Have E&P Cake -- And Eat It, Too

Peter R. Rose is managing partner of Rose & Associates, Austin, Texas.

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."

Figure 1: Differing E&P project mixes from different business units in a model corporate portfolio.

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.