Wanted: A New Type of Business Leader to Fix E&P Asset Developments
Authors: Nandurdikar Neeraj 
Published: February 2015

Guest editorial

The world of E&P asset developments is seriously challenged even with oil prices higher than USD 100/bbl. Over the past decade and a half, the average E&P asset development has delivered only 60% of the value promised at sanction. The remaining 40% of expected value is eroded during asset development and execution. In any other industry, commodity chemicals, grocery stores, you name it, the level of capital discipline demonstrated by E&P businesses could put their firms in jeopardy. And yet the rising tide that lifts all boats—high oil prices and oil company profits—hides and perpetuates poor project performance.

Here is our situation: Our larger and more complex projects over the past nearly 15 years have had generally dismal outcomes. Now, due to the demographics of the industry—both ours and our supply chain providers in the engineering, procurement, and construction (EPC) industry—we find ourselves unable to make consistent and robust profits on new field developments even with prices that are by historical standards very good. We need to be realistic and face the problem that things are not going well in our major capital deployments, and history suggests that our decisions have not been good. If nothing changes, there is every reason to believe that things will get much worse before they get better.

The circumstances and contributors to this asset development quagmire is a mess of our doing. There is no use pinning the blame on project management or EPC contractors or the quality of supply chain. That only carries us to despair because supply chain providers also face problems of their own when dealing with owners. We continue to make the same mistakes over and over and over. We do not rigorously follow our own work processes and always make exceptions for “strategic” projects. We have substituted short-term gain for long-term value. But most damaging of all, we chase volumes in the wrong way, and in the process, destroy the most critical drivers of value: production attainment, and reserves recovery. These are the symptoms of the problem, but they are not the source. The source lies at the disconnect between business expectations of project performance and the realities of what is possible today.

Project teams can deliver great projects, and our firm has seen some exceptional teams deliver exceptional projects. The problem is the conflict between business desires and what is realistically possible. Project management and functional leads are responsible for delivering on the business objectives handed to them. The onus, therefore, is on business managers—that is right, the business side of the organizations— to change their mind-set about how to pursue the right projects the right way in today’s environment by tailoring our project development systems.

Broken Promises Gone Unrecognized

But first, business should understand just how much project value is eroded. So let us step back and look at our performance on projects completed over the past 15 years. Of all the developments completed, 70% of the developments eroded value. On a price-normalized basis, these projects delivered less value 2 years after startup compared with the value promised at sanction (Fig. 1).