removing the uncertainties from a problem. They are not trained to think about the uncertainties and incorporate them…. You actually can profit from uncertainty. It's not just a negative. It's a way of testing new opportunities," Brashear said.

Advancing the science

Calling basic risk management technology "an immature science," he said, "It is not subject to a patent or copyright, with the exception of software. It is not in any individual company's interest to invest a material amount in advancing the science. It's in the collective interest of the industry to do it."

He expects the center will have gained a reputation as a center of excellence worldwide within 2 years. UT's schools of engineering, business, and geosciences announced the center's formation on Sept. 30.

"This is the management science complement to the natural science that UT already was doing," Brashear said. "There are almost no players doing research on (real asset risk management) other than a handful of isolated academics on things that are not software-related."

In the past, research on real asset risk management always was approached from a single disciplinary perspective. Brashear said the center is "genuinely interdisciplinary" in that it involves a three-school management committee.

"It needs to be done from an academic institution and from a neutral point," he said. Brashear has vowed to run the center by emphasizing the positive points of being affiliated with a university while conducting the research as work statements that will be fulfilled on a schedule to ensure real results are produced.

"If academic means irrelevant and out of control, we don't want to do that. If academic means independent and intellectually excellent, that's what we want to do. So yes, we are academic, but no, we are not academic," he said with a laugh.

Confident of the center's future success, Brashear is counting on UT's renowned petroleum engineering, geosciences, and business programs as well as anticipating that leading oil and gas companies will be among the center's founding partners.

"The companies individually will contribute by their participation, their own insights, and their own perspectives. We will do things in that context. The same quality of a center located somewhere distant from the oil industry would not have the same level of participation," he said.

Partners' input

In soliciting partners, the center published a 153-page prospectus describing the center and outlining how exploration and production companies, service companies, public agencies, and research institutions can join.

The prospectus is being circulated to solicit reactions and is subject to modification during discussions with founding members.

The document will become final at the full partnership's first meeting, anticipated for spring 2003.

Membership costs are based on a sliding scale to attract companies ranging from the supermajors and national oil companies to the independent producers who own minority interests in numerous oil and gas properties but who never act as an operator.

"The prospectus is marked 'draft.' The reason for that is we expect it to change as we learn from our partners and as we negotiate with our partners," Brashear said. "We are absolutely open to the suggestions of the partners."

Computing advances

Risk management technology has some tools existing in the marketplace, but each of those tools can be improved, Brashear said, adding that the center might invent some new tools.

"The math has been definedU. We still are doing things that made sense when we were doing manual calculations through spreadsheets," he said. "Today, every engineer and geologist has the equivalent of a major computing center of 25 years ago sitting on the desk or closed up in the briefcase."

Current technology has been constrained and compromised because it was developed based upon computational capability dating back to 1975 or earlier, he said.

"An awful lot of people learned the 'one right way' when they first took this up. It was the only way to do it then because the computations were just impossible to run," Brashear said.

Gaps exist between theory and practice in real asset management. Subject to the wishes of the partners, Brashear believes the center's initial priorities will be resolving how an E&P company can:

  • Update its portfolio analysis to quickly evaluate new opportunities.
  • Maintain logical consistency.
  • Calculate aboveground risks, which include prices, politics, competition, etc.

"Nobody treats those very well today, and a lot of people ignore them altogether at their peril," Brashear said of the aboveground risks, which involve "the war-and-famine kind of things."

The center will strive to advance the science as well as "look a little over the horizon. What would we really like to do if we could? If we can specify that, that is the fun of R&D," he said.

Career highlights

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Jerry P. Brashear is managing director of the Brashear Group LLC, a Potomac, Md., consulting firm he founded in 1996. He was named provisional director of the Center for Petroleum Asset Risk Management at the University of Texas at Austin in 2002. Additional information about the center is available by contacting him at [email protected]. He lectures and writes about the basics of risk, real options, and portfolio analysis.

Employment

Before starting the Brashear Group, Brashear was senior vice-president and director of the oil and gas consulting practice of ICF Kaiser International Inc. At ICF Kaiser and its predecessor, Lewin & Associates Inc., Washington, DC, for over 20 years, he pioneered the use of integrated simulation of specific assets (reservoirs, pipelines, refineries, and storage) as the basis for corporate, strategic, and policy planning. His career also included serving as project manager at Riverside Research Center of New York and as a visiting lecturer to Princeton University and Fordham University.

Education

Brashear holds a BA from Princeton University, an MBA from Harvard University, and a PhD in environmental and technology planning from the University of Michigan.

Organizations

Brashear has held various titles with the Society of Petroleum Engineers and currently is an SPE distinguished lecturer in economics, risk, and portfolio analysis. He also belongs to the American Association of Petroleum Geologists and the International Association for Energy Economics.