To stay competitive, companies in the oil and gas industry must invest continually in exploration, production and refining. While the major oil and gas companies have been experiencing historic revenue and profit growth in recent years, the global recession has put a dent in demand and has caused a precipitous drop in oil prices -- placing their operations and finances under stress.
However, long-term demand for energy continues to grow, necessitating new large-scale capital projects for exploration and production, which can present significant risk. Company leaders who must approve these projects, and those who provide external funding for them, are focused on the fundamentals: Is the project viable? How do we prioritize our projects? How will natural disasters or a shortage of talent affect completion dates and project costs?
Company leaders today are looking for proof far beyond a reasonable doubt that the company's investment will be secure and safe and meet return-on-investment metrics. And the obligation to provide proof falls to those making the investment request, placing a heightened emphasis on risk analysis and risk mitigation plans for projects and portfolios.
In challenging times, one failed project has the potential to jeopardize both short-term success and the company's ability to accomplish its long-term strategic goals. Success depends on adhering to schedules, allocating resources efficiently, meeting budgets and delivering capital assets on time and within budget. A host of pitfalls and risks all have the potential to push efforts off schedule, over budget and potentially offline.
However, most projects fail because of factors that offer a high degree of potential control. The causes of failure often can be traced to several key areas where operational practices have fallen short, including improper analysis of the facts, faulty decision-making and incomplete communication -- in other words, poor risk management.
Companies that consistently achieve their goals and complete projects on time and on budget have one thing in common: They effectively assess project risk, therefore investing time, resources and talent in successful endeavors that further the company's strategic objectives. However, identifying risk is not an intuitive process, and no single individual can accurately identify the innumerable contingencies that can arise. Luckily, sophisticated technologies exist to help provide this assurance.
Project portfolio management systems such as Oracle's Primavera applications enable project managers to conduct comprehensive and rigorous risk assessments and provide all involved in the decision-making process the information they need to draw sound conclusions. They also help companies identify the best strategies for pursuing existing projects and determine the most promising future projects for investment.
Although risk assessment never will be an exact science, today's IT solutions are effective and can help companies identify and mitigate risk, enabling executives and team members to:
- Construct detailed risk models and scenarios.
- Leverage probabilistic cash-flow analysis both at the project level and across projects to help identify possible areas of over- and under-allocation.
- See in an instant how individual investments affect the bottom line.
- Pose what-if scenarios, enabling stakeholders to see in real terms how a contingency will affect the project, including the budget and schedule.
- Manage risks as they arise with Monte Carlo-based cost and schedule analysis.
With an understanding of the skills and solutions they need for ensuring that capital is effectively deployed to projects with as little risk as possible, oil and gas leaders will survive -- and likely thrive -- even during challenging economic times.
Guy Barlow is an industry strategist for Oracle's Primavera GBU.