Back to Volume 4 | Summer 2019

Time is Money: The Financial Implications of Project Production Management on Oil and Gas Companies

Executive Summary

One of the primary underlying tenets of Project Production Management (PPM) is that operators can and should be calculating the appropriate level of inventory required within and between each task in their project. While almost all operators track inventory, or WIP, few to none know what that inventory should be. In addition, there is a lack of clarity around the financial impacts of controlling inventory and how this relates to equity performance. This article aims to explain the three main areas of financial impact once PPM is implemented. These are: 1) a reduction in cash tied-up / working capital, 2) a reduction in capex to deliver the same number of wells, and 3) an increase in project net present value. These impacts, in turn, will lead to higher free cash flow and stronger return on cash invested – two very important financial metrics used to judge the health of the US oil and gas industry. While PPM can be applied to any capital project, this article will focus on onshore unconventional developments.

Keywords: WIP; Throughput; Variability; Littleā€™s Law; Financial Implications

Author: Amanda Goller Director of Analytics, Strategic Project Solutions Inc., agoller@spsinc.net



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