Build Wise

Oil and Gas

Maximizing Value of Capital Investment

Since crude oil prices dropped from over $100 USD/barrel to under $50 USD/barrel in late 2014, the upstream oil & gas companies in the unconventional plays of the US have made remarkable efficiency improvements, particularly in drilling and completions. However, even with drilling times dramatically improved over the last 3 years, the industry still has room to improve its capital effectiveness and efficiency to deliver greater value from returns on capital employed. 

During the Unconventional Integrated Well Delivery (UIWD) webcast hosted by Enstoa and Oracle in October 2017, we asked several survey questions of the participants and 60% of the respondents rated their organization’s maturity in capital effectiveness and efficiency as “developing”, which was the first level in a 4 level maturity model. Capital effectiveness is the organization’s ability to select and fund the right number and mix of projects that best align with the strategy and deliver the maximum value, while capital efficiency is the ability to execute the projects faster and less costly than your competition. The relationship between capital effectiveness and efficiency is illustrated in Figure 1 below.

Figure 1

Figure 1. The Relationship Between Capital Effectiveness and Efficiency

Many factors play a role in limiting capital effectiveness and efficiency, such as low coordination within and between asset teams, disconnected systems and tools (particularly between the field and the back office), labor-intensive data collection and reporting, numerous and complex vendor/contractor agreements, and disconnected processes with many broken handoffs between functions. Combined, these factors make a case for a capability based approach that can accelerate improvements and increase returns from capital investment.

Capability Based Approach

Developing and producing unconventional oil & gas is capital intensive with a continuous capital investment of hundreds of millions to billions of dollars per year in facilities and drilling & completions. As organizations strive to maximize return on capital employed, the challenge is creating the organizational capability to be able to successfully execute the strategy and deliver the value.

Figure 3
Figure 3. Capability Enables Execution
Figure 2
Figure 2. Execution Links Strategy & Value                      

As illustrated in Figure 2 above, capital investment strategy in unconventional oil & gas is driven by the continuous need for new wells (growth), increasing operational efficiencies, and responding to regulatory requirements. The value of that capital investment comes from selecting the right projects (capital effectiveness) and then executing them faster and less costly (capital efficiency) than the competition. Figure 3 illustrates that organizational capability for capital project execution is what delivers the value for the strategy and this is where companies continue to have challenges. What capabilities do we need to successfully execute our corporate strategy and deliver the expected value?

Figure 3 also illustrates what organizational capability encompasses:

1.    The Processes that are used to execute the work
2.    The organizational Structure, policies, and procedures that organize the work
3.    The Technology that enables and facilitates the execution of the work
4.    The skills and culture of the People in the organization to perform the work

Identifying and developing the right capabilities to the right level required for executing the strategy is the key to delivering value.

How to Develop Organizational Capability

Two mental models are required for developing the capability required to successfully execute the company strategy and deliver the expected value back to the business. The first is a model of how projects are developed and executed within upstream oil & gas companies, which we can refer to as the Integrated Project Portfolio Management (IPPM) model. The second is a model that defines the maturity levels for each of the elements of work defined by the IPPM model, and we can refer to this as the Project Excellence Maturity Model.

The IPPM model is illustrated in Figure 4 below and it represents how capital projects are developed, executed, and turned over to operations within the larger context of the overall business. The model consists of 11 capabilities that are organized into 4 capability groups; strategic, project, production, and support. Each of the 11 capabilities is further broken down into a total of 51 elements that can be assessed to determine an organization’s current and target state capabilities with the Project Excellence Maturity Model.

The IPPM model provides an overarching framework for how the company’s different functions work together to plan, develop, execute, and turn over projects and then operate the new assets. It facilitates fact-based discussions of what works and does not work, with most of the challenges coming from interfaces between the capabilities. These discussions help to align the organization around an accurate assessment of the current state and clearly define a target state that everyone can work towards reaching.

Figure 4

Figure 4. The Integrated Project Portfolio Management Model

The Project Excellence Maturity Model defines four levels of maturity for each of the 51 elements that make up the IPPM model. The specific characteristics or attributes for each level of maturity are defined for each element to facilitate getting alignment on what good looks like in the eyes of the company. Although the level definitions are specific to each element, the four levels of maturity in the Project Excellence Maturity model can generally be characterized as follows:

Developing – “hero based”, people driven, no common processes or technology
Competitive – some enterprise level processes and technology, but not connected or integrated
Advantage – integrated enterprise level processes and technology, people aligned with the vision
Best in Class – best practices and continuous improvement are ingrained as the company culture

Using the IPPM and PE Maturity models, oil & gas companies can quickly assess and get alignment on where they are today and where they need to be to successfully execute their corporate strategy as represented in Figure 5 below. Once these current and target states are established, the next step is to then begin driving the transformation and realizing the value.

Figure 5

Figure 5. Current and Target State Capability

Drive the Transformation

Objectively knowing where your organization is and where it needs to be is helpful, but it is the journey that ultimately delivers the value back to the business. Through the capability assessment, gaps in capability are identified and attributed to process, structure, technology or people. Then practical, achievable actions are developed and prioritized to define a roadmap for the journey. The last step is to set the size of the prize by quantifying the value that the improved capability will deliver to the organization and establishing the metrics that will be used to drive the transformation.

Read more about Enstoa’s Capabilities Assessments, Data Insights, and Systems Governance offerings here.

Michael Matthews is Vice President at Enstoa, the leading systems integrator for capital projects worldwide.

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