Front end loading: misunderstood or misapplied?
David Newman A , Steve Begg A and Matthew Welsh AThe University of Adelaide
The APPEA Journal 56(1) 247-258 https://doi.org/10.1071/AJ15019
Published: 2016
Abstract
Historically, oil and gas projects have struggled to achieve promised outcomes. Research has demonstrated that a good predictor of project outcomes is the level of front end loading (FEL) achieved at the final investment decision (FID). Specifically, projects with high levels of FEL have more predictable costs, shorter schedules and better production attainment.
Anecdotally, however, the application of FEL within the industry is patchy, with many companies advocating its use but allowing projects to pass decision gates with incomplete levels of FEL.
To understand why this occurs, the authors have interviewed more than 30 senior personnel from a range of oil and gas companies, asking them a series of questions about their understanding and acceptance of FEL. Those interviewed had significant experience, averaging more than 25 years in oil and gas, and more than 20 years’ experience on opportunities and projects.
Results suggest that, while FEL is highly regarded and the concept is well understood, it is not always applied appropriately. It is used as a final hurdle—checking the level of FEL just prior to the FID—rather than as a guide from the early stages to determine what work needs to be focused on to achieve a good FEL score. Furthermore, lower FEL benchmark scores are often overridden by expert judgment, justified by a project’s unique characteristics, allowing it to proceed.
This approach, focusing on the specific attributes of a project and ignoring general effects or predictive models such as FEL benchmarking, is referred to as taking an inside view and is known to produce inferior results, such as cost and time overruns. The authors argue that a stricter application of FEL and benchmarking predictions, integrating it from the early stages of projects and allowing overrides only in truly exceptional cases, will produce superior outcomes.
David Newman is presently undertaking a PhD from The University of Adelaide, researching decision making for oil and gas projects. He has a BSc in aeronautical engineering from Bristol University, and a MSc for research on airships from Loughborough University. He has 35 years’ experience in the oil and gas industry, mainly working for Shell and Woodside in a variety of project, operations and business roles. This includes managing projects and running a decision making framework for opportunities and projects. He is a Member of the Institution of Mechanical Engineers (UK), a Chartered Engineer, and a Member of the Society of Decision Professionals. newpoms@westnet.com.au |
Steve Begg is a Professor at the University of Adelaide’s Australian School of Petroleum, where he specialises in tools and processes for improved business performance. His focus is on asset and portfolio economic evaluation and decision-making under uncertainty, including psychological and judgmental factors. Prior to joining the University in 2002, Steve spend 19 years in the oil and gas industry as Director of Decision Science and Strategic Planning for Landmark Corp., in a variety of senior geoscience and engineering operational assignments for BP Exploration, and as a reservoir characterisation researcher and project manager with BP Research. Steve has twice been an SPE Distinguished Lecturer on decision making and uncertainty assessment topics, and was commissioned by the SPE to co-author a book—Making Good Decisions. He was recently elected to the Board of the Society of Decision Professionals, and won the SPE Asia-Pacific Management & Information Award. Steve holds a PhD degree in geophysics and a BSc degree in geological geophysics from Reading University. steve.begg@adelaide.edu.au |
Matthew Welsh is employed as a Senior Research Fellow in the Centre for Improved Business Performance (CIBP) at the Australian School of Petroleum where, for the past 12 years, he has conducted research on psychological aspects of decision-making and the impact that these have on the accuracy of forecasts and, thus, economic outcomes. Matthew is a member of the American Geophysical Union, Cognitive Science Society and Association for Psychological Science, and has written 40 papers for psychology journals and industry outlets. He has been an invited Discussion Leader at an SPE forum on risk mitigation and uncertainty management, and presented work at psychology, engineering, geology and geophysics conferences worldwide. He holds a BA (Hons) in philosophy, a Graduate Certificate in Education (Higher), and a BSc (Hons) and PhD in psychology from the University of Adelaide. matthew.welsh@adelaide.edu.au |
