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Developing Multi-Attributes Portfolio Selection Model for Downstream Oil & Gas Projects

FEATURED PAPER

by Rico Milza, CCP

Jakarta, Indonesia


Abstract

There are numbers of decision models available for evaluating and selecting potential projects within a corporation, from qualitative to quantitative. Each company, including Indonesian National Oil Company (NOC), should have its own version of a selection model that will allow them to make the best choices among alternatives within the usual constraints.

This paper developed a multi-attributes selection model for downstream projects within Indonesian NOC. The selection model uses single dimensional and multi-attributes value for selecting potential projects. In this paper, the Author demonstrates the development of a multi-attributes selection model using following attributes: Financial (NPV and ERR), Contribution to strategy (Strategic plan and Market Development, and Risks (Probability of Product Success and Influence of External Factors).

After that, optimization model applied using multi-attributes value and added some specific constraints such as budget constraints, project constraints, and resources constraints.

Keywords: MultiAttributes Project Selection, Portfolio Optimization, NPV, ERR, AHP, Downstream Oil & Gas.

1. Introduction

1.1  Downstream Oil and Gas Business in Indonesia

Two main sectors of oil and gas industry are upstream sector and downstream sector. Upstream sector identically with exploration and production activities such as searching for potential oil and natural gas reserve and production activities to bring the crude along with raw natural gas to the surface. On the other side, downstream sector refers to refining process of crude oil and natural gas as well as marketing and distribution of the products.

The upstream projects, especially in exploration phases, categorized as high-risk projects since it has a higher probability of failure to find oil and gas reserves. But, this kind of industry (in general) offer big margin. On the other side, the downstream projects in general categorized as lower risk projects. Downstream sector deals with huge amount of money in transactions but offers a much lower margin compared to upstream sector.

Indonesia’s downstream industry has changed significantly since the implementation of Indonesia’s 2001 Oil and Gas Law. Market liberalization of downstream industry in Indonesia has changed the industry player for downstream business from dominant Indonesian National Oil Company to more competitive market with the presence of International Oil Company such as Shell and Total.

1.2  Project and Portfolio Selection

There are a number of decision models available for evaluating and selecting potential projects within a corporation. All company try to develop a screening model (or set of models) that will allow them to make the best choices among alternatives within the usual constraints of time and money.

Project or portfolio selection activity is the periodic activity to select a project from available project proposals comes from various departments in organization by considering company budget and resources constraints. Following are some of common project selection models:

a. Checklist Model

Check list is the simplest form of project selection models. The application of checklist model on project selection is to help a group of decision makers to initiate a conversation, stimulate discussion and exchange opinions, and highlight priorities for the group.

b. Scoring Model

The expected result of a scoring model is to get a specific weighted score for each alternative. Firstly, each attributes ranked with a specific important weight and assign a score to each attribute in terms of its rating. Then, to get the weighted score for each attribute, each score multiplied by its important weight. Lastly, the weighted scores added to get an overall project score.

c. Analytical Hierarchy Process

The AHP model was first developed by Saaty in 1980. The AHP is used to support decision makers to rationally select the best alternative based on the qualitative and quantitative approach. It uses subjective and pair-wise comparisons approach. The decision goal, attributes, and sub-attributes are set in the hierarchical structure for order ranking and each alternative set for comparison in pairs.

1.3  Problem Statement

This paper will focus on the development of multi-attributes selection model for downstream projects within Indonesian National Oil Company. The proposed model will:

a) Use single dimensional and multi-attributes value for selecting potential projects.

b) After that, optimization model applied using multi-attributes value and added some specific constraints such as budget constraints, project constraints, and resources constraints.

2. Multi-Attributes Decision Making

Multi-attributes decision making can be classified into the compensatory method and non-compensatory method. In the compensatory methods, the decision-maker assumed to be able to explain his preferences rationally. Changes in the values of the particular attribute in the compensatory method can be traded off against opposing changes in another attribute. Unlike in the compensatory method, in the non-compensatory methods trade-offs among attributes are not permissible. Thus, comparisons of alternatives in non-compensatory method must be judged on an attribute-by-attribute basis.

The proposed project selection model will use multi-attributes model with a compensatory method using weighing technique. There are some weighing techniques commonly used such as additive weighing technique, Analytical Hierarchy Process, and Rank Order Centroid Weight. This project selection model will use Analytical Hierarchy Process as weighing technique because the attribute used in the model constructed into a hierarchy.

3. Development of Project Selection Model

The project selection model will focus on downstream oil and gas industry in Indonesia, especially in marketing and distribution sector. Indonesian NOC business in downstream marketing and distribution sector includes petroleum product distributions (gasoline, diesel fuel, LPG, lubricants, Petrochemical, etc.)

Project selection model developed for Indonesian NOC for downstream sector was described in the following workflow:

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Editor’s note: This paper was submitted to the Association for the Advancement of Cost Engineering International (AACE) in 2016 in partial satisfaction of the author’s application for Certified Cost Professional (CCP) certification.  


About the Author

pmwj50-Sep2016-Milza-PHOTO
Rico Milza, CCP

Jakarta, Indonesia 

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Rico Milza
is an oil and gas professional with more than 7 years of experiences in Cost Engineering and Project Management; from conceptual phases to executing phases as cost engineer, project engineer, and project coordinator. He is currently a Planning & Cost Engineer at Pertamina (Persero) in Indonesia. Rico holds a bachelor degree in Industrial Engineering from Institut Teknologi Bandung (ITB). Rico is a Certified Cost Engineer/Professional (CCE/CCP). He lives in Jakarta, Indonesia and can be contacted at [email protected]