Upstream oil and gas performance is commonly assessed through established technical and management disciplines, including reservoir engineering, drilling and completions, major projects, production operations and financial management. Each has defined responsibilities, performance measures and methods for establishing whether its objectives have been achieved.
The more difficult question is whether satisfactory performance across these disciplines establishes that an asset is operating close to its economic potential.
A reservoir may perform in accordance with its approved development plan, a major project may be delivered within its sanctioned cost and schedule, and production operations may achieve their availability and efficiency targets. Each outcome may represent competent execution. Yet none establishes, individually or collectively, whether the underlying development choices were economically competitive against feasible alternatives.
This distinction raises a question that cannot necessarily be answered through functional performance measures alone:
How should the economic quality of upstream development decisions be established when the responsibilities for making, executing and subsequently operating those decisions are distributed across different functions?
The accompanying figure presents Fulcrium’s indicative assessment of the relative distribution of ten management responsibilities across six upstream executive positions.
The distribution illustrates a familiar organisational characteristic of upstream businesses. Specialist responsibilities are necessarily divided, while accountability for asset, development and portfolio outcomes extends across those divisions.
An Asset Manager may be accountable for overall asset performance without exercising direct organisational authority over every contributing function. A Development Director may influence reservoir development, well delivery and concept selection without controlling all subsequent capital commitments, project execution and operating decisions.
Similarly, a Major Projects Director may be responsible for delivering a sanctioned development within agreed cost, schedule and technical parameters, although the assumptions governing the original investment decision were established through a wider process.
These arrangements do not necessarily represent organisational weaknesses. They reflect the specialist responsibilities required to develop and operate complex assets.
The figure illustrates the distribution of those responsibilities. It does not establish that the resulting decisions were economically suboptimal. That question requires separate examination of the choices made, the alternatives available and their economic consequences.
The analytical difficulty arises when satisfactory performance within individual functions is treated as sufficient evidence of the competitiveness of the overall development.
Consider an asset in which reservoir performance, project delivery and production operations are all assessed as satisfactory.
The reservoir development team may have achieved recovery performance consistent with the approved plan. Surveillance may have been effective, reservoir behaviour may have remained within forecast expectations, and production targets may have been met.
The major project may have achieved its sanctioned cost and schedule commitments, with engineering, construction and commissioning completed competently.
Production operations may have delivered high facility availability, satisfactory operating expenditure and reliable production performance.
These achievements are meaningful. They provide evidence that assigned responsibilities have been discharged effectively.
They do not, however, establish whether the approved development configuration was the most economically competitive among the alternatives reasonably available.
A different well configuration, development sequence, processing capacity or recovery strategy might have produced a different lifecycle economic outcome. Equally, the selected configuration may have been the most appropriate once technical uncertainty, capital availability, execution risk and production timing were considered.
The observed functional results cannot distinguish between these possibilities.
That distinction requires examination of the development decisions themselves, rather than inference from the subsequent quality of their execution.
Development concept selection illustrates the problem because decisions made at this stage can influence asset performance for decades.
A project organisation may reasonably favour a configuration offering lower initial capital expenditure, greater schedule certainty and reduced execution complexity.
Reservoir and production considerations may favour an alternative involving higher initial expenditure but potentially superior recovery, production flexibility or lifecycle economics.
Financial management may introduce further considerations relating to capital availability, investment sequencing, portfolio priorities and risk exposure.
Each position may be defensible within its respective responsibilities.
The question is not which function has the correct perspective in isolation, but whether the competing development alternatives have been evaluated on a sufficiently comparable basis to establish their relative economic merits.
Consider two hypothetical development concepts.
Concept A requires lower initial capital expenditure and offers greater confidence in the planned execution schedule. Concept B requires additional upfront investment but provides greater production flexibility and potentially higher ultimate recovery.
If Concept A is selected and subsequently delivered within budget and on schedule, the project organisation may legitimately demonstrate excellent execution.
That result does not establish whether Concept A was economically superior to Concept B.
Nor does a subsequent observation that Concept B might have delivered higher recovery necessarily establish that Concept B should originally have been selected.
The comparison must account for the information available at the decision date, the technical uncertainties associated with each concept, capital constraints, production timing, operating expenditure and the economic consequences of risk.
The economically preferred alternative may change depending on these conditions.
A comparison that ignores them risks attributing an observed performance difference to concept selection when it may be explained by other factors.
Successful execution demonstrates the quality of implementation against an agreed basis. It does not, by itself, validate the economic quality of that basis.
Assessing the economic quality of development decisions requires distinguishing three questions that are often considered together but are analytically different.
The first question concerns the information, assumptions and constraints prevailing at the time of sanction.
A development decision made fifteen years ago should not be judged solely against information that became available subsequently.
Reservoir uncertainty may have been greater, recovery technologies less established, capital more constrained or execution risks assessed differently.
A decision that appears economically inferior with hindsight may nevertheless have been reasonable given the alternatives and evidence available when it was made.
The relevant enquiry is therefore whether the original decision was adequately supported by contemporaneous evidence, whether feasible alternatives were examined and whether the assumptions used to compare them were defensible.
The second question concerns the comparative merits of the development options.
This is not answered merely by demonstrating that an alternative configuration could have produced higher recovery, lower capital expenditure or improved facility availability.
Those outcomes must be considered within a consistent economic and technical framework.
For example, higher recovery may require additional capital, defer early production or increase operating complexity. Lower initial expenditure may reduce financial exposure but constrain later development flexibility.
The comparison must establish whether an alternative was genuinely feasible under comparable conditions and whether its expected economic advantages were sufficient to justify the associated costs and risks.
Where the evidence is observational, care is required before attributing differences in economic performance to a particular development choice. Geological conditions, commercial terms, investment timing and operating constraints may differ materially between otherwise similar assets.
An observed performance advantage establishes a question for investigation, not proof that the alternative development strategy caused the advantage.
The third question is prospective.
Even where the original development decision was reasonable, subsequent reservoir performance, technical information, operating experience or economic conditions may alter the relative merits of the remaining options.
An asset may have been developed appropriately under its original assumptions while its current development strategy no longer represents the most competitive available pathway.
Conversely, a development that appears disappointing against its original expectations may still offer limited scope for economically justified change.
The appropriate assessment must distinguish expenditure already committed from future expenditure, identify which constraints can realistically be changed and compare the incremental economic consequences of the remaining alternatives.
The original decision, the historical economic outcome and the optimal future decision are therefore separate subjects of enquiry.
Confusing them can lead either to unjustified criticism of past decisions or to unnecessary continuation of a development pathway whose underlying assumptions are no longer valid.
The boundary of a performance assessment should follow the question being investigated.
Where the enquiry concerns drilling execution, comparison of well complexity, drilling practices and delivery performance may be sufficient.
Where it concerns reservoir recovery, the assessment may need to examine reservoir characteristics, depletion mechanisms, development strategy and comparable recovery outcomes.
However, where an observed performance difference cannot be adequately explained within one discipline, the enquiry may need to extend beyond it.
A difference in reservoir recovery may be connected to well architecture, injection capacity, processing constraints, development sequencing or investment decisions.
A difference in production efficiency may reflect operational practices, but it may also arise from earlier facility design or development assumptions.
A difference in capital efficiency may reflect project execution, yet concept selection, infrastructure flexibility and reservoir uncertainty may have contributed materially to the outcome.
The purpose of extending the analytical boundary is not to make every assessment unnecessarily broad.
It is to include the decisions and constraints necessary to explain the observed performance difference.
This also requires recognising when the existing explanation may be incomplete.
If a performance difference persists after reasonable allowance for reservoir conditions, project complexity and operating circumstances, the appropriate response is not necessarily to introduce additional explanatory variables indefinitely.
It may be necessary to reconsider whether the original performance objectives, development assumptions or comparison framework adequately represent the economic question being investigated.
Such an enquiry may validate the existing explanation. Alternatively, it may reveal that the explanation accounts for satisfactory performance against established objectives without establishing whether those objectives reflected what was economically achievable.
Upstream assets reflect connected decisions taken across technical, operational, financial and organisational responsibilities, often over several decades.
The individuals responsible for executing those decisions may have performed competently. The objectives against which their performance was measured may also have been appropriate within their respective responsibilities.
Nevertheless, satisfactory functional performance cannot, on its own, establish the economic competitiveness of the development choices connecting those responsibilities.
That conclusion requires a different evidential basis.
It requires distinguishing the quality of execution from the quality of the original decision, examining feasible alternatives under comparable conditions, and separating historical judgement from the question of what remains achievable.
It also requires accepting that comparative evidence may confirm the appropriateness of existing decisions rather than necessarily identifying superior alternatives.
The objective is not to demonstrate that functional performance measures are inadequate for their intended purposes. They remain essential to disciplined management.
The question is whether the evidence used to evaluate functional performance is also sufficient to establish the economic quality of the decisions that determine the asset’s overall outcome.
If every function can demonstrate satisfactory performance against its own objectives, what evidence establishes that those objectives – and the decisions connecting them – were collectively consistent with the greatest achievable economic outcome?
Accompanying figure: The Distribution of Executive Responsibilities Across Upstream Oil & Gas. Source: Fulcrium analysis.
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