Strategic Gaming. An Introduction to its Application in Oil & Gas and Energy

Transcription

1 Strategic Gaming An Introduction to its Application in Oil & Gas and Energy

2 Contents About Dragonfly Game Theory and Strategic Gaming Strategic Gaming Applications 2

3 Background 3

4 Our work has spanned the globe Our oil & gas work has enabled our clients to capture billions of dollars in value from a wide range of projects, including strategies for upstream developments, NOJV & partner alignment issues, pipelines/transportation, refining, LNG terminals, storage, country entry, political stakeholder engagement, negotiations, bidding, and procurement We have helped clients with a wide range of strategic challenges: Company & Business Unit Strategy Portfolio Management Growth Strategy Investment & Capacity Decisions Alliance & Joint Venture Strategy Competitive Positioning Market Entry Strategy M&A and Licensing Strategic Sourcing Bidding Strategy Negotiation Strategy & Tactics Product & Pricing Strategy Governmental Affairs & Political Risk Assessment 4

5 Services and Capabilities Strategy Support Coaching & Training Decision Tools Process Development Strategic Gaming Decision Analysis Real Options Portfolio Analysis Political Analysis Typically our work involves a combination of our services and capabilities; our leading game-theoretic approach provides our clients with a competitive edge War Gaming 5

6 Contents About Dragonfly Game Theory and Strategic Gaming Strategic Gaming Applications 6

7 So, what is game theory? Game theory, the science of strategic thinking, is a tool that enables us to analyze interactive situations Should we compete or cooperate, and how? Provides a logical and clear structure of interactive (chess-like) situations Helps predict and prescribe optimal strategic behavior for a wide range of interactive situations John Nash Since 1994, five Nobel prizes have gone to game theorists: game theory has become a universally accepted tool and language. Thomas Schelling 7

8 Where does game theory apply? COLLABORATION COORDINATION Yes Decision Analysis (with options) Game Theory Prisoner s Dilemma Assurance Battle of the Sexes No Decision Analysis Game Theory Chicken Deadlock No Yes Influence Potential COMPETITION 8

9 Traditional DA and Game Theory: Small Changes, Big Differences In decision theory, we model other players choices as uncertainties EV = 0 Don't enter Enter EV = -5 Incumbent cuts prices 0.0 Incumbent holds prices 1.0 Incumbent cuts prices 0.5 Incumbent holds prices In game theory, we model other players choices as decisions, and their payoffs 20 Humans and chimpanzees share 98.5% percent of DNA, but there are big differences; decision theory and game theory are analogous Entrant EV = 0 Incumbent Don't enter Enter Incumbent EV = 20 Cut prices Hold prices Cut prices Hold prices Entrant Incumbent

10 DOWNSTREAM MIDSTREAM UPSTREAM Game dynamics are endemic in oil & gas Competitive positioning Partnering/strategic alliance/jv choices Partner alignment Bidding INTERACTIVE ISSUES Political /regulatory issues Licensing, acquisition or divestment Infrastructure choices Downstream facilities choices (e.g., refineries, LNG terminals, storage) Commercial negotiations Procurement/supplier management GAME DIMENSIONS Compete or cooperate? Others value drivers? Win-win space? Points of leverage? Messaging? Interpreting signals and bluffs? Timing of actions? Tactics for eliciting information and/or influencing others? Game changers? Contingency plans? 10

11 Strategic Gaming : A Practical Game Theory Approach Dynamic Framing Strategy Evaluation Execution Planning Steps: Players Choices Sequence Uncertainties Quantify uncertainties Compute payoffs Evaluate game changers Develop tactics Ensure alignment Deliverables: Structure Strategic thinking Qualitative evaluation Anticipation of others moves Initial evaluation How to change the game Effective signaling Dynamic road map Provide direction NegotiationReady 11

12 Framing interactions and uncertainties Cooperate on tech studies Reservoir model only Beta accept? Seek to buy out Gamma? Gamma accepts? Tech learning Imaging Existing wells Choose preferred strategy Beta aligns? Yes Cooperate or confront? Conditional cooperation Expand scope of studies Modeling results No Veto threats 12

13 Evaluation principles Look forward and reason back Assume rationality (economic) A useful starting point; later, can relax the assumption Clients often say that another player is irrational; after inspection, it is seldom true 13

14 Example: Identifying leverage Accept Back down/agree to current rates Supplier demands 15% increase Nash Reject Supplier Walk away Supplier able to move 30 to others Supplier able to move 20 to others Supplier able to move 10 to others Nash gradually shuts in for as long as it takes to bring in alternatives Nash gradually shuts in for as long as it takes to bring in alternatives Nash gradually shuts in for as long as it takes to bring in alternatives Agree to stick with current rates but move rigs to others Supplier able to move 30 to others Supplier able to move 20 to others Nash gradually shuts in for as long as it takes to bring in alternatives Nash gradually shuts in for as long as it takes to bring in alternatives.25 Supplier able to move 10 to others Nash gradually shuts in for as long as it takes to bring in alternatives 14

15 It turns out, there s a lot of leverage Delta NPV to Nash if Supplier Pulls Rigs Delta NPV to Supplier if They Pull All Rigs range of estimates for what Supplier could place with others range of estimates for what Supplier could place with others Rigs Pulled by Supplier Nash s value rises even if the supplier tries to walk away, and based on the supplier s other opportunities, it is highly unlikely that they can move more than Rigs Supplier Can Place With Others Supplier will be shooting themselves in the foot if they walk away from doing business with Nash 15

16 Deal structuring & qualitative assessment These 4 terms define the deal structure By putting ourselves in the shoes and minds of the players, we qualitatively assess their preferences on each of the deal terms; here we see there will likely be alignment on deal terms 2 & 4, misalignment on 1 & 3 This approach is often a useful first cut to framing the dimensions of a deal and qualitatively assessing where there are likely win-wins and misalignment; quantitative evaluation can and should, in most cases, follow from such an exercise 16

17 Economic modeling (negotiations) Terms Price of asset sale 330 Cash deal Yes Cash up front 100 Financing 230 Years financing 5 Interest Rate 5% Cash flows for each party Uncertainties Our and counterparty payoffs, different metrics 17

18 Including uncertainties, we can evaluate the range of value from different deals 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Deal 1: 30% chance of negative NPV for Red, large gap with Blue 0 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 Deal 2: 60% chance of NPV negative for Blue, not realistic 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Deal 3: A win-win in which risk is minimized for both parties By identifying and modeling key uncertainties and risks for each player, we can generate s-curves to show the range of potential value. In this case the s-curves show Red would never accept Deal 1, Blue would find Deal 2 too risky and unfair, and Deal 3 would be a win-win. Such insights can be very useful in negotiations. 0 18

19 Projects deliver clear, detailed road maps Opco 1 Explore Meetings with Gamma Opcos 1, 2 Assess swap opportunities Opcos 1, 2, 3 Opco 3 Work on price increases & contractual changes with customers Interest on Product? Interest on Crude? No Yes Yes No Close coordination needed Verify there is a business case for equity crude blending Work the value of trading opportunities Talk with Delta (use as threat with Gamma) Work a product deal (connectivity to XYZ) Work a deal. Needs ABC connection. Asset swap. Protect/enhance (equity) trading opportunities & opco needs Reach out to Beta. Must bring ABC connection. Asset swap. ABC contingent deal. Protect/enhance (equity) trading opportunities & opco needs. ABC fails Deal works out? ABC: $0-25MM Deal should be ABC contingent. ABC: $0-25MM No ABC: $20-45MM Deal should be ABC contingent. Talk with Alpha (strong bargaining position if ABC has failed; consider ways to block ABC if it has not) Begin to build business (does not need to wait until 2017). Shift blending operations away from Alpha. Refine required footprint/tradeoffs for deal Yes No Delta Gamma Beta Alpha Internal Such road maps are typically supplemented with detailed plans for key interactions and other action items Other Opcos Determine footprint that needs to be secured contractually/tradeoffs for deal 19

20 Contents About Dragonfly Game Theory and Strategic Gaming Strategic Gaming Applications 20

21 JVs in Oil & Gas On numerous occasions, we have used Strategic Gaming to help oil and gas clients understand how to better influence partners in JVs and compete more effectively with competitors. These clients have captured or preserved hundreds of millions of dollars of value by developing bold strategies and tactics that: Enable them to exercise effective levers Gain alignment with partners on beneficial win-win terms Play Studies Complete in 4 months Old Play Existing infrastructure Form new partnership? Nash Oil Co. The Client JV Exploration Will they renew? Niche Player Infrastructure & Technical advantages Partner Adversarial relationship developing (?) New Play Open Acres Auction in 6 months Go Alone or with Partner? 21

22 Positioning Strategy in Gas & Power We used Strategic Gaming to help a company understand how to better position itself in the face of serious risks from two LNG competitors. The client was in a complex game of Chicken with competitors, and we helped the client see how certain investments and customer deals could help them to move first with a credible commitment that would provide them with the upper hand. 22

23 Forging Alliances in Alternative Energy In a consolidating industry and in the face of a serious threat from a much larger rival, we helped an alternative energy company develop a strategy and tactics to successfully negotiate key alliances without leaving value on the table. As a result, the client: Became the clear market leader, Grew revenue 20 times in 2 years, Reduced its costs, Increased profit margins sharply. Payoffs to: Nash Alpha Beta Offer to Alpha Alpha Accept Reject Beta Offer to Alpha Compete Alpha Accept Compete

24 Sources of value-add across 50 projects that used Strategic Gaming Share of projects featuring each source of value-add 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Better Understanding of the Game: 100% Better Insights into Other Players: 90% Better Organizational Alignment: 84% These sources of value have led to billions of dollars in value capture or savings versus clients momentum strategies New Game Changing Ideas: 84% Better Tactical Ideas: 71% 24

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