Oil price declines are already impacting capital programs in E&P and will continue to do so for some time as we plunge into the trough of the oil price business cycle. When E&P mega-budget capital program activity is cut, it creates an environment of heavier competition for remaining capital dollars. If upstream CIOs find themselves in the position to compete for a portion of upstream budgets along with lower cost production/ operations activities (recompletions, work overs, etc.), they should be willing and able to justify their IT capital project ambitions in a way that competes effectively for available capital.
How do your operations counterparts justify their capital expenditures? Chances are they will have a structured approach that includes a recommendation for budget allocation based on achieving a result that is expressed in NPV terms, with a decision tree that includes an analysis of anticipated outcomes in varying scenarios - each with an assigned probability of success. If you are willing to adopt this type of rigor, closely mirroring your company’s operations approach in documenting your case for IT budget spend, and if you are willing to defend it in capital allocation meetings, you will then gain credibility and improve your chances of successfully defending your budget requests.
If this sounds difficult to do, that’s because it is. Here are some things to consider if you aren’t already justifying your capital expenditures in a similar fashion.
- This approach requires the quantification of benefits in order to arrive at an NPV estimate of value. In IT, we typically justify our benefits based on productivity gains, staff efficiency, etc., whereas our operations counterparts will use gains in production or reserves. Can you defensibly claim a direct connection to production/ reserves enhancement from your project? Think it through and be conservative.
- Even if you are not able to capture your requested budget allocations using this approach, as a member of senior management you will better understand why that is the case and be able to communicate this more clearly to your staff that may be impacted.
- This approach assumes that you will have an opportunity to participate in budget allocation meetings and compete on a level playing field. In my own experience this is more likely to be the case at a business unit or asset level.
- If your project requires the involvement of operations personnel, and if staff retention is a concern, you may also remind your operations peers that IT projects need their staff’s expertise and offer a chance to keep good engineering staff engaged even if their primary capital projects have been cut or scaled back as a result of oil price driven capital cuts.
This suggestion comes from my own experience as an IT leader in a large business unit of an independent E&P company. I know it can be frustrating to be reminded that IT is a support function, but this perception is frequently the reality of how our operations colleagues view the IT function. In my case, the implementation of this approach to budget allocation in a capital constrained environment greatly improved the perception of my group’s value and improved our credibility regardless of the outcome of each individual budget request. Talk to your operations peers and get their input as you firm up your own version of this approach, and let’s all hope for higher oil prices in the near future.