ANALYSIS OF CAPITAL EXPENDITURE PROPOSALS IN THE PETROLEUM INDUSTRY

Abstract

BECAUSE of the characteristics of the decisions and the nature of the industry, this is especially true of the management of capital expenditure in the petroleum industry. Much progress has been made, however, in the development and application of good analytic techniques for measuring the relative attractiveness of various investment proposals. These include the use of the present value concept to take account of the time pattern of future benefits and of probability theory to handle the problems of risk and uncertainty. The concept of strategy and its effective application to a business is also needed to give purpose and direction to the whole capital expenditure programme. That strategy may be even more important than fine analytic tools is illustrated by some examples of Texaco's success.

“Management,” said Peter Drucker, “is the art of doing the impossible with intelligence.”

At first sight this statement may seem merely clever. On reflection it turns out to be true. I hope to show that, for the management of capital expenditure in the petroleum industry, it is profoundly true, and that its truth holds some important lessons.