Maximizing the Potential of Your Capital Management Plans
Author: Duncan McDonald, Vice President – Products and Markets, 3esi-Enersight
My name is Duncan McDonald, the Vice President of Planning Products at 3esi-Enersight. Over my 2 decades of experience in building capital management solutions for upstream operators, I have had the privilege of working with hundreds of operators and have experienced firsthand many of the problems these companies face with capital management and in year execution of their plans. Over three installments, I want to take you through the problems I have seen, and some best practices that companies could be implementing to maximize the potential of their capital management plans.
Part 1: The Problem:
Every year budget season comes around, and teams go through the long and iterative process of putting together next year’s budget, ultimately seeking board approval. These individuals are not devoid of their primary responsibilities during this time, and throughout budget season, they must continue managing the capital projects underway that were approved this time last year. Those on-going projects have hard deadlines, as do the budget requirements, so something has to give – which usually means late nights and working on weekends.
In reality, a lot of the budget work has already been completed, but by different people in different departments – such as the Long Range Planning group. However, there is a lack of transparency and cross-department communication in many companies that results in individuals being pulled away from ensuring proper execution of on-going capital projects to perform a largely redundant exercise. In addition, this lack of transparency and lack of integration often results in a budget that may not represent the highest value projects, and may not be tied to corporate initiatives.
In almost any oil and gas company, you can hear rumblings about how management has a habit of reviewing budget data put forward to the corporate team, then declaring new restrictions or constraints, requiring teams to manually adapt their forecast under the new conditions. The more granular details of the forecast get lost in the rollup through the organization, making it extremely difficult for teams to incorporate the change without the same amount of effort as the first time.
Further complicating the process is the lack of a standard format for the data, with different departments using different tools.
Let’s look at this in the context of a single asset.
- Asset team members submit their separate inputs (usually derived from a spreadsheet of their own design), and format them as requested by their manager.
- The Asset Manager then manually consolidates the data into a format requested by the Business Unit Manager.
- The BU manager goes through the same process, and on it goes up the chain…
With no standardization and multiple format transformations, the data has very little resemblance to its original source when it reaches its final destination. It is near impossible to tie back to the individual capital projects that ultimately make up what becomes the budget.
The data is also fraught with potential errors, and organizations don’t have time to vet the information. Trust in the end result is minimal. Upper management generally reverts to using their “gut” to come up with the final numbers, which essentially makes the whole process moot.
Once compiled in the desired format (usually in Excel) the budget is presented to the Board who provide their feedback and inevitable requested changes or different scenarios. After several iterations of this, the budget is finally approved.
This is a great deal of effort to do once, but the reality is that building the budget is just the beginning…
Execution of the Budget
When companies begin to execute on the budget, more complexities come into play, such as the introduction of actuals and field estimates and timing changes. The reforecasting cycle begins, which generally sees many iterations on a monthly basis. All of the individuals involved must gather actuals and factor in timing and other changes to determine the updated forecast. Far too often, highly skilled and highly paid professionals are spending an enormous amount of time as data gatherers, and little time actually analyzing that data to gauge the health of the capital program. This perpetuates a lack of trust and confidence in the resulting forecast.
Meanwhile, the reality of executing the plans continues. Different processes, such as Ready to Drill processes and related AFE’s must be circulated for approval. There are many people involved in these processes, resulting in inevitable time lags. These logjams become extremely costly if required permits and approvals aren’t in place when required, delaying activity and changing annual assumptions.
Budget execution requires people to work together but each department uses their own tools, so there is no collaboration between members of the project team. In addition, companies have no audit trail or guarantee that their process is in compliance with regulatory requirements…
In our next installment, we will begin to explore the 5 key components required for efficient capital management – February 20th, 2017
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