1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
How to Use System Dynamics to Create Your Own Future : A Case Study
of a Worldwide Oil and Gas Exploration Group
Peter J Genta Gregg Anderson, Rusty Hinote,
David P Kreutzer William C Hood, Kim McMillan
Gould-Kreutzer Associates, Inc. Amoco Production Company
River Court, 10 Rogers Street Worldwide Exploration
Cambridge, MA 02142, USA 501 WestLake Park Blvd.
Tel: 617 577-1430 Houston, TX 77079, USA
Fax: 617 577-0426 Tel: 713 366-2985
Abstract
This paper describes the work and experience gained by a team of senior managers using a systems
thinking approach, to develop their own set of future ios, to support a reali of strategy
and the redesign of a worldwide exploration group of a major integrated oil company. The
opportunity for this experience arose from a need to assess the diminishing returns produced during
several years of overseas exploration activity . According to a recent article in The Wall Street
Journal, the entire petroleum industry has increased its search for reserves overseas. "...between 1988
and 1992, the world's 234 largest publicly traded oil companies spent $157 billion on exploration and
development overseas, 49% more than in the U.S.", but with diminishing results. "In 1990, the
industry discovered 148 barrels of oil outside the U.S. for every 100 barrels it sold abroad; last year it
added just 100 barrels of foreign reserves for every 100 barrels sold, while the average cost of
replacing crude surged 55% to $6.56 a barrel."
Against this backdrop. the senior managers used a systems thinking approach to brainstorm the
factors influencing the dynamics of the world oil and gas industry. From this process the group was
able to develop a set of five distinctly different plausible futures that might develop. To test their
group mental model for consistency, they developed a causal model of the industry and discovered
that their five different futures all could be explained by a common model.
Business Decision-Making, page 53
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
How to Use System Dynamics to Create Your Own Future : A Case Study
of a Worldwide Oil and Gas Exploration Group
Introduction:
From the fall of the Berlin Wall to the rapid rise of the economies of Southeast Asia and the
effective collapse of OPEC’s grip on the world oil market, the world had changed dramatically during
the 1980’s. Against this backdrop of change, the nature of finding oil and gas reserves for the major
oil companies has changed as well. As new fields have been increasingly more difficult to find,
many oil companies have been moved to re-evaluate their strategies. Amoco has been no exception.
The managers at Amoco’s Worldwide Exploration Business Group (WEBG) have spent a good
portion of 1993 evaluating and realigning their global strategy to adapt to the changing environment.
WEBG managers have spent several months identifying and then selecting an appropriate strategic
alignment for their group using an approach best articulated by Perry, Stott, and Smallwood in Real-
Time Strategy: Improvising Team-Based Planning for a Fast-Changing World. While this approach
proved useful for helping WEBG identify and define a number of alternative strategic options for
moving forward, the group felt a need for better evaluating how the world was changing before
committing to a specific course of action.
After attending a series of workshops on systems thinking earlier in the year, the WEBG
management team was intrigued with the experience David Kreutzer had with integrating systems
thinking with the scenario-planning approach at Royal Dutch Shell. In particular, Amoco wanted to
participate in the creation of their own common viewpoint of alternative futures. Building upon the
idea of creating future scenarios as articulated by Peter Schwartz in The Art of the Long View, we
devised a plan for the team members to brainstorm and map out the relevant paths along which the
future might develop.
The Hexagon Process:
We began the process of scenario creation with a half-day exercise with many of the more
influential managers and staff in Amoco’s WEBG. This group consisted of roughly fifty people,
the senior team, the exploration strategy team, and a number of senior
explorationists from around the world: These were the players that had the most experience, as well
as the most at stake, in the future outcome of WEBG. Together with two facilitators from Gould-
Kreutzer Associates, we spent a morning brainstorming about the future of dynamics of the
worldwide petroleum industry as it will effect global oil and gas exploration.
While the assembled group was larger than we would normally recommend for using the
hexagon facilitation process, we felt comfortable with this decision for three reasons. First, we
wanted to work with a diverse enough set of personalities and experiences to provide the broadest
possible range of ideas to form the basis for creating a robust set of future scenarios. Second, we
wanted to open up the process to all and increase the chance of “buy-in” to the future scenarios by
being sure to capture all the plausible uncertainties that might be ont the minds of all the key EBS
players. Third, over half of the group had p: iP: ina long
systems thinking and was already accustomed to working with the hexagon approach and sharing thel
mental models with the use of causal loop diagrams.
In our first session we used a nominal group technique in which we asked all the participants,
in advance, to think about the following question: “What are your concerns, fears and hopes
world wide exp for the next 30 years?” We chose a long time frame to get
participants to really stretch their thinking beyond their typical day to day focus. We also wanted the
group to think beyond the negative factors which had resulted in the need for their current strategic
realignment, so as to consider all the positive trends which might be on the horizon. Also, along the
lines of Schwartz’s approach, we wanted to anchor the underlying focal issue to encourage people to
think about the relevant key factors and driving forces.
Business Decision-Making, page 54
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
We felt that this approach worked well. Within the first two hours we had elicited well over
one hundred ideas and filled four (4 x 6 feet) white boards (Figure 1). These ideas covered all realms
of possibilities from “totalitarian backlash in the former Soviet Union” (22) and “nuclear attack in the
Mid-East”(81) to “worldwide standards of living driving demand”(53) and “gasoline being displaced
by natural gas as the transport fuel of choice”(53).
NOC Rule!
Geoscience
Renewal
Figure 1: One of the Four White boards from the First Session
While we were very productive in generating ideas during the first half of the morning this
made our task for the remaining time all the more challenging. We worked with the group to find
related associations among the ideas collected. As these related “clusters” of ideas emerged we
looked for an engaging name which would best represent the underlying connecting idea. Using this
converging approach we were able to bring order to the collected ideas by uncovering roughly twenty
clusters of related ideas.
It was at this point that we were ready to begin the search for future scenarios. We began a
second hexagon process by “collapsing” each cluster of ideas to a single idea represented on its own
new hexagon. We worked with this new and smaller collection of hexagons to begin a new
clustering process. Rather than just looking for related associations as before, we started to group the
hexagons based upon the likelihood that their underlying ideas would occur at the same time, or as a
result of those ideas of the adjacent hexagons. While we were not yet looking for logical cause and
effect explanations, we were finding the uncertainties that would likely evolve together.
As these new clusters emerged, we started to see the possible paths that the future might
plausibly evolve toward. Five distinct scenario paths began to develop, and we had a little fun giving
them creative names (Figure 2). The resulting future worlds began to be referred to as 1) Green Gas
World, 2) Beyond Your Wildest Dreams, 3) The World in Turmoil, 4) NOC’s Rule and 5) Supply
Glut. While we did not set out to create exactly five scenarios when we began the process, we did
have a healthy discussion of what would be the appropriate number. The Amoco team talked about
the fact that the planning group at Royal Dutch Shell has routinely narrowed the number of future
Business Decision-Making, page 55
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
scenarios employed to no more than two or three so as to simplify their eventual use with their
We d the possibility of reducing the five scenario paths that had
emerged down to two or three, but the group nearly unanimously agreed that to do so would force
some separate but possibly mutually exclusive trends together and that we should stay with the all the
emerging paths which they created. Our personal feeling, is that as “creators” of all the underlying
ideas, the operating managers assembled did not have a problem working with five plausible scenarios
and would have felt “slighted” if any had been consolidated. This contrasts with the Shell experience,
whereby the external planning group creates the ‘ios and the are not as
familiar with all the underlying nuances and are less likely to “buy - in” or might be confused by more
than a couple distinctly different alternatives.
Market
Flooded
With Olt
NOC's Rule Worst Nightmare
Figure 2: One of the Two White Boards from the Second Session
Envisioning the Future:
After generating a rich set of ideas on the morning of the first day, we spent the remainder of
the two days fleshing out the ideas behind each of our five scenarios. We wanted to create a story for
each scenario to give meaning to the underlying events. In the words of Peter Schwartz, stories have
many advantages. They open people to multiple perspectives and help them cope with complexity.
We worked with a team of four from within Amoco along with the two facilitators from Gould-
Kreutzer Associates to create these stories as well as search for the underlying systems structure. We
wanted to make certain not only that our stories sounded plausible, but we wanted to map out the
logic in a causal loop diagram to uncover-and change any flaws in our thinking. Most of the team
from Amoco had either been through a week long workshop of systems thinking or had been working
over the previous months on a project to uncover the systems structure behind their business unit and
worked well with exploring their mental models using causal loop diagrams.
As we discussed each scenario path we started writing the stories that would weave all the
related events together. In one likely scenario, the supply of the world’s remaining oil and gas
resources becomes dominated by state-run national oil companies (NOC’s) resulting in a stable
supply of oil to meet increasing world demand at the detriment of the global multinational oil
Business Decision-Making, page 56
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
companies (MNC’s) who find it increasingly difficult to discover and develop resources overseas.
The following is an excerpt from the “NOC’s Rule” scenario:
“The new century dawns with the announcement that Aramco has purchased
Exxon to gain outlet to monetize its massive oil reserves. Economic growth and
stability in emerging economies have inspired many developing countries to reclaim
control of country resources. As a result, many NOC’s now dictate the terms on
which multi-national oil ies can partici in exploration and devel
activities. This has resulted in the high risk, frontier basins being the only open
playing fields for companies like Amoco, and even there they face fierce competition
as new ind dent oil ies from i ies also pursue the
remaining opportunities. The NOC’s themselves have added to the competition.
With access to global financial markets as well as internal funds, NOC’s have started
to expand regionally, focusing on countries with similar cultures and stage of
economic development...”
While the length of this paper does not permit us to describe in detail the other four scenarios, the
following offers the highlights:
Supply Glut - This future is characterized by the collapse of OPEC and a flooding of the
markets with increased production. While this results in historic lows for oil prices and increased
worldwide GDP growth and energy demand, the multinational oil companies-suffer.
- Rising pollution and environmental restrictions limit the demand for oil
and gasoline. The search for alternative fuels leads to a major conversion of automobiles to run on
compressed natural gas (CNG) and a subseq rise in the exploration and of natural
gas resources.
- A “New World Order” brings peace and stability to the
world. Rising GDP in emerging counties creates over one billion new consumers all desiring
mopeds, autos and the “conveniences” of modem society. Demand for oil and gas rises accordingly.
The World in Turmoil - Continued unrest in the Middle East sparks a new war as another
dictatorship tries to dominate the region’s oil supply. The resulting increase in oil prices triggers
Tunaway inflation and interest rates reminiscent of the 1970’s.
The Causal Loop Diagram:
NOC
Supply
Demand s
/ 3 a. PO Oil Supply
o
Ss
World-Wide (8 Oil Price i?)
GDP per Capita
Pel ¢ \ MNC
s s Supply
°
Economic Multinational
Growth Exploration
Figure 3: Adam Smith: Supply and Demand Balance Through Oil Price
Business Decision-Making, page 57
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
With our five scenarios articulated as stories, we were able to explore the underlying
dynamics in more detail. We did this by searching for the relevant reinforcing and balancing loops
which would need to be present for each scenario to occur. For this process we used a group approach
to brainstorm and draw out causal loops, building upon and refining our logic as we progressed. This
approach is similar to that articulated by Genta and Sokol as presented at last year’s System Dynamics
Conference. While space does not allow us to describe the causal loops behind all of the future’s
which we created, what follows is an explanation of the “NOC’ s Rule” scenario.
Figure 4: Newly Emerging Economies Increase Demand
Figure 3 shows the basic law of supply and demand
Oil explained over two centuries ago by the Scottish philosopher,
Demand Adam Smith. This century has seen a dramatic rise in western
7 economic growth spurred by the advent of the automobile and
/ based in large part on the rise of petroleum as the dominant
fuel source. Since “Colonel” Drake discovered oil in
World-Wide Titusville in 1859, our voracious appetite for oil has
GDP per Capita historically outstripped the industry’s ability to meet demand
s leading to rising prices and a subsequent search for new
sources of supply. As new sources of oil were brought to
Economic market, prices would fall spurring yet more economic growth...
a s Growth Three trends became increasingly evident in the Post-
World War II era. With the discovery of oil in the Middle
Rise in Consumers East, most of the world’s oil supply became increasingly held
(® s outside of the western world, first under the control of major
. Emerging Iti-national oil ig overseas, and later
Economies under the control of state run national oil companies as various
nations nationalized their domestic oil industries.
Figure 5: Economic Growth Leads to Stability and World Trade
Second, as North America, Japan and Western Europe’s economies have matured in the later
half of this century, the dominant sources of economic growth have shifted to the highly populated
emerging economies of Southeast Asia and more recently to Latin America and Eastern Europe. As
the economies of these rapidly developing regions grow the world is seeing a dramatic rise in the
number of people who are able to escape the subsistence poverty of agricultural society to become
consumers in a more urban setting. This rise in consumers is beginning to drive the demand for a
broad Tange of products and services ranging from soap and razor blades to mopeds and air
leading to a cor ding increase in the demand for energy, particularly oil and gas
(Figure 4).
Third, along with this rise in worldwide living dards, we are i i
growth in the democratic political process. From the student activism of South Korea 6 the fall of the
Berlin Wall and the break-up of the Soviet Union. the world’s people are demanding participation in
the political process to go hand and hand with their new found economic freedoms. As more freely
elected governments come to the world scene, we hopefully should see more of a concern for
economic growth and the welfare of the average citizen and a move away from militarily dominated
states. This should lead to increasing world political stability and an increase in world trade (Figure
Business Decision-Making, page 58
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
NOCControl
Political oS, . pee
Stability stability &
World Trade
(®) io NOC
s
Emerging Oil Price
Economies , Pag
Economic. ° s
ges! Growth — '
‘Oil Suppl:
Figure 6: NOC’s Rule: Stability and World Trade Puts NOCs in Control of Resources
With increasing access to capital, economic growth and stability, the emerging economies
will be increasingly inspired to reclaim control of their own resources. Since the national oil
companies (including those in the former Soviet Union) control more than 90 per cent of the world’s
oil reserves, they will be able to control its supply and ultimately the price (Figure 6).
However, this does not imply that today’s multi-nationals will be shut out of the game
completely. No doubt production sharing agreements as they exist today may be irrelevant in this
new world order. On the bright side, with rising worldwide economic growth, more capital should
become available for investment. With cheap and abundant supplies of capital, long term oil
development projects should become more economically viable (Figure 6).
Economic
/ s Growth
Rise in Consumers ®
s
Emerging
Economies
s
s
Sy ly of Dollars for
Coital ——* Exploration
Figure 7: Rising World Economy Provides Cheap Capital for Both MNCs and NOCs
In addition, political stability and increased world trade from sustained peace and Prosperity
should lower the barriers to entry for d dent oil ies. While today’s establish
NOCs such as Saudi Arabia’s Aramco and Venezuela’s PDVSA should have easy access to world
capital flows and oil industry expertise, this might not be the case for the newly independent NOCs in
the former Soviet Republics and the newly opened countries of Vietnam and Myanmar. As the
number of new indep the supply of i capital per pany will tend to
diminish, encouraging these new NOCs to coop with today’s multi-national to gain
access to capital, technology and downstream markets. In return, the MNCs will enjoy ‘the expansion
of many new market opportunities (Figure 8).
Business Decision-Making, page 59
Figure 9:
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
s a
Emerging
Stability & eo
Independents tg
World Trade
Supply of
Capital
®
Ss °
Oil Supply Cooperation
s with MNCs
MNC ——m = Market
Supply Opportunities
for MNCs
Multinational
Exploration
s w®
Profits
Dollars for _— of MNC
Exploration j
Figure 8: E d Cc
with MNCs
With this plausible explanation of the “NOC’s Rule” scenario we started to develop a fairly
extensive causal loop diagram of the worldwide oil industry. As we created similar diagrams for each
of our other four scenarios we began to notice that a number of the relevant causal loops overlapped.
In fact, by the time we had finished we realized that we really did not have five independent and
mutually exclusive future “end states.” Instead, we had showed the one underlying structure behind
the dynamics of the world of oil which today carries the seeds of those trends which might prevail in
the future. The outcome of the future would depend on which of these trends developed sooner, or
systemically, which causal loop segments become dominant (Figure 9).
World Wide Oil Industry Dynamics
s
lean Oil Use Technology’
oat :
Emerging
Indcpendenty
Sunn
OR
t
SAE Remand
0
© Cooperatim
with MNC
Market ith MNCS
a World-Wide 5 a“
ction opp oe 04 Pace
a $ Demand for
Ezonomic s GenSgieace
= Cinmin
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GD Neue Gas he el
's Pee 3 3
Fmergiog ‘i :
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and
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Free Internal Markets s
‘ Sao of Datars as io
\ Ae, © Note
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s
‘Supply of
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World Wide Oil Industry Dynamics
Business Decision-Making, page 60
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
Using the Scenarios in the Strategy Renewal Effort
With our scenarios developed, we began to introduce them back into the strategic alignment
effort. First, we introduced the future stories to the participants of the original hexagon session. They
were well received and as we further explained the underlying causal loop di to them, we were
able to get more detailed feedback to revise the industry map. Because the future scenarios were
created by the team responsible for changing the gic design of WEBG, we used them to help
them to refine and select the strategic alignment options that were under consideration.
We realized that there was no way to predict which future scenario, if any, would take place.
Rather, we engaged the team in debate and discussion to consider how all of the strategic options
under consideration would fare under each of the five scenarios. This series of exercises proved
valuable to both help more clearly define the strategic options as well as to help determine which one
would be most robust under a variety of changing conditions.
With the strategic direction of WEBG defined, the team will begin to further refine and
develop their industry map. As described by Peter Schwartz, the group has been gathering
information, such as recent news articles, to either confirm or disprove the underlying logic of their
causal loop diagrams. Similar to the way the Canadian, Athat Uni ity has been izing
their organizational research described by Smalldon, Mohammed, and Genta and presented at last
year’s System Dynamics Conference, the group has set up a “thinking room,” a large conference room
equipped with magnetic white boards and the ability to post notes on all the walls. Here the team has
space on a large bulletin board devoted to each of the five scenarios and relevant news articles are
posted next to their corresponding causal loops. In this way, the group’s shared causal loop diagram
is being used as an intuitive way to organize a large collection of ideas. This systemic approach to
learning is proving to be a very efficient way to make sense of a range of complex phenomena ranging
from the rise of alternative fuels to the opening up of Vietnam and the on-going turmoil in the former
Soviet Republics.
REFERENCES
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Perry, L.; Stott, R.: Smallwood, W. 1993. Real-Time Strategy: Improvising Team-Based Planning for
a Fast-Changing World New York: John Wiley & Sons, Inc.
Schwartz, Peter. 1990. The Art of the Long View , New York: Doubleday/Currency.
de Geus, Arie 1988. Planning As Learning. Harvard Business Review. 66/2: 70-74.
Wack, Pierre. 1988. Uncharted Waters. Hurvard Business Review. 66/2: 70-74.
Senge, P. 1990. The Fifth Discipline: The Art and Practice of the Learning Organization. New York:
Doubleday/Currency..
Genta, Peter J., Neville Soko! 1993. A System Dynamics Approach to Business Process Re-
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1993, Oxford University Press.
Yergin, Daniel. 1991. The Prize: The Epic Quest for Oil, Money & Power New York: Simon &
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Genta, Peter J., Sam Smalldon. Mohamed Mahmoud 1993. Microworld of an Open University: A
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Business Decision-Making. page 61
