A Shifting Focus for E&P Spending – The Case For Benchmarking Business Unit Performance
The E&P Sector Wastes Billions on Inefficiencies in Small and Midsize Projects, Including Maintenance Efforts
Until recently, the majority of exploration and production (E&P) spending targeted increasing production volumes and growth, as well as finding new reserves. Huge, high-profile projects became routine—as did a somewhat casual attitude towards profligate spending. Falling oil prices, geopolitics, and a wave of upcoming regulatory changes have resulted in a new trend—cost cutting. Today, global declines in E&P spending are among the largest since the 1980s. Diminished capital expenditure and the overall focus on cost reduction is likely to continue well into 2016.
What does this mean for IPA’s clients?
Although investment in very large projects aimed at bringing production online and finding new reserves is declining, significant capital investment is ongoing. However, on individual projects, this will more routinely reflect spending measured in millions, not billions.
Room to Improve for Capitalized Maintenance Projects
On average, roughly one-third (and often more) of our clients’ overall capital expenditure is dedicated to “small” and “mid-sized” projects, often capitalized maintenance efforts. Generally developed and executed at the business unit level, these projects are vitally important: in addition to ensuring that both production and facilities are maintained, these projects generate cash for the business and provide a refuge for talent no longer required on larger projects. However, despite their criticality and the enormous amounts of capital required to do them, these projects routinely suffer from shockingly disappointing outcomes—wildly unpredictable costs and schedules, frequent and costly changes, and generally inefficient capital deployment.
Why should a company care about how effectively it has installed that new pipe header, replaced those damaged heat exchanger internals, or increased the efficiency of separator equipment? Because by not doing these projects well, companies waste both time and money. And, these efforts represent a significant portion of most project portfolios.
Effective Deployment of Capital and Resources is Vital
Another reason business should care? The organizations that most successfully manage capital requirements of any size tend to feel the effects of falling revenue less acutely than their competitors. As the market has shifted, so should our focus. The reality is that the numbers of these “smaller” projects included in capital portfolios will continue to rise, and the potential consequences for not effectively delivering these jobs will become more significant. The case for improvement is strong: fewer than 4 in 10 projects developed and executed at the asset/facility level were delivered successfully.
In 2015, IPA saw that business units operating on- and offshore facilities all struggled with applying Best Practices consistently. Portfolio management challenges and cash constraints imposed by market volatility have complicated matters. Aside from a few bright spots, the general trend for all has been towards underperformance. IPA can confidently conclude that, cumulatively, the E&P sector has wasted billions of dollars on small and midsized capital projects in the past year. By contrast, projects done at the best organizations were significantly more competitive and predictable, and successfully avoided costly changes.
At the most successful business unit level organizations, IPA found time and time again that using Best Practices makes the difference. Further, these business units serve to provide a refuge for talent, allowing for the development and retention of project professionals in the face of calls for headcount reduction.
Effective deployment of capital and resources helps ensure these organizations will be ready for eventual recovery.
IPA evaluates the effectiveness of small and midsized projects (on- and offshore) delivered by companies operating in the E&P and Midstream sectors. IPA’s quantitative approach to benchmarking allows it to identify practices that drive success (and underperformance) within specific business units. When coupled with quantitative evaluations of organizational staffing, IPA can help a company maintain a competitive edge on its maintenance capital portfolio.
Originally published in the December 2015 IPA Newsletter (Volume 7,Issue 4)