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The inspiration for OilFinancier came to me in 1998 when I was a software tester/document writer for a petroleum economics software program. I was testing for bugs, reporting them to the programmers, and ensuring the programmers fixed them. I also was writing the documentation for new users to understand the program.

This software was a new approach to Monte Carlo analysis techniques for petroleum economics. Rather than conducting thousands of runs based on many technical and financial variables to determine a range and average of profitability for various petroleum projects, this software used sophisticated statistical math to quickly determine the same kind of answers a Monte Carlo analysis would produce. This new software would take a lot less time than Monte Carlo analysis to get the same kind of answers.

Although I didn't have the knowledge to verify whether the math was correct (the engineer I worked for was responsible for this), I kind of liked this program. In addition the shorter time for analysis, I quickly saw several advantages this program had over Monte Carlo:

  1. A professional not knowledgeable about Monte Carlo techniques could easily run this program to get reasonably sound economic answers,
  2. The program could easily identify projects that were too good or too bad to ever require a Monte Carlo analysis, and
  3. The program could easily identify those sensitive variables that really affected the results, allowing the professional team to focus on finding technically sound values for these variables and leaving the other variables as reasonable estimates.

The engineer and his software development company believed that this program would eventually supplant Monte Carlo analysis and sold the program in this way. I thought that they were perhaps overestimating its potential in the petroleum industry.

Before the launch, we had Beta-versions of the program in several engineering offices to test customer response. Most of the response was good, and we were quite optimistic. Some of these Beta versions made it into the hands of some Monte Carlo experts who, fearing their expertise would no longer be needed, began pointing out the supposed flaws with this new approach. Rather than address their concerns, our engineer dismissed their claims as “turf protection.” And so began a battle of professional propaganda.

While this battle was going on, I could only think: “We really have no way of knowing which economic analysis is better, for we don't pump the oil back into the reservoir and reproduce it to determine if Technique A is indeed superior to Technique B.” All these experts, including the engineer I was working for, could not prove their claim based on any scientific experimentation. It was all theory.

“What we need,” I then thought, “was a forum where the experts could compete using their technical expertise and not their hot air.”

My part of the project was done soon after the launch, and the software company and I parted ways. About a year later, the company pulled this economics software from its line of petroleum engineering software. It seemed the Monte Carlo experts had won the propaganda battle, and the company had to protect its line of software by letting the “defective” program go.

OilFinancier Version 1

The “forum” idea never quite left me. I started envisioning a simulation that allowed different economic theories to compete against each other. Part of the challenge was that I could see a fully automated version of a competitive simulation costing between $100,000 and $200,000 to build. I really didn't have this money. And if I had, I wouldn’t have risked it all. So the challenge was to get this concept out there with little cost on my part.

So after several years of thinking, I came up with a hand-email-spreadsheet approach that had me manually updating individual spreadsheets and sending appropriate emails with attached spreadsheets to the financiers. For something much less than $100,000, I built OilFinancier Version 1 in 2003. This version had a negotiation aspect where owners of nearby oil rights should negotiate their common interests to share risk and consolidate their initial success.

I gave three seminars in the next three years to young professionals in the petroleum industry. Results were mixed. In each seminar, about a third of the participants were fairly engaged, another third marginally engaged, and the last third not really doing much after they signed up for free. With each seminar, I added some new features, but nothing really improved the engagement. All three seminars lost participation between 150 and 200 OF Days; which meant shutting it down long before all the fictitious oilfields were discovered and exploited.

I attribute the failure of the first version to several factors:

  1. The manual administration was a deterrent to engagement. I made occasional, yet easily fixable, mistakes while entering well revenues into the spreadsheets. I think some participants were annoyed with these repairs. I also sensed that participants were expecting the daily report about the same time each day, but I could not keep this kind of schedule. For these two reasons, the next forum had to be automated.
  2. The negotiation aspect took away from the engagement. While crafting up deals is good practical experience for young professionals, I think many of them would have just preferred grinding numbers alone (and living with the results) than working with people. I decided to suspend the negotiation aspect for the next version—and just let the young professionals grind out numbers.
  3. In all three seminars, financiers expressed interest in having an investment alternative to not buying oil rights and drilling wells. While I had crafted some rules for “running in the black” and “running in the red,) this did not suffice their need for that risk-free alternative. I just couldn't find a practical way to put this feature into the current design.

In 2006, I “parked” OilFinancier. The site was still on the internet; I was doing a little advertising; and if a group wanted to have their own seminar for a small fee, I would have done it. But this offer never came.

Dave Volek's Food Chain

In 2010, I was reading some articles by critics of curricula for high school math and science. What these critics were saying was that, after several generations, teaching math and science has yet to engage students to want to learn more. On one hand, I had to agree with these critics as I found my high school math and science quite easy: I could have been a lot more challenged. On the other hand, I could not agree with the critics that math and science could always be “fun, practical, and relevant.” Unfortunately math and science students first need to acquire some basic skills (which are usually not so much fun, practical, or relevant) before they can move into fun, practical, and relevant activities.

But my creative side kicked in. In my mind, I started designing all sorts of simulations for math, chemistry, physics, and biology. I thought I should put one of these simulations together, put it in the marketplace, and see what happens. If high students (or others) liked my approach, I would put the other simulations together. Based on past experience with my out-of-the-box ideas, I gave my project a 10% chance of success. But if it worked, there would be a great upside to it.

So I selected the simulation that I thought would be the least expensive to program: Dave Volek's Food Chain. To keep costs down, I found a computer programmer from Kolkata, India. He did a fantastic job, and his invoices were a fraction of what a western programming firm would have charged.

With Google ads, I had no trouble getting people to the website. After about 30,000 visitors, not one person tried the simulation. Like Thomas Edison with the light bulb, I had another invention failure. It seemed silly to invest more money into marketing this simulation. Designing interactive, online simulations that have high school students role-playing scientists seems something I should stay away from for a few more years.

But the important lesson I learned from Food Chain was that with my new found programmer, I could build OilFinancier Version 2 at a fraction of the cost than what I had originally anticipated. So I started thinking about resurrecting the OilFinancier concept.

Version 2

In 2012, I had done enough visualizing and started designing the simulation.

I used all the lessons from the first version of OilFinancier. Version 2 is fully automated, so seminar progress is smoother and free of errors. There is a risk-free alternative to investing in oil wells, so financiers will have to determine their own appropriate discount rate to do well. And there is neither negotiation nor risk in Version 2.

In Version 2 we have added the emphasis on royalties, corporate taxes, and environmental liabilities. These financial parameters will provide a much higher technical (financial) challenge than the first version. There is a lot of petroleum economics number crunching, much more than the first version.

Because my experience tells me that the world does not like my inventions yet, I need to protect my financial resources lest I put too much money into something the world doesn't want. So first I am introducing the OilFinancier concept to the world. If there is actual interest, I will build the simulation.

So if you like the OilFinancier concept, please go to the registration webpage to show your interest.

Future Versions

If Version 2 proves successful, OilFinancier can go in all sorts of directions. I could certainly bring back negotiation and risk analysis. I can also see ways to make reservoir engineering and geology as more prominent features of future versions. But first, let's prove Version 2 and then take cues from the industry where the next version should go.

© 2014 Dave Volek. All Rights Reserved.