strategic gaming introduction oil and gas...jvs in oil & gas on numerous occasions, we have used...

Strategic Gaming™

An Introduction to its Application in Oil & Gas and Energy

Contents◦ About Dragonfly

◦ Game Theory and Strategic Gaming

◦ Strategic Gaming Applications

Mar 2019 Strategic Gaming Introduction O&G and Energy2

Background


Our work has spanned the globe • 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

We have helped

clients with a wide

range of strategic

challenges:

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


Services and Capabilities

Strategy Support

DecisionTools

Coaching & Training

Process Development

Typically our work involves a combination of our services and capabilities; our leading game-theoretic approach provides our clients with a competitive edge…

Strategic Gaming™

Decision Analysis

Real Options

Portfolio Analysis

Political Analysis

War Gaming


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

Since 1994, five Nobel prizes have gone to game theorists:

“…game theory has become a universally accepted tool and language.” Thomas Schelling

John Nash

Where does game theory apply?COORDINATION

COMPETITION

Prisoner’s

Dilemma

Deadlock

Battle of

the Sexes

Chicken

Assurance

COLLABORATION

Decision

Analysis

Game

Theory

Game

Theory

Influence Potential

Yes

Yes

No

No

Decision

Analysis

(with options)


Decision Theory and Game Theory:Small Changes, Big Differences


Humans and chimpanzees share 98.5% percent of DNA, but there are big differences; decision theory and

game theory are analogous

In decision theory, we model other players’ choices as uncertainties

In game theory, we model other players’ choices as decisions, and their payoffs

Game dynamics are endemic in oil & gas

• Competitive positioning

• Partnering/strategic alliance/JV choices

• Partner alignment

• Bidding

• Political /regulatory issues

• Licensing, acquisition or divestment

• Infrastructure choices

• Downstream facilities choices (e.g., refineries, LNG terminals, storage)

• Commercial negotiations

• Procurement/supplier management

INTERACTIVE ISSUES 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?

UP

ST

RE

AM

DO

WN

ST

RE

AM

MID

ST

RE

AM


Strategic Gaming™: A Practical Game Theory Approach

• Players

• Choices

• Sequence

• Uncertainties

• Structure

• Strategic thinking

• Qualitative

evaluation

• Provide direction

• Quantify

uncertainties

• Compute

payoffs

• Anticipation of

others’ moves

• Initial evaluation

• Evaluate game

changers

• Develop tactics

• Ensure alignment

• How to change the

game

• Effective signaling

• Dynamic road map

• NegotiationReady™

Steps:

Deliverables:

Dynamic

Framing

Strategy

Evaluation

Execution

Planning

Mar 201911 Strategic Gaming Introduction O&G and Energy

Framing interactions and uncertainties


Beta accept?

Seek to buy out Gamma?

Gamma accepts?

Tech learning

Beta aligns?

Reservoir model only

Expand scope of studies

Imaging

Existing wells

Modeling results

Cooperate on tech studies

Yes

No

Choose preferred strategy

Cooperate or confront?

Conditional cooperation

Veto threats

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


Case example: Understanding leverage


Nash

Supplier

It turns out, there was a lot of leverage

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 the supplier can move more than 30

Supplier will be shooting itself in the foot if it walks away from doing business with Nash

Delta NPV to Supplier if Pulls All Rigs

0 10 20 30 40 50 60 70

Rigs Supplier Can Place With Others

10-50-90 range of estimates for what Supplier

could place with others

Delta NPV to Nash if Supplier Pulls Rigs

0 10 20 30 40 50 60 70

Rigs Pulled by Supplier

10-50-90 range of estimates for what

Supplier could place with others


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

Economic modeling (negotiations)


Cash flows for each party

Our and counterparty

payoffs, different metrics

Uncertainties

Terms

Price of asset sale 330

Cash deal Yes

Cash up front 100

Financing 230

Years financing 5

Interest Rate 5%

Including uncertainties, we can evaluate the range of value from different deals


100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

0

Deal 1: 30% chance of

negative NPV for Red,

large gap with Blue

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

0

Deal 3: A win-win in

which risk is minimized

for both parties

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

0

Deal 2: 60%

chance of NPV

negative for Blue,

not realistic

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.

Projects deliver clear, detailed road maps

Such road maps are typically supplemented with detailed plans for key interactions and other action items

Explore Meetings

with Gamma

Assess swap

opportunities

Work a product deal

(connectivity to XYZ)

Talk with Delta

(use as threat with Gamma)

Reach out to Beta. Must bring ABC

connection. Asset swap. ABC contingent

deal. Protect/enhance (equity) trading

opportunities & opco needs.

Work a deal. Needs ABC connection.

Asset swap. Protect/enhance (equity)

trading opportunities & opco needs

Determine footprint that needs to be secured

contractually/tradeoffs for deal

Begin to build business (does not need to wait until 2017). Shift

blending operations away from Alpha.

Work on price increases & contractual

changes with customers

Verify there is a business case for

equity crude blending

Work the value of trading opportunities

Talk with Alpha (strong bargaining position if

ABC has failed; consider ways to block ABC

if it has not)

Interest

on

Product?

Interest on

Crude?

ABC: $0-25MM

Deal should be

ABC contingent.

ABC:

$0-25MM

No ABC:

$20-45MM

Deal should

be ABC

contingent.

ABC

fails

Deal

works

out?

Refine required footprint/tradeoffs

for deal

Delta

Ga

mm

aB

eta

Alp

ha

Inte

rna

l

Opco 1

Opcos 1, 2, 3

Opcos 1, 2

Opco 3

Other Opcos

Yes

Yes

Yes

No

No

No

Close

coordination

needed


JVs in Oil & GasOn 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

PartnerAdversarial relationship

developing (?)JV Exploration

Will they renew?• Play Studies

– Complete in

4 months

Niche PlayerInfrastructure & Technical

advantages

• New Play

– Open Acres

– Auction in 6

months

• Old Play

– Existing

infrastructure

Form new

partnership?

Go Alone or

with Partner?

Nash Oil Co. The Client


Positioning Strategy in Gas & PowerWe 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.


Forging Alliances in Alternative EnergyIn 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.


Nash Green Dog Red Dog

Sources of value-add across 50 projects that used Strategic Gaming™


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Share of projects featuring each source of value-add

Better Understanding of the Game: 100%

Better Insights into Other Players: 90%

Better Organizational Alignment: 84%

New Game Changing Ideas: 84%

Better Tactical Ideas: 71%

These sources of value have led to billions of dollars in value capture or savings versus clients’ momentum strategies

To find out more…


[email protected]

www.DflyStrategy.com


mailto:[email protected]?subject=Query

http://www.dflystrategy.com/

strategic gaming introduction oil and gas...jvs in oil & gas on numerous occasions, we have used...

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