What's
the most effective way to organize an E&P outfit?
Is it better
to run everything through headquarters, benefiting from the efficiencies
of central control (even though response time is sacrificed, and local
representatives often feel like "map-caddies" or "errand-boys")?
Or is it better
to delegate all or most of the decision-authority to empowered, motivated
local managers and teams (even though this encourages counter-productive
competitive bias among different offices and neutralizes the selective
power of large inventories)?
Or is some hybrid
"matrix" organization preferable (even though multiple accountabilities
and confusing reporting patterns may result)?
Pete Carragher,
of BP, posed this question at a 1995 Hedberg Conference on risk analysis.
He recognized that centralization and decentralization each had different
strengths and weaknesses, but that as either organizational system "took
root," the weaknesses would tend, over time, to outweigh the benefits.
Carragher suggested
that management's particular task should be to encourage periodic oscillations
between these two polarities, but always to accomplish such shifts before
the weaknesses began to dominate.
Interesting idea,
but it sounds like frequent reorganizations!
Even though most
E&P professionals prefer to "run their own show" (and many well-known
companies are committed to "business-unit autonomy"), four recent AAPG
and SPE papers all make a strong case for central E&P coordination
and portfolio management, based on observed company performance patterns.
And there's no doubt that most companies today are either actively conducting
their E&P business using portfolio analysis, or seriously evaluating
doing so. Portfolio management leads to improved E&P performance.
Maybe there's
a form of organization that allows E&P outfits to "have their cake
and eat it, too."
First, recognize
that any organizational system should accommodate these fundamentals:
- Only corporate HQ can set
realistic goals such as reserve growth, production, cash flow, etc.,
for the corporation.
- A larger inventory is more
selective and predictive than a smaller one.
- Most outfits don't have
the luxury of assembling an inventory of "ready-to-drill" prospects
a year in advance. Instead, prospects are drilled as they are submitted
or acquired. Therefore, "model" portfolios are constructed using "bins"
of certain classes of prospects; i.e., rank wildcats, trend exploration
wells, step-outs and development wells (Figure 1).
- Geotechnical teams -- not
centralized review committees -- need to be accountable for project
results. Different business units can identify the classes and numbers
of projects they each should be able to deliver, so as to collectively
meet overall corporate goals (Figure 1).
- A systematic prospect evaluation
process, calibrated through centrally coordinated post-audits of geotechnical
forecasts and results, can produce the necessary consistency among all
considered prospects.
These fundamentals
suggest an effective, permanent solution to the centralization/decentralization
argument:
- HQ describes the mix of
projects needed to meet its corporate goals, as described by portfolio
analysis.
- Different business units
contract with corporate HQ to deliver successful projects that will
collectively meet those goals.
- Budgets are negotiated
with business units that allow corporate goals to be met. If goals cannot
be met, other credible sources of appropriate prospects are found, goals
are redefined or budgets are expanded. This is the essence of portfolio
management.
- Business units are free
to carry out their contracted E&P projects as they choose, but are
fully accountable to do so within budget -- and are rewarded when they
do.
- A centrally coordinated
geotechnical group ensures that a consistent evaluation process is followed
and monitors geotechnical performance, identifying and correcting predictive
bias.
Such an organizational
system allows maximum business unit freedom (with full accountability),
and also utilizes proven effective methods of centrally coordinated portfolio
management with geotechnical calibration. But it demands clear, achievable
corporate goals, business unit accountability, a valid and objective evaluation
process with monitoring and feedback, and incentives that encourage all
of them.