Arthur D. Little: in an Era of Cost-Cutting, How Can Oil Companies Maximize Capital Investment Potential?

After a meteoric crash in oil prices over the last nine months, a new report released today by management consultancy Arthur D. Little urges oil companies to look even more closely at the economic viability of their current project portfolio. Until recently, the high price of oil has driven 14% annual growth in E&P (Exploration and Production) capital spending. However, with the potential for such spending to shrink by as much as 10% in 2009, “Managing Capital Investment Programs” argues that firms must re-think their approach to managing these projects in order to encourage internal coordination and cost-savings whilst avoiding project failure.

Between 2007 and 2008, many firms saw inflation of approximately 17% across labor, equipment and material costs. In order to guarantee ROI in such a difficult environment, firms must ensure that capital intensive projects are managed even more effectively.

“With falling oil prices and constrained project budgets, the most significant challenge E&P firms face is the successful delivery of their current project portfolios” says Stephen Rogers, Global Head of Arthur D. Little’s Energy Practice based in the UK. “However, cutting these projects now could have long-term repercussions on supply. Rather than cutting individual projects to save costs, we urge oil companies to revisit their full portfolio of CAPEX projects with a new lifecycle approach to managing successful projects.”

According to the new report, most E&P projects fail because of ineffective management. The report concludes with four management causes that must be addressed in order to ensure successful ROI in the current downturn:

• Strategic conceptualization of projects
• Optimization of program and project portfolios
• Initiation and management of projects
• Ensuring value delivery

Arthur D. Little’s lifecycle approach has proven successful for a number of oil and gas companies across Europe and the Middle East. One such firm saw its production increase by 2000 BOE/day and improved operational efficiency save the business €25m per annum. For further case studies and details of Arthur D. Little’s expertise, “Managing Capital Investment Programs” is available for download at www.adl.com/capinvest