What Does it Mean to be a Top Upstream Planning Organization in 2017?
Authors: Lillian Warren, VP Strategic Consulting, 3esi-Enersight, and Tom Hiddemen, Managing Director, KPMG Strategy
A recurring theme we hear in our conversations with operators is that their planning capability is not what it should – or could – be. Many are quick to point out clear flaws or inefficiencies in the planning processes. The more nuanced responses are typically something to the effect of:
“Effective planning is incredibly valuable to the organization – it’s just not achievable by us right now.”
It is easy to take these comments at face value, but with so many convinced they have an underperforming planning process, we thought it is natural to ask: how do they know? To repurpose the well-known saying about the children from Lake Wobegon: the entire industry cannot all be below average.
This begs the questions, what does “effective planning” actually look like and is anyone really doing it? And how far is the typical E&P organization from meeting that standard? Perhaps more to the point, what characterizes a top-performing organization and how does a company begin making that transition?
Context from the field
The oil and gas industry provides a great deal of objective visibility into the operating activities of the typical E&P. This is true for a variety of reasons (regulatory requirements and the role of service companies, for example) – but those reasons are another topic for another day. The fact remains that, in most cases, the average engineer can obtain myriad data on all aspects of their operation:
- Third-party data vendors provide estimates of the subsurface and prospectivity.
- Public disclosures can often be found for key benchmarks – well depth, lateral length, etc. – but can also entail play strategy, well tests, and other broad-based assessments.
- JV partners (when involved) will offer their own independent assessment of the entire operation.
The data is not perfect; certain technical nuances are left uncaptured by publicly available data and many operators struggle to appropriately interweave competitive intelligence into their management practices. Nevertheless, the ready availability of this data make benchmarking technical performance a relatively attainable process.
Moving from the field into the office, however, we see a paradigm shift. To begin with, the nature of planning data makes secrecy the norm, and thus inherently very difficult to compare between organizations as it is rarely made available for such analysis. What does get shared is often qualitative, anecdotal, and very much subject to interpretation by the listener – a far cry from the data being shared in the oil patch. That said, we see still see some of the problems as a market failure: there is an appetite for benchmarking and best practices, but no efficient mechanism to enable them.
Experience with planning benchmarking
Ten years ago, we conducted a set of interviews to compare how planning was conducted across ten companies. The survey was not designed to be exhaustive. Instead, it was developed to identify the similarities, differences and challenges in practices between companies in hopes of gaining some insights and stimulating ongoing conversations. Some of the broad conclusions were:
- Planning time frame – The typical time horizon for a strategic plan was 5 to 20 years. The companies surveyed were focused on using analysis to investigate ways to balance goals over an extended time-horizon of company performance. Phrases used to describe this type of analysis were: investigating trade-offs, investigating alternatives, understanding interactions, meeting goals, balancing goals.
- Data updates and ownership – The companies refreshed their plan data between 1-4 times per year (the frequency of refreshing data was not correlated to the size of the company). Each company experienced some challenges with data collection, usually centered on data ownership and data fit/quality. Respondents offered the following comments:
“The most important thing is to clearly communicate and gain buy-in regarding data ownership. When will it be changed? Why? Who can change it?”
“Establish clear expectations and guidelines for data collection. Data must fit the questions, and the level of detail and accuracy must be appropriate. Our main challenge in data collection was to have appropriate risking. Business unit staff tended to be too optimistic and not consider the real ranges of uncertainty.”
- Importance of culture – Interviewees saw value from the planning process in providing a structured framework for decision making, but nearly all also recognized this value was predicated on company-wide trust and buy-in. In particular, two needs were identified:
- Executive support for the process, not only when it is being built and refined, but also – and most importantly – when it is in regular use: executives must actually use the objective planning framework to guide decision making.
- A clear and defined understanding with the Asset or Business Unit leadership of their role in the broader process. The absence of this often means functional groups feel (or are) unfairly disenfranchised.
- Desired enhancements: The most desired enhancements to the process were focused on data generation, with only a minority of the respondents voicing a need for enhanced analytic capabilities. `The desire to improve communications and engagement with the project teams was based largely on the need for appropriate, timely data that only the project teams can provide. Obtaining appropriate data did not always mean requiring detailed data:
“Sometimes high-level estimates are just as useful as more detailed ones. Resist the temptation to automatically create detailed, bottom-up estimates which take significant effort and introduce the possibility of inaccuracies and errors that that can be difficult to diagnose.”
The world was, of course, a very different place in 2007. Oil prices had been steadily increasing for 5 years and the biggest challenges for operators were centered around finding resources to execute projects.
Since then the industry landscape has changed considerably. Perhaps the single greatest shift over this period has come from the ‘Shale Boom’, which has not only revolutionized the North America unconventional oil and gas marketplace but also fundamentally altered worldwide industry dynamics and indeed geopolitical dynamics as well. An economic recession followed by a short period of growth has been offset by the recent price collapse, in many ways a result of the oversupply created by the aforementioned boom. The modest recovery in which we currently find ourselves is also adjusting to the effects of a demographic shift in the labor market and a heightened sensitivity to environmental outcomes.
All those changes notwithstanding, have our planning challenges and best practices changed along with the industry? If so, what has changed and what has remained the same? Perhaps most importantly, what does it mean to have a top performing planning organization in 2017?
3esi-Enersight and KPMG have collaborated on an industry survey designed to address the benchmarking issue by building a current-state snapshot of upstream oil and gas planning.
Our goal is to provide operators with tangible measurements of industry standards and practices, and initial results provide an interesting contrast to some of the conclusions identified in our 2007 work:
- Are time horizons shrinking? Our initial research has shown that only 40% of respondents consider a time frame longer than 5 years when doing strategic or long-range planning. That number shrinks to a mere 20% when expanding the timeframe to 10 years. Contrast that with the previous data, which showed near unanimity in examining time frames beyond 5 years. Given recent developments in the industry, this shift to a narrower frame of reference is not surprising.
- How are risk & uncertainty incorporated into the planning process? There is a clear lack of consensus on the role of risk and uncertainty within a planning process. Only 1 in 4 respondents claim to use uncertainty information during the planning process on more than a rare occasion. And while over half would like to see more uncertainty in use, nearly as many (~45%) express doubt at how the data would be used or its value to the overall process.