What is Good Upstream Business Planning?
Business Planning in Upstream O&G firms (Part 1): What Business Planning actually is
Like natural environments, emerging technology and national regulation become more complex for the upstream sector to navigate, the limitations of traditional business planning practices are holding oil and gas companies back from keeping pace with change.
In order to gain the foresight necessary to make accurate decisions, particularly in forecasting and budgeting, many upstream companies are searching for better ways to manage their businesses come planning time.
Based on the knowledge we’ve acquired from representing hundreds of upstream oil and gas companies of all sizes – we put together a short two-part series of insights on all the boxes you need to tick if you want to consider your business planning process thorough and efficient. So first thing’s first.
Business Planning in O&G organizations – What it is?
Strategic planning and decision making are key parts of an oil and gas company’s risk management approach. It’s not a technical activity, but it forms the basis of field operations and covers everything from production forecasting to commodity pricing tax, HR and more. It’s an attempt to look years ahead and lay the strategic groundwork for future profitable asset investment.
Every department that contributes to helping the business obtain this edge helps its long term success in a project investment. The first thing to understand is that:
Business Planning is a decision-making exercise
Business Planning is the exercise of gathering minds and compiling all possible opportunities (including base) into a sequence that best meets the multiple objectives of the Company. It results in a “What and When” decision for each possible opportunity that the Company in its inventory. The output may be called a “Long Term Plan” (LTP), a “Forecast”, or a “Budget”, but the process is the same in all cases.
Divisions involved usually include personnel who perform Economic Analyses, Strategic Planning and Risk teams, financial and Digital (incl. data) teams.
Business Planning is ideally performed on a consistent rolling basis
As any seasoned player knows, opportunities come and go. The best way to minimize investment and maximize return is to learn from what worked in previous plans (rather than reinventing the wheel each time), but also be agile in adapting to change. In this way, upstream business plans should be informed by actual historical results, while still operating with one eye to the future.
Environments can change, but consistently planning helps you glean important information on a regular basis that can be used to streamline processes later on.
Business Planning is informed by and informs the Reserves Process
The Reserves Process holds essential data including much of the next 5 years of PUD, 2P and 3P reserve and Contingent Reserve opportunities – all of which should inform the Business Plan.
Long-term plans that result from planning cycles, may reflect changes to the timing of future opportunities, which should then be updated in the Corporate Reserves. Data flow between the reserves and business planning divisions should be accurate and timely in order to give a clearer picture of what’s feasible ahead.
Business Planning consumes technical and economic inputs
As mentioned, business planning is NOT a technical activity. As such, technical and economic inputs are best determined elsewhere, not authored in the business planning system you use. Examples include:
- Base well production and opex forecasts
- Type well cost, timing, and production forecasts
- Uncertainties (i.e. multiple possible outcomes)
- Inter-opportunity dependencies
- Physical and Contractual constraints
- Price Forecasts
- Escalation, Inflation, FX rate assumptions
Business Planning inputs include operational financial parameters such as DD&A and Tax Pools
Business Planning must, by definition, support common Business metrics. These are often found on or derived from the Income Statement (Net Income, Cashflow, EBITDA) or from the Balance Sheet (Debt, Book Value, etc.).
A key “operational” financial metric is Return on Capital Employed (ROCE). This requires the book calculations of remaining depreciated capital and DD&A as well as financial inputs such as tax pools. Even though it is a Company-level calculation, an asset-level EBITDA and ROCE are often calculated (estimated) by Business Planners.
Business Planning may extend into true finance concerns such as Debt, Interest, Capitalization, Dividend Payments, etc.
Financial matters have previously been separate from operational Business Planning, but more and more oil and gas companies are finding the business planning process useful for model financing, debt/equity ratios, etc. To ensure you’re getting the most from your business planning process, consider using a tool that helps you provide value-add into other divisions.
Business Planning teams create multiple scenarios
Sound Business Planning asks the “What and When” questions, and is all about scenarios. Teams involved in Business Planning need to able to alter input data, and – all technical interdependencies being equal – must be able to generate multiple scenarios of “What and When”. The business plan must be capturable to a certain extent so it can be compared against other considered scenarios in order to make the best decisions.
Business Planning supports sensitivity analysis
Often confused with “scenario analysis”, sensitivity analysis takes a given scenario (a fixed set of what and when), then scales various inputs to see the effect on a key output variable. The “tornado” chart is a classic output format for this analysis, showing the variance in NPV for a given % change (say +/- 10%) in Production, CapEx, opex, price, royalty, etc.
Sensitivity analyses are essential for Business Planners to understand whether their forecast inputs are too optimistic or pessimistic.
Business Planning supports both before- and after-tax analysis
Operational Planning often stops at BTAX analysis, but good business plans must be able to support stand-alone ATAX calculations (applying statutory rates to individuals opportunities’ taxable incomes). For a full and correct financial picture, some O&G companies require rigorous ATAX calculation (rolled up to Legal Entity) to be made and the business planning system should account for such.
Business Planning can work at a much coarser level than that of the supplied data
One of the biggest challenges, when teams come together at each planning cycle, is the differing requirements for variable granularity. CEOs for example, will not likely want to see anything at a level below a Country-level as they will tend to make decisions on a higher scale. The Imperial Oil Business Planner for Heavy Oil, on the other hand, has more refined decisions to make.
Ideally, the Business Planning process should allow both decision-makers to work within the same opportunity set while being exposed to the roll-up levels most relevant to them.
Business Planning must retain the “Golden Thread” with technical input data
Maintaining siloed datasets between technical input data and the Business Planning function only serves to isolate teams. For example, CEOs should be able to request a price scenario that correctly invokes Alberta well-by-well royalty calculations (and all other PSA non-linearities around the world) without being bombarded directly by granular details.
A CEO’s decision to cut funding to the Oilsands by 50% should be able to be executed by the IOL planner against a very specific set of known opportunities.
Business Planning supports both Stochastic and Deterministic analysis methods
To reduce risk and allow for agility in investment decision making, Business Planning should embrace and enable both Stochastic and Deterministic methods.
Much of the underlying source data is already stochastic (Reserves Classifications being the best example). The Business Plan should be able to revert to a realizable deterministic outcome for each opportunity at any point in the roll-up or maintain a stochastically correct range of outcomes right up to the CEO’s level.
Business Planning typically models 1-5 years of opportunities (including the existing base). All technical forecasts are full-life.
Business Plans are usually multi-year plans, refreshed “officially” once per year, so it’s imperative to make each refresh meeting a productive one.
A typical 5-year plan includes all-new Capital investments for 5 years, and all terminal CapEx and production through to the end of the technical forecast period.
Due to fiscal regime non-linearities, economic limits are typically determined during the economic analysis of any particular planning scenario.
Business Planning includes Lookback analysis
Lookback analysis is performed using one or more perspectives, with questions such as:
- It can be Budget vs. Actual – Did I achieve the aggregate plan that I set out to achieve?
- It can be Plan Year vs. Plan Year – Does this year’s 2nd year look like last year’s 3rd year?. How good is my long-range planning?
- It can be said/done at a completed Investment level – Did I achieve the economics that I justified the Project on?
- It can be Said/Did at the Investment driver level – Did I estimate CapEx correctly? Reserves? Production? Opex?
These analyses typically fall under the remit of the Business Planning team and should be supported by the Business Planning system.
The Business Planning function in Oil and Gas companies is the core from which stems all the critical decisions that will be made later on. We’ve found that following these guides help our clients to ensure that their planning cycles are as efficient as possible, mistakes are corrected and good decisions continue.
We hope you enjoyed this post. Stay tuned for Part 2 where we help you understand more about good Business Planning and what to avoid in your next planning cycle.
Make every Business Planning meeting count
When it is time to start the next planning cycle, an organization that does not have access to updated market dynamics, production data and financial figures often ends up with dissatisfactory meeting outcomes. That’s why it’s important to have a sound Business Planning process in place.
Learn how to get the integrated data you need to accurately plan around current realities, improve efficiency and reduce risk. Aucerna’s Solution for Business Planning provides energy companies with a single software solution for petroleum business planning – capturing opportunities, building business plans, analyzing scenarios and tracking progress against business goals.
Learn more about how we can help you integrate planning across your entire organization and make better investment decisions, or Book a Demo today.