5 Critical Practices Fundamental to Upstream Business Planning
Transcript of the Webinar: Upstream Business Planning – 5 Best Practices delivered August 31st 2016
Author: Wayne Keinick, Product Manager – Business Solutions, 3esi-Enersight
The planning process in upstream oil and gas can look quite different across companies of differing: sizes, resource type focus, strategic approach and other factors. However, whether you work for a small independent or a global IOC (super major), there are distinct characteristics that contribute to building relevant, achievable, and defensible plans that are aligned to your business priorities.
Business Planning in upstream oil and gas includes the following key activities:
- Taking stock of all existing and potential projects available to the company
- Selecting which projects to invest in, which to divest, and which to put on hold
- Determining the timing for selected projects
- Analyzing the predicted performance of selected projects against corporate goals and metrics
Projects are analyzed, selected, measured against objectives and the overall plan is Set. New information is then incorporated to fine tune the plan over the next few months.
Planning of the Past
When oil was $80/barrel, business planning was not a priority, and perhaps an afterthought in many companies. With higher commodity prices came confidence, and less emphasis on a planning process to ensure success or mitigate risk. It didn’t help that gathering information from various stakeholders was extremely time consuming. Consolidating, validating, and analyzing the data from different teams was a tedious process using disparate systems with no central data repository. As a result, companies would settle for broader and less detailed information. Loss of insight was a common consequence of this loss of information. There was a general lack of input, collaboration, and understanding across all vested parties.
However, the planning process must address entities down to the level of wells, plants, fields and connect these to corporate metrics such as capital budget, production targets, and others. The planning process needs to link across multiple levels of an organization, and in the past this either didn’t happen or was extremely painful to implement.
Modern Business Planning
Today’s planning process demonstrates a great improvement. An efficient and rapid process has enabled the transition from a once-a-year, build-it-from-scratch process to an evergreen model that is constantly updated as new information is available. Less time is spent on collecting and validating data, while more is spent on analysis and insight.
The plan is integrated from many perspectives. The data is shared across departments and people and the plan has input from various stakeholders. This creates a collaborative plan that everyone can defend and everyone can work with.
Technology, namely software and related tools, have evolved to support efficient workflows, and enable the 5 best practices below to be easily implemented.
Modern Business Planning – 5 Best Practices
1. Thorough exploration of every relevant investment scenario
There are two key components involved in thoroughly exploring relevant investment scenarios
For creation, the key is having the ability and time to generate the scenarios. This is not about simple data entry but is referring to a bigger picture. For instance, a typical planning scenario might be running all projects against several different price forecasts. That scenario itself may involve multiple nuances and project tweaks to get an accurate assessment for each price forecast.
Another scenario may involve accelerating, delaying or cancelling certain projects. A change to one aspect of the project list may imply numerous other changes that need to be considered.
The second component, analysis, involves the vetting and scrutiny around those scenarios. This requires a significant amount of time for planners and engineers to actually think with the data in order to provide value add analysis. In the past most of the time was chewed up in scenario creation with little left time over.
The value of thorough scenario analysis
At first glance the value of thorough scenario analysis may be difficult to see. In a recent SPE paper, presented at HEES, called “Portfolio Optimization in High and Low Risk Environments”, the authors focused on exploring different portfolios and different business scenarios for a major US shale producer. By reducing time for gathering data and increasing time for analysis, the new revised scenario they built was able to exceed the original plan submission by almost 25%.
2. Understand the level of detail you need in your plan
With various scenarios available, the next challenge becomes how much detail to put into each. Each planning scenario is likely made up of multiple projects. With hundreds or potentially thousands of projects, the challenge of data granularity can be mind numbing. Adding further fuel to this fire is the timing of when that data is needed.
It’s important to find a happy medium between throwing all available information into the scenarios (a very slow process unfit for a quickly changing market) and sacrificing too many details, consequently sacrificing accuracy and insight.
In addition to the level of detail required, there is an aspect of timing as to when that information is required. Changes in the market, operational conditions occurring in the field, and quick update requests from management and investors are a few of the many reasons to re-evaluate your business plan.
The amount of granularity and timing do not follow an ideal constant, but you can be certain that they will change. The business planning process must be responsive, and decisions are made with the data that is critical to the questions you are trying to answer.
3. Insights into the past and present
A primary fault in historical planning processes is that they occurred once a year, and results and performance of the plan were not vetted or validated.
In the modern planning process current performance is an integral part of building accurate and realizable plans.
Insight into your current performance comes in two forms:
- Make use of actual data.
This refers to actual production data, capital spends, operating costs, and drilling and cycle times. A good planning process will make use of actual data to update and adjust the plan going forward.
- Look at the planning process itself.
If the current process is long, and arduous then it is likely turning engineers into data gatherers. Leaders may be making decisions without the necessary information on hand. This is an unfortunate reality for many companies, because they are averse to changing the process they have always used. The process needs to be treated like data: It is the best estimate we have so far but it will be replaced as soon as we know better.
4. Accurate and Timely Economics
In the past, planners either made broad assumptions to incorporate economics, or the planning cycle was significantly delayed in order to incorporate accurate economic metrics into the plan. Inevitably, companies faced an extended planning cycle, and plans did not contain current economic conditions or accurate gross assumptions.
Advancements in modern planning practices focus on two key components:
- Accurate and robust economic models.
In order to have a truly useful and meaningful plan, accurate economics are essential. With lower commodity prices, profit margins have become much more sensitive to slight changes and can be a big influence on planning decisions. The complex fiscal regimes that exist in many parts of the world do not lend themselves well to “rules of thumb.” It is essential that the economic models used are accurate and robust.
- Petroleum economics integrated with business planning.
Economics used to be managed outside of planning, but today software applications are able to incorporate detailed economics into the planning process with minimal impact to turnaround time. The planning team should now insist that when they evaluate, analyze, run economics on their plan that it is done using the most accurate calculations available.
In the end, this approach provides the necessary accuracy without sacrificing cycle time.
5. Cross functional integration
The final best practice that should be incorporated into business planning is one of a more holistic nature. In the past, plans lived in isolation; the corporate planning group or individual asset team planning groups often worked separately, with limited accessibility to the other information.
The resulting plans are intended to represent the same assets that are managed and reported in the reserves group, that are actively produced and executed in operations, and that are tracked in accounting. By taking a holistic approach, and incorporating information from interdisciplinary teams through cross functional integration, the data is defensible and grounded in reality.
To accomplish this, companies are introducing integrated systems to support the planning workflow across different business units with the ability to roll up to a corporate level. Data is drawn from different teams, and covers differing workflows from planning, to economics, to capital forecasting.
With integrated systems for business planning, you eliminate tedious and frequent data migration and all of the problems that come with it – loss of data, loss of time, and data inaccuracy. In addition, the burden on IT is greatly reduced from going from multiple systems to one.
No longer is business planning an isolated activity carried out by a separate group once a year only to chew up precious time, discarded, and started over again. By employing some essential best practices, the planning process is an integral part of the oil & gas E&P organization.
The best practices discussed today are summed up as:
- The ability to create all relevant scenarios while allowing for time to properly analyze and generate insight on each.
- Providing the right level of detail, not too much or too little and providing the details in response to demand. All while having the flexibility to zoom in or out on that level of detail.
- Incorporating actual data to validate forecasts. Reviewing processes themselves to fine tune the planning process.
- The planning process can and should make use of accurate economics. With modern software applications there is no reason to short cut here.
- Lastly, the planning process itself will benefit and other corporate groups will benefit when it is an integral part of the overall business functions in your organization.
In order to implement these best practices, it is crucial to leverage the advances in technology and availability of information. This will lead to an evergreen process that is integrated and scalable to organizations regardless of size.