Preparing a Business Case for Technology Investment in Production Operations

J. Roger Hite, Business Fundamentals Group; Kemal Farid, Merrick Systems; M. Lee Blanton, Business Fundamentals Group; Fred Gard, NSI Upstream; and Charles Crawley, Chevron Energy Technology Co.

Broad support exists in the leadership of most large oil and gas companies for a version of the digital oil field as a strategic direction, but there is difficulty at the implementation level in building a convincing case for investment. Implementation seems slow, perhaps because generating a convincing business case for incremental investment is challenging.

Winning acceptance for new computing, automation, and communications technology* (CACT) in the oil patch is always a challenge, and one that begins and ends with a convincing business case. A good business case speaks to decision makers in a language they understand. It outlines in clear terms the benefits of the investment, its costs, and its risks. Each needs to be presented clearly, openly, and honestly.

A good business case is guided by five principles:

• Value is created only when good decisions are made and implemented. The value of an oil and gas asset derives from decisions made and implemented in the past—to drill wells, to complete them, to implement recovery processes, and to install facilities. Once decisions and investments are made, the assets are operated in a way to capture the intended value.

Oil fields do not exactly run themselves, of course, because numerous decisions are made every day to keep them running smoothly. Lift changes, new choke settings, changes in injection and production rates, and set-point adjustments are all designed to make sure the value of the original investment is achieved. Added value is created when decisions are made and implemented to add new assets, modify existing ones, or to change operating practices or procedures. It is important that these decisions be the right decisions made at the right time. Whether they are depends greatly on the quality of the information available at the time.

• CACT investments affect decisions. Computers do not produce oil; they facilitate decisions. Thus, the value of investments in CACT derives from its ability to improve decision making or improve on the decisions that are made. Having more terabytes of data stored on a server does not help a bit. Rather, it adds cost. Likewise, storing production rates and pressures minute by minute does not add value. Faster communications, bigger computers, and more gadgets do not help unless they lead to better or more timely decisions.

• Real time is defined by the frequency of decisions that need to be made. Because the value of CACT investments comes from the decisions it influences, the frequency of data collection should be matched to the rate at which decisions can be made and implemented safely. The decision rate defines what “real time” really is. Information at time scales shorter than the rate at which decisions are made does not help because the information cannot be acted on that fast. Longer time scales may mean lost opportunities because decisions could be made faster if the information were there. Thus, “real time” is really “right time”—the right time for making decisions.

• A process exists for making decisions. Decision making follows a process. It begins with gathering data, and, to be useful, data have to be transferred and stored, either in a computerized database or in a file cabinet in someone’s office. Then, they have to be retrieved where they can be analyzed. Analysis leads to recommendations, to make a change or not. If the decision is to make a change, and if it is a good decision, value is created when that decision is implemented.

CACT can aid decision making by allowing faster, better, or money-saving decisions. Faster decisions mean reducing losses from operating at less than optimum conditions. Better decisions reduce risk. A good business case deals with the decision process and how the proposed investments help.

• The business case demonstrates that project implementation is well planned and that all aspects are covered. Managers who make investment decisions need to be assured that the proposed investment has a high probability of turning out as planned.

Fig. 1—The value of data, information, knowledge, and understanding is in the decisions that are made.

Preparing the Business Case

Preparing the business case borrows some familiar concepts from project management. Good project managers understand that every project really consists of two separate projects. The first is getting the asset ready for the organization, and the second is getting the organization ready for the asset.

The First Project. Investment decisions generally are based on cost/benefit analysis. Consequently, the business case must present clear costs and benefits and must include a clear picture of what is going to be built or installed. Perhaps the most important aspect of the business case is the description of the expected benefits. All too often, business cases either omit this or provide only a qualitative description of expected benefits. Phrases such as “it is the most advanced technology” or “this will make our staff more productive,” or even “this is so much better than what we have” may sound good, but they are hardly the basis for sound investment decisions. The problem with these statements is that they do not address how the investment will enable better or more timely decisions, nor do they address the added value that better or more timely decisions will lead to.

A business case without numbers is just hot air! The expected benefits need to be quantitative, measurable, and credible. Managers who make investment decisions must always ask themselves, “Will this investment make money for the enterprise, and will I be able to prove it?” This demands that the added value that the investment is proposed to generate be measured and tracked to assure the result. These expected benefits must be credible. The best way to ensure this is to spell out exactly where the benefits will come from. For example, to say, “This investment will save us U.S. $10,000,000 in the first year” may or may not be credible. On the other hand, to argue that, “This investment will reduce the time to conduct a certain step in a process by 3 hours, enabling us to correct operational problems in the field 3 hours faster, and based on the number of times this occurs in a year, the increased production will be worth $10,000,000” is much more believable and measurable.

Another important part of a good business plan is defining risks and creating contingency plans. Because complex projects rarely go exactly as planned, the project manager must plan for what can go wrong.

Finally, the business case must address how you will recognize success. How will you know when you are finished, and how will you know if you are successful?

The Second Project. Investments in CACT generally derive value for the organization by improving work processes. By definition, changes in work processes mean the jobs and activities of individuals who perform the tasks also will change. When CACT projects fail, it is often because little attention was given to the changes that people have to make and little was done to prepare them for it. When planning a CACT project, changes to the work process and to individual jobs must be understood clearly.

A business case should confront barriers that impede adoption. CACT projects have the reputation in many organizations of being “overpromised and underdelivered.” If this is the case in your organization, you must make sure your business case builds the argument for why this will not be just another of those projects.

Case Studies

Following are three case studies that illustrate various features of a good business case. Although none include every feature we have recommended, each provides valuable insight into how others have approached the task.

Case Study A—Production Monitoring. Together, two deepwater platforms produce more than 91,000 BOEPD (at $60/bbl, amounting to $5.5 million/day or $228,000/hour). But engineering and management personnel responsible for meeting production targets could not reliably “see,” from onshore, the real-time data collected offshore. Without a common view of what had been occurring in real time on the platforms, each group was arriving at differing conclusions regarding effective management of the assets.

The solution was to install a data-visualization tool that allowed engineers, operators, and managers, working from anywhere, to see the real-time data over the Internet. The project cost less than $100,000 (less than 1 hour of production) and 1 man-month of time per platform. The expected benefit was $500,000 per year in increased production. The anticipated payback was greatly exceeded. One event illustrates how this was achieved.

The production engineer was at home on a Saturday morning when he got a call from the platform. The platform had shut in. The production engineer, working from home, was able to work with the operators to bring the platform back on line. However, because of a closed downhole valve, one of the wells could not be brought back on, costing 5,700 BOEPD. The operators on the platform had made a number of attempts to equalize the pressure and open the downhole valve without success.

The production engineer, in collaboration with the operators, began overlaying the status of different valves and pressure-transmitter values on his computer screen. Working with the operators, he was able to identify a flow safety valve that was leaking, preventing them from being able to equalize pressure and open the downhole valve. Once the problem was identified, the production engineer and the operators were able to determine a solution. The company estimates it was able to avoid more than $500,000 worth of deferred production.

One of the lessons learned was the importance of internal cultural acceptance by the platform operators. The company was able to transform apprehension into a collaborative environment.

Case Study B—Automation Project. The project was to extend SCADA in a field spread over a large jungle area. Fifty-five of the field’s 163 producing wells already were being monitored and controlled by SCADA. The project would add SCADA to 108 producing wells, 37 injection wells, 3 remote gathering stations, and 5 test stations.

The team first collected production and operating time data for the wells before and after the previous SCADA installation. The data showed a 12% increase in production. SCADA provided fast identification of the wells that shut in, fast recovery of field operation after power outages, and reduced exposure to driving hazards by reducing the amount of time required to drive to a field location to check the status of a well or to restart it.

A model was used to determine the feasibility and economic risks of implementing SCADA that included the uncertainties in various input parameters. The model generated a range of results (a risk profile) using all combinations of the uncertain variables. Based on this risk profile, the expected values (EV) for the project were

EV of net present value (NPV) is $1,299,000 (P10=$580,000, P90= $1,925,000).
EV of return on revenue is 69% (P10=40%, P90=93%).
EV of DPI is 3.5 (P10=2.1, P90=4.6).

A sensitivity analysis showed that the uncertainty in accelerated production had the largest impact on the project NPV, followed by crude-oil pricing, and reservoir decline rate. The project team concluded that SCADA would be a good investment.

Case Study C—Pumpoff Controllers. A producer had installed a SCADA system with pumpoff controllers (POCs) in an old established thermal oil field. The goal was to improve production while reducing pump failures, well maintenance, and associated costs. The project’s business case was built around a 2% production increase and a 20% reduction in costs because these numbers were typical of systems of this nature. A key question was whether the project had achieved the expected results.

The producer reviewed the maintenance data provided by the field’s well-service contractor. It could not be assumed that the POCs were properly set up or even in control, so the producer first examined the data to get an indication of which wells were operating properly and which were operating in timer mode or running continuously and unable to pump off.

The study showed that repairs for events that a POC could affect, primarily noncorrosion problems, decreased from a failure frequency of 1.2 failures per year before POC installation to a failure frequency of 0.5 failures per year after installation. This accounted for approximately 65% of the failures in the field. Those improvements were more than enough. At an average well-service cost of $50,000, the reduction in failure rate produced a $35,000 benefit per well per year. Because the cost of a POC, including communications back to a master, amounted to $3,500 per well per year, the project produced a payout of only 0.1 years.

Additionally, it appeared production holdup could be reduced and maintenance benefits increased by performing a preliminary setup on the POCs and placing them in proper control. More than half of the wells did not appear to be under correct POC control. The producer identified additional opportunities in which wells were running in time clock mode and significant fluid pound was occurring. A lesson learned was that an audit of technology can document benefits for future business cases.

Fig. 2—The decision process: data gathering, storage, retrieval, analysis, and recommendations lead to decisions and revised operating instructions.

Conclusion

A frequent complaint from petroleum engineers is that they have been unsuccessful in getting funding for projects they believe will improve production optimization significantly. Following this “recipe” for building a business case will greatly improve success rates in getting approvals.

Ensure that the business case is based on the five guiding principles listed above.
Prepare the business case, consisting of two parts:
Get the asset ready for the organization (first project). Expected benefits need to be quantitative, measurable, and credible. Remember: a business case without numbers is just hot air!
Get the organization ready for the asset (second project), and prepare the organization for anticipated changes.
Identify barriers to moving forward, and determine the best way to overcome those obstacles.

*By computing, automation, and communications technology, we include all aspects of their use, including data acquisition, data storage, software applications, decision tools, automation, supervisory control and data acquisition (SCADA), and devices.