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Building the High-Performance E&P Company

In the E&P industry, the product is the same for all companies: oil and gas, or some form of them. So unlike, for example, the automotive or pharmaceutical industry, E&P companies cannot differentiate themselves by producing a new and exciting product. Rather, E&P companies differentiate themselves based on their ability to find and produce oil and gas more efficiently than their competitors. Even though the E&P industry is in many ways unique, there are lessons to be learned from studying other industries and the characteristics of their high-performing companies.

Lessons Learned From Dell and Wal-Mart

Michael Hammer is a well-known business author who has written a number of books and articles on high-performing companies. He has studied in depth companies such as Dell and Wal-Mart, two companies that are held up as shining examples of high performance and leadership in their respective industries. What might Dell and Wal-Mart have in common with the E&P industry?

First, like oil and gas companies, these companies are not differentiated by their products. Dell is the leader in the personal computer industry, an industry the product of which is considered to be a commodity. Wal-Mart is the premier retailer in the world, but Wal-Mart does not sell unique products. In both cases, the products they sell are not easily differentiated, so these companies have had to establish a competitive advantage in other ways. Certainly, they have developed unique features in their business models and customer interface. For example, Dell has focused on a mail-order or online customer interface and delivery mechanism. Wal-Mart, on the other hand, is known for its friendly service, employee training programs, and store greeters. But surely, these are characteristics or strategies that could be replicated by competitors. Moreover, in both the computer and retail industries, competition is fierce, and margins are paper thin. What is it that consistently sets these leaders apart from their competitors in such a tough environment?

Hammer refers to a characteristic he calls “operational innovation,” which he defines as “the invention of new ways of doing work.” When examining Dell and Wal-Mart, one finds that these companies did not grow through diversification of businesses, nor did they grow through merger and acquisition. On the contrary, both companies have “stuck to their knitting” and have grown by systematically and organically increasing market share. They have been able to do this because they have practiced operational innovation, which has produced superior profitability compared with their competitors. For example, both Dell and Wal-Mart are recognized leaders in supply-chain management. They have integrated and innovated the processes for engaging and communicating with their suppliers, and have done so in a way that their competitors have been unable to replicate. That is because the process changes are not incremental or evolutionary; they reflect a completely new way of interacting with suppliers. They are revolutionary.

Hammer further defines operational innovation as “coming up with entirely new ways of filling orders, developing products, providing customer service, or doing any other activity that an enterprise performs.” Speaking of Dell and Wal-Mart, he says:

“Each of these…companies fundamentally rethought how to do work in its industry. Their operational innovations dislodged some of the mightiest corporations in the history of capitalism, including Sears…and IBM.”

So how does this apply to the oil and gas industry? Today, profits for E&P companies are better than they have been in many years, but that does not mean that oil and gas companies can relax in their pursuit of high performance. It is true that higher commodity prices tend to mask some aspects of financial performance, but there are other metrics, such as production growth and reserves additions, that are not masked by commodity prices and are closely watched by analysts and investors. The best-performing E&P companies are still rewarded in the marketplace. In spite of higher commodity prices, competition is still fierce. A merger or acquisition may drive results for a year or two, but the key to ongoing, consistent, superior results is to out-operate the competition and to be able to do it year after year.

So, if operational innovation delivers superior performance in other industries, how does one go about defining a strategy that will drive operational innovation for E&P companies? The objective of operational innovation is to discover a new way of working by examining and optimizing core business processes. Thus, a strategy for delivering operational innovation must begin with the examination of the core processes that drive value in E&P.

The “Prospect to Production” Metaprocess

The core process that drives value in the E&P industry is the overarching “Prospect to Production” life cycle (the P2P process). All E&P companies have a P2P process. It may be defined and documented at a very detailed level, or it may simply be part of the corporate culture, an undocumented process that is learned and understood through experience and unwritten rules and procedures (Fig. 1). At Digital Oilfield, we conducted research on the opportunity for improving this core process by speaking to executives and managers in a range of functional groups in more than 25 E&P companies and found that

• Most companies do not have a well-documented process that covers the full range of this core business process.
• Although some attempts had been made to integrate processes between certain functional silos, there is still a significant opportunity for improvement (in the range of 20 to 40% of the time/cost of the entire process).
• Most companies do not measure the time required to perform the end-to-end P2P process in any consistent fashion, nor do they measure many steps within the process, so it is difficult to identify bottlenecks and inefficiencies in a systematic way.
• Most managers believe that accelerating the P2P process would have a significant impact on improving business performance.

Fig. 1—Accelerating the P2P process improves business performance.

The Size of the Prize

So, if most managers believe that accelerating projects can have an impact on performance, is the impact significant enough to warrant the investment in process review and reinvention? Let’s look at a hypothetical drilling program to evaluate the potential improvement opportunity. In this example, we will assume that we are focused only on the portion of the P2P cycle from the time that the geological prognosis is complete to the point where the location is in a “ready to drill” state. In this example, the potential is based on the following assumptions:

• Drilling program consists of 100 wells.
• Each well adds production of 200 BOE/D.
• On average, wells are drilled in 15 days.
• Land/minerals (securing lease/mineral rights, surface access) requires an average of 30 days.
• Engineering requires an average of 15 days.
• Regulatory and approvals require an average of 30 days.
• Total cycle time from land to “ready to drill” is an average of 75 days.

We will assume that only approximately a 6.5% cycle-time improvement occurs, which is much less than the 20 to 40% we heard from E&P managers during our research. What would the potential benefits be, based on these assumptions?

• Cycle time would be reduced by approximately 5 days per well, multiplied by 100 wells, resulting in 500 additional days.
• At 15 days per well, that would allow our hypothetical E&P company to drill an additional six to seven additional wells.
• With the assumed production of 200 BOE/D, 1,200 to 1,400 BOE/D in additional production would be delivered.

Clearly, the opportunity or “prize” that is available to E&P companies that are able to make even small improvements in cycle time is quite significant. This is especially true in the current environment, where E&P companies tend to be constrained more by people and equipment than they are by capital.

Using Business-Process Management (BPM) To Accelerate P2P

Most E&P companies today make good use of technology within functional silos to improve “in silo” processes. Some of the silos have actually been integrated. For example, the geological and geophysical functions have become more integrated, and the function is often referred to as “geoscience.” Nonetheless, there are many instances where the overarching P2P process is viewed as being significantly suboptimal because of gaps or lags in the end-to-end process. Most often, these gaps are caused by waiting time (waiting for completion of a certain task such as providing a critical piece of information or a technical analysis). For example, a reservoir engineer may need to run economics for a lease/land sale or licensing round, but he/she is waiting for the drilling engineer to provide a cost estimate. In turn, the drilling engineer cannot prepare the cost estimate until he/she receives the expected bottomhole location from the geoscientist.

These gaps, or lag time, are caused by several factors:

• The functional expert/staff member does not understand how his contribution impacts other steps in the larger -process.
• Individuals have many tasks to perform on any given day, and it is not always obvious that a particular unfinished task is delaying the overall process.
• There is no automated way to communicate with various team members and to give them a view of the status of the overall process, as well as the impact of their individual tasks. Most companies rely on email for team communication, and “email overload” is an issue for most E&P professionals.

BPM software is available today to address these issues and to provide a mechanism for automating and optimizing the P2P process. BPM software that is designed specifically with the oil and gas industry in mind allows companies to set up and track key “between silo” and “in silo” processes. This delivers two key benefits. First, it provides a platform for documenting and institutionalizing defined processes and best practices. Second, it provides for the measurement of cycle time of various steps in the process, as well as the entire end-to-end cycle time. As a result, bottlenecks and improvement opportunities, as well as comparison of organizational and geographical variances, are identified more easily.

Even more important than documenting and measuring the process is the ability to improve the process. So other important aspects of a solution that will drive operational innovation include

• Business Process Modeling: The system must easily model the myriad of business processes across complex organizations.
  Scheduling: the ability to schedule and manage tasks and delivery dates.
• Notification: automated notification of critical deadlines, changes in project schedules, and other business or technical information to project stakeholders.
• Data Management: The ability to capture and make available to all team members critical data required to move the process along optimally, without replicating the detailed technical/business data managed in other functional or “silo” data management systems. This implicitly requires integration between the BPM solution and the silo systems so that data are not duplicated or compromised.
• Collaborative Architecture: The system design must comprehend sharing of data and processes across organizational silos, providing easy access while maintaining appropriate security.
• Analysis Tools: With the ultimate objective of improving business processes, the system must provide easy analysis through reporting and visualization that will allow project stakeholders and management to identify process bottlenecks, resource constraints, and schedule conflicts.

Processes With Stakeholders “Outside Your Four Walls”

Applying operational innovation to processes within the E&P organization is of high value. But the E&P business is one that is highly outsourced, so dealing only with internal processes will not yield maximum benefits. More than 60% of a typical E&P company’s expenditures are actually conducted by suppliers. Moreover, of the total amount spent by suppliers, 64% is spent on “complex services” (Fig. 2). Complex services are the work activities that involve a high number of complex operations. They also require the most collaboration with strategic suppliers in the design and execution of complex, expensive oilfield operations. Detailed engineering design, complex logistical coordination, and supplier-to-supplier collaboration characterize this expenditure workflow.

Fig. 2—Of the total amount spent by suppliers, 64% is spent on “complex
services,” work/activities that involve a high number of complex operations.

Thus, integrating financial and operational processes, particularly with key suppliers who expend a significant portion of any E&P company’s annual capital and operating budget, should drive substantial benefit. We call this integration of financial and operational processes between operating companies and their suppliers “supplier integration.” It is more than strategic sourcing (e.g., reducing the number of suppliers with which a buyer works, or giving the supplier a bigger “piece of the pie” to gain better service and discounts for the buyer). Rather, it is the application, once again, of operational innovation—inventing ways of working with suppliers that drive value for both the supplier and the operating company. This is exactly what companies such as Dell and Wal-Mart have done. They are clear leaders in the area of supply-chain management and supplier communication.

Operational Innovation With Suppliers

Many upstream oil and gas activities are repetitive. Some E&P companies drill more than 1,000 wells a year. Those 1,000 drilling operations will share a number of similar expenditure requirements. A drilling contractor is required. One, two, or three casing and cementing jobs will be conducted for each well. And so on. In fact, as many as 50 or more services are required to drill each well. Some services and their suppliers are required for the duration of the project. Others are required to be present at a specific time in the project to deliver a particular service.

Almost all significant operations in the energy industry are planned in advance. Engineering calculations are performed by the operating company, and in many cases by the supplier companies providing the required products and services. In most cases, it is a collaborative process between operating company and supplier. Throughout the planning process, a significant amount of communication takes place. This collaborative process results in both the operating company and suppliers having input into and gaining an understanding of the project plan. There are logistical challenges that are shared by both the operating company and the suppliers, ensuring that the right service, with the right technical configuration, is delivered to the job site at the right time.

Many companies indicate that managing this collaborative planning process with suppliers is still largely a manual process. In most instances, the only technologies used to manage this complex process are e-mail and spreadsheets. Surely, this is a process that is ripe for operational innovation with the potential to drive material benefits for both operating company and supplier.

So what might a platform for operating company/supplier collaboration require? First, it must be easily accessible to all parties, ideally through a Web-based architecture. But the architecture must allow appropriate security, ensuring that each party’s view of the data respects all security and confidentiality concerns. Second, it should leverage the BPM platform that is used within the operating company. This is important, because otherwise there would be significant duplication of business process steps if two separate systems were used: one for business processes that are internal to the operating company, and another for those business processes that involve suppliers. In fact, using one integrated system for both internal and external business processes would allow the parties to reflect through the technology what the reality is of the business relationship for many operating companies and their suppliers today; that is, the supplier organization is actually an extension of the operating company when it comes to planning and executing complex services.

Third, the functionality of the BPM system, including such factors as business-process modeling, automated notification, data access and sharing, and visualization, should be available to the supplier, just as it is to operating-company internal stakeholders. This is extremely important in order to maximize the benefits of collaboration across the op-erating company and supplier organizations. In this way, the technology truly becomes an enabler for creating a virtual organization from what historically has been two separate -organizations.

Companies in other industries have delivered consistent competitive advantage by examining their business processes, and then by using technology to “invent new ways of doing work.” If the goal of every E&P company is to out-operate its competitors, then upstream companies must examine the core processes that drive value. Two key groups of processes offer significant opportunity for operational innovation: processes within a company’s four walls (internal operational innovation) and those that extend beyond corporate boundaries to key suppliers (external operational innovation). Just like Dell and Wal-Mart, there will be leaders in this area within E&P, and for those who are willing to look at their internal and external business processes in a new way, and to use technology to enable process change, the potential prize is sustained competitive advantage and industry leadership.

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