Managing Trade-Offs Between Conflicting Goals Through a Portfolio Visualization Process

Rasey, Stephen M., WiserWays, LLC and Custer Resources, Houston, TX

Managers of petroleum businesses have many simultaneous and conflicting measures of performance and success. They must also negotiate, and set performance goals and resource levels, such as capex and headcount. They must understand the tradeoffs that exist between performance measures, goals and resources.

In Markowitz-style Linear Programming portfolio optimization these trade-offs can be found in the “dual variables”, first-order partial derivatives of the objective function with respect to the constraint levels at the solution point. These are “exchange rates” between the portfolio reward and the goals. Portfolio management is more than setting the goals and finding an optimal solution. You must also look for desirable trade-offs between your rewards and goals.

A visualization-oriented approach to portfolio optimization called “BlitzPort” (Rasey 2004 Cancun) reverses the process. The BlitzPort process builds thousands of operational­ly executable portfolios based upon hundreds of strategies at many capex levels.

One part of a strategy is the set of exchange rates we accept between competing goals and resource constraints. For example, how much are we willing to reduce NPV for an extra 1 MMBO of production, or an extra $1MM in earnings? To explore the possibilities, we cre­ate a library of strategies, each with a different combination of exchange rates between goals. Build thousands of near-optimum portfolios quickly using efficient capital budgeting techniques driven by the strategies in the library. Load these portfolios into a multi-dimen-sional visualization application and interactively apply goal and resource constraints to find portfolios that best meet all our conflicting objectives.