Business Planning in Upstream O&G firms (Part 2): What BP is not
As 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.
That’s why 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 in Part 1, we took learnings from the knowledge we acquired from representing hundreds of upstream oil and gas companies of all sizes to outline what the Upstream Business Planning Process is. Here in Part 2, we’ll lend their insights to what it isn’t.
Business Planning in Oil and Gas Organizations – What it isn’t
Whether you use spreadsheets and datasets, or a sophisticated digital solution to carry out your business planning process, you’re trying to look ahead and work towards ascertaining the profitability of potential asset investments.
If you have a good Upstream Business Planning function in place, drawing a line between what the process is and isn’t is key to keeping it focused purely on planning. Adding on to our previous post on What is Good Upstream Business Planning?, here’s what we’ve found Business Planning not to be.
- Business Planning is not a technical activity
It’s easy to put Business Planning activities into the same box as Business Management activities, but there’s a crucial difference – Business Planning as a process does not usually concern itself with things like type well forecasting, ARPS parameters, reservoir or hydraulic flow models.
While often performed by engineers, it usually does not require any “classical” petroleum engineering skills. Business Planning is instead often the remit of individuals with business or finance backgrounds.
- Business Planning is not an Activity Plan
The time granularity of a Business Plan is typically monthly. Partial-month spend and production is generally supported, but that is usually resolved to monthly totals.
An Activity Plan, on the other hand, concerns itself with fine-grained tasks, often at daily or hourly granularities. This is typically the domain of an Activity Planner, often working extensively in a tool such as Primavera.
- A Business Plan does not represent a specific spending approval (such as an AFE or FID decision does)
A Business Plan helps to foster better, final decision making but is not spending approval. A soundly integrated Business Plan may be used to “lock-in” approved levels of funding for specific opportunities or programs of work, but the formal approval to spend money on specific opportunities within those funded programs usually sits outside of the scope of Business Planning.
- A Business Plan is not used to track execution of a specific task or budget
Business Planning may well inform and largely create an annual budget, but the stewardship and tracking of Budget vs. Actual is best left tracked separately using more granular metrics.
The Budget and the Business Plan should be able to inform each other but should be managed separately.
- A Business Plan is not a scheduling tool
This is a bit of a grey area, so for the purpose of this blog, “Scheduling” means “I want to do this activity or task on this day with this named resource”. Scheduling in this sense should be managed separately so it doesn’t affect the Business Plan at a lower, more irrelevant granularity.
A Business Plan will contain a schedule of opportunities performed at different times, but it is typically not concerned with real named resources or specific tasks, simultaneous operations constraints and the like. Rather, a Business Plan will typically schedule higher level “investment decisions” rather than specific spend types. To ensure the feasibility of a Business Plan, its output may be rigorously scheduled, but that is not typically core to the Business Planning activity.
The Business Planning function in O&G companies is the core from which stems all the critical decisions that will be made later on. To recap, let’s summarise:
|What Business Planning is||What Business Planning isn’t|
|✓ Decision-Making Exercise||✗ Not a technical activity|
|✓ Performed on a consistent rolling basis||✗ Not an Activity Plan|
|✓ Informed by, and informs the Reserves Process||✗ Does not represent a specific spending approval (such as an AFE or FID decision does)|
|✓ Consumes technical and economic inputs||✗ Not used to track execution of a specific task or budget|
|✓ Extend into finance concerns such as (Debt, Interest, and Capitalization)||✗ Not a scheduling tool|
|✓ Create multiple scenarios|
|✓ supports sensitivity analysis|
|✓ Supports both before- and after-tax analysis|
|✓ Can work at a much coarser level than that of the supplied data|
|✓ Must retain the “Golden Thread” with technical input data|
|✓ Supports both Stochastic and Deterministic analysis methods|
|✓ Typically models 1-5 years of opportunities|
|✓ Includes Lookback Analysis|
So there you have it, a clear distinction between what a Business Plan is and isn’t, made up of lessons we’ve learned from our energy clients.
However your Business Planning team functions, the goal is universal all-round – to accurately plan around current realities, improve efficiency, reduce risk as well and track progress against business goals. In the case of E&P, getting the Business Planning right makes the rest of the project’s journey that much simpler.
We hope you enjoyed this post. If you haven’t yet, read Part 1 of this series, where we outline a list of what makes Good Upstream Business Planning.
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