In front of you are two choices: Tie up $100 million with low return or over spend by $50 million with no reliable return. Which option do you choose? Neither is acceptable.
“It seemed we were either tying up cash and missing on other opportunities, or overspending where we should not have in the first place,” said a former officer of a US independent. “We heard great stories at presentations from engineers and geoscientists as they were painting the picture to executives to fund their programs. But at the end of the year, the growth was never where we had expected it to be.”
Passing by poor investments through better allocation of capital greatly enhances company performance. To achieve this, executives needed a system to look back and evaluate what each asset team had predicted compared to the actual performance of the asset. They needed a look-back system where hindsight is always 20/20.
A look-back system is beneficial not only for better capital allocation, but also to identify and understand the reasons for low or high performance of an investment.
Implementing a look-back system is data intensive. The data needed, however, typically has already been collected and stored as part of everyday operations. For example most companies have an AFE system that captures predicted economics of well projects. All companies keep system(s) to capture production volumes and accounting data for both revenue and costs. Data for evaluating an investment after-the-fact is already available – for the most part. The reason executives did not have a look-back system was buried in their processes. In how each asset’s economic returns are calculated and allocated.
Here are few tips to consider when implementing a look-back system for an oil and gas company:
- Start with the end. Identify the performance indicators (KPI) required to measure assets’ performance.
- Standardize how economics are prepared by each asset team. Only then will you be able to compare apples to apples.
- Allocate costs and revenue back to each well. Granularity matters and is key. With granularity, mistakes of lumping costs under a wrong category can be avoided and easily rectified.
- Missing information for the KPI’s? Introduce processes to capture and enter data in company’s systems (historically this information may be in presentation slides and personal spreadsheets).
- If well information is scattered across systems, data integration will be needed. Well, AFE, Production, Reserves, and Accounting data will need to be correlated.
- Automate the generation of information to executives. Engineers and geoscientist should not have to prepare reports at the end of each month or quarter to management. Their time is FAR better spent making money and assets work harder for their investors.
- Know it is a change to the culture. Leadership support must be behind the initiative and well communicated throughout the stake holders.
“Once we implemented a look-back system, we funded successful teams more and reduced the budget from under performing assets, then we utilized the freed money to grow. We were a better company all around” – Former Officer of a Large Independent.