Using simulated annealing to schedule oil field drilling rigs

Oil companies often have large backlogs of drilling opportunities. Optimizing this portfolio is critical. The author used a simulated annealing algorithm to schedule drilling rigs for BP Exploration by making an analogy to the vehicle-routing problem, and estimated the value of acquiring additional drilling rigs. By considering the perishability of projects’ benefits in optimizing over a multi-period planning horizon, the author increased the value of portfolios by deferring attractive projects in favor of less attractive ones. This violates the standard practice of maximizing value by sorting projects by such attractiveness measures as net present value or internal rate of return. The program is BP’s primary planning tool in the Prudhoe Bay field. The first year’s application improved portfolio net present value by approximately $30 million over traditional planning methods.