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Maximizing value through good decisions and execution

Maximizing value through good decisions and execution. March 28, 2011. Making and executing decisions in today’s business environment is a challenge. “Oh, if only it were so simple.”. The traditional approach to decision making is to advocate and sell a desired decision. Decision Review.

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Maximizing value through good decisions and execution

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  1. Maximizing value through good decisions and execution March 28, 2011

  2. Making and executing decisions in today’s business environment is a challenge. “Oh, if only it were so simple.”

  3. The traditional approach to decision making is to advocate and sell a desired decision. Decision Review Situation Analysis Decision Proposed Assumptions & Forecasts Discount Factor Value Calculated “Here is the situation, now justify a decision.” 1) Situation Analysis is done 2) Decision is proposed 3) Assumptions are made 4) Costs & Benefits are forecast 5) Appropriate Discount Factor is used 6) Business Case Analysis is worked 7) Business Case is presented to Decision Makers What can go wrong with this approach? Why does it so often lead to a lack of buy-in, unresolved ambiguities, lingering uncertainties or frustrating analysis paralysis?

  4. Good decision quality - best alternatives are selected. Good execution and operational quality - decisions are implemented well. Without good project execution quality, even good decisions are implemented poorly. Without good decision quality AND project execution quality, project financial performance will most likely be poor. Decision Quality & Execution Quality Are Necessary To Maximize Value Most Common Outcomes Did The Right Thing Badly Highest Value Good Decision Quality Train Wrecks Relying On Luck Poor Poor Good Execution and Operability

  5. Making better decisions from the start coupled with stellar execution creates the greatest value for the enterprise. Schedule & Execution Optimization,Signposting, Value Realization Activities Increasing Value Activities Decreasing Value Value Realization Planning, Resourcing, Commitment to the Decision Failing to focus on value, recognized uncertainty downside VALUE VOI, VOC, Hybrid Solution Stochastic Evaluation with valid Range Assessments Delighted Outcome Discovery & Framing with correct team Goes as planned Lucky Breaks Ideation Unplanned failures Disappointed Results Idea Scoping Strategic Develop FEL Implementation Decision Solution TIME

  6. Process industries need to follow a stage gate process incorporating good decision making and execution to maximize value and minimize risk. Capital Financial Management Decision Management Capital Project Planning, Execution and Control Management What is the Opportunity? What are the Alternatives? Select the Preferred Alternative Execution Operations • Develop Frame • Strategic • Commercial • Business Case • Preliminary • Assessment • Preliminary • Overall Plan Generate Alternatives Preliminary Scope for Each Alternative Preliminary Implementation Plans Assess Preliminary Value Narrow and Select Alternatives Refine Business Case Define and Freeze Scope Final Implementation & Execution Plans Confirm Value and Commit to Business Metrics Finalize Business Plan Execute Consistent with Execution and Implementation Plans Finalize Operating Plan Execute Business Plan Operate Asset Monitor and Evaluate Performance Adjust as necessary Identify New Opportunities

  7. Integrated Decision Management™Process Map What needs to be decided? What choices do we have? What is thebest choice? What's needed to do it? Do itwell. Discovery&Screen Opportunity Fully Develop Selected Alternative Implement & Monitor Performance Creation & Framing of Alternatives Evaluation and Agreement • Clarify Situation • Define Opportunity • Assess Value Potential • Create Alternatives • Define Requisite Evaluation • Identify Experts • Assessments • Analysis Work • Key Insights • Optimize Strategy • Resource Plan • Schedule Project • Resourcing • Project Mgmt. • Track Metrics Process Steps Opportunity Clear Appropriate Frame Fund & Resource Decision Makers Strategic Decision & Alignment • Situational Perspective • Governance • Objectives • Strategic Question • Stakeholder Analysis • Scoping Analysis • Objectives Hierarchy • Decision Hierarchy • Strategy Map / Strategy Table • Qualitative Assessment • Influence Diagram • Identify Subject Matter Experts • SME Assessments • Decision Tree • Decision Model • Sensitivity Analysis • Simulation • Value of Control & Information • Organizational Alignment • Hybrid Strategy • Value Optimization • Metrics Development • Project Plan • Staffing, Budget & Schedule • Risk Reduction & Contingencies • Optionality • Tactical Decisions • Communication • Metrics Tracking • Transfer to Operations • Value Capture • Periodic Review • Learning & Improvement • Exercise Options Scaled “fit-for-purpose”

  8. The Decision Support Package (DSP) incorporates each of the process deliverables into a concise document for review. DSP Understanding the Problem Value of Components Explanation of the Alternatives Evaluated Risk-based Comparison of Alternatives

  9. The DSP also should include forward planning documents as well as project history Project Roles Project Calendar DSP Communication Plan Budget Forecast

  10. Decision Support Package Overview:We always start with the “Why” and “What we want” Corporate Value Capital Efficiency Cost Effectiveness H,S&E Goals Revenue Growth Reserves Replacement Operability Expertise Retention Cycle Time Market Capture Future Flexibility 1) Reminder of drivers for developing a new strategy: 2) Agreement on strategic objectives and likely tradeoffs:

  11. Decision Support Package Overview:We need to know what we “can do” and work to make the strategies creative and doable. • LoneStar Oil will explore and develop prospects in the country. • LoneStar will operate and meet H,S&E goals • LoneStar to meet Tier 1 levels of key benchmark metrics • LoneStar will comply with “no-flaring” regulations Key Decisions Strategy Themes Exploration Hub Develop. Develop. Timing Production Drilling Rigs Gas Disposition Marketing Plan • Exploration - focus areas vs. land-grab leasing • Hub Development - standardized hubs vs. fit-for-purpose hubs • Development Timing - fast track, staged or traditional • Production - standard technology vs. platform-of-future • Drilling Rigs - company rig vs. second leased rig • Gas Disposition - reinjection, HTL/LPG or LNG/LPG • Marketing - long term contracts vs. spot market Oil Hub Focus Big Gas Value Flexible Options • Hub Area Focus • Land-grab leasing in all areas • Standard design • Fit-for-purpose design • Fast track (2 years) • Staged expansion • Traditional (5 years) • Standard technol. • Platform-of-the-future • Company rig • Lease second rig • Reinject • HTL/LPG • LNG/LPG • Long term contracts • Spot market • Partnering opportunities • Shipping details for blended or segregated products • 3D Seismic purchase • Farm-in, Farm-out Review of the policy decisions and the scope of alternatives considered:

  12. Decision Support Package Overview:We need to know the uncertainties that impact the choices and gather good information from experts. Contract Success Transport. Availability Market Demand FOB Sales Prices Reserve Certification Deal Timing Revenues Sales Volume Fiscal Terms Oil Prices Gas Reserves LNG LPG HTL Production Rate Oil Production Oil Reserves Shareholder Value Operating Efficiency Operating Expenses Oil Hub Focus Big Gas Value Flexible Options Discount Rate % Other Expenses Capital Investment Gas Plant Technical Risk Hub Gas Quality Upstream Storage 4) Overview of the evaluation model and sources of information: • List of Experts

  13. Decision Support Package Overview:We want to communicate insights on how value is created and where the risk lies. IRR% 20% $3,179 3500 NPV $(millions) 17% $2,877 3000 18% $2,182 2500 2000 1500 1000 500 0 Oil Hub Focus Big Gas Value - LNG Flexible Options - HTL Financial Strength? ∑ CapEx $ 8,520 $10,650 $11,400 Max Exposure $3,890 $4,519 $ 4,307 Risk Tolerance? 5) Monetization of gas resources adds significant value, but all of the options stretch Lone Star’s risk tolerance.

  14. Decision Support Package Overview:A comparison of stochastic outcomes is the only way to really judge one option from another. 6) Probabilistic evaluation suggests upside for LNG, but with significant risk. Both strategies that monetize the gas resources dominate over the Oil Hub only. The LNG upside is attractive to explore. HTL has the highest expected value due to staged development and market flexibility.

  15. Decision Support Package Overview:Which variables drive the opportunity and at what point would you choose something different. NPV ($ Billion) 1000 2000 3000 4000 Oil Reserves Gas Reserves Oil Pricing Upstream CapEx Hub CapEx LNG (or HTL) Pricing  Critical factor Gas Deal Timing Hub Op. Efficiency Gas CapEx  Critical factor LNG Contract Success LNG (or HTL) Demand Transport Avail. 7) Critical uncertainties for gas alternatives are “Deal timing” and “Contracts”. Strategy-independent or highly correlated uncertainties. HTL Flexible 50 NPV = $2,182 Big Gas Value 50 NPV = $3,179

  16. Decision Support Package Overview:We always look for a hybrid strategy with counter-intuitive possibilities. Major Uncertainties Clairvoyant Value Wizard Value Actions/Ideas Deal timing $ 67 M $ 87 M Competitor could cement the deal Deal timing & contracts $ 67 M $ 244 M timing and secure long term Contract Prices $ 0 M $ billions contracts at favorable prices. Capital Expenses $ 0 M $ billions Lone Star could focus on strengths Operating Efficiency $ 0 M $ millions in capital projects and operations. 8) Value of Information or Control suggests a creative new option to explore LNG upside that also addresses the risk tolerance issue for Lone Star.

  17. Decision Support Package Overview:By clearly identifying the highest value options each group can effectively manage their own strategy. Key Decisions Strategy Themes Exploration Hub Develop. Develop. Timing Production Drilling Rigs Gas Disposition Marketing Plan Big Gas Value • Hub Area Focus Fit-for-purpose design Traditional (5 years) Platform-of-the-future Lease second rig LNG/LPG Long term contracts Gas Group Plan Strategy Themes Resources Included Gas Process Facility Size Transport Plan Gas Marketing LNG/LPG • All gas in hub area plus 3rd party LNG 300 MMCFD Build LNG fleet • Fixed contracts 9) The strategy is actionable for each functional area and aligned around a winning business theme. Each group will have their own specific actions which align with the selected business strategy.

  18. Decision Support Package Overview:Developing off-ramps and contingencies ahead of time minimizes value destruction later. B i g G a s F a v o r a b l e S t r a t e g y R e s p o n s e 3 1 7 9 B i g G a s L N G D e a l S t r a t e g y E x p l o r e L N G E x t e n d e d 3 1 0 0 P a r t n e r s h i p N e g o t i a t i o n s R e i n j e c t G a s F l e x i b l e H T L S t r a t e g y N o D e a l 2 9 0 0 F l e x i b l e H T L N o Deal S t r a t e g y 2 9 3 5 10) Strategic pathways and contingency options with critical decision points: The best strategy is a pathway that includes options and contingencies for each major barrier or opportunity that can be anticipated.

  19. Decision Support Package Overview:A correct project frame provides the basis for faster follow on decisions. • LoneStar Oil will explore and develop prospects in the country. • LoneStar will operate and meet H,S&E goals • LoneStar to meet Tier 1 levels of key benchmark metrics • LoneStar will comply with “no-flaring” regulations • Exploration - focus areas vs. land-grab leasing • Hub Development - standardized hubs vs. fit-for-purpose hubs • Development Timing - fast track, staged or traditional • Production - standard technology vs. platform-of-future • Drilling Rigs - company rig vs. second leased rig • Gas Disposition - reinjection, HTL/LPG or LNG/LPG • Marketing - long term contracts vs. spot market • Partnering opportunities • Shipping details for blended or segregated products • 3D Seismic purchase • Farm-in, Farm-out 11) Tactical decisions can be made quickly with the evaluation framework that has been developed for the strategy decision. Decisions made become policy. Decisions which were deferred become the focus for decision teams

  20. Decision Support Package Overview:The DSP provides a quantitative and qualitative basis for execution of the plan. • 12) Project management plan is being established: • Resourcing and responsibility plan (RASI diagram) • Budget and schedule (GANTT chart) • Key metrics for tracking progress and results of the strategy • defined data sources and method of gathering • Contingency plans and critical trigger points to take action • Review schedule to update key uncertainties and track metrics

  21. Decision Support Package Overview:Communication is critical to coherent actions. 13) Communication plan to gain understanding and coherent action: Target Audiences Executives Middle Managers Front Line Investors Customers Partners Key Messages Objectives of the decision. Why change? Impact of not changing. Options considered. Key factors. Process for development of detailed implementation plans and involvement of each functional area. Media Options Executive speech. Newsletters. Town meetings. Interactive questioning and processing to gain understanding. Performance Metrics Level of Understanding Resource commitment Value Created Cycle Time Critical Sensitivities

  22. Last Thought “It must be considered that there is - nothing more difficult to carry out, - nor more doubtful of success, - nor more dangerous to handle, than to initiate a new order of things.” The Prince, 1513 Niccolo Michiavelli

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