Executives in the oil and gas industry today face some unique challenges, including a competitive landscape, compliance and regulatory pressures, and the need to monitor complex land and exploration agreements. To provide strategic leadership, executives must maintain a real-time, informed and comprehensive view into the daily operations of their company.

There are key performance indicators (KPIs) that can help spotlight the benchmarks being reviewed. The review of these KPIs can drive operational decision-making and influence the bottom line. A system for easily monitoring them on a real-time basis helps executives make the kinds of informed decisions that enhance productivity and cut costs.

Visibility into three key business areas-accounting, land and operations-provide executives with current, business-critical information to proactively and effectively stay abreast of complex day-to-day requirements of their business and react quickly. Real-time, comprehensive, at-a-glance access to this information provides the edge that is needed to stay competitive. Following are the KPIs for the oil and gas producer.

Lifting costs. One of the fundamental performance indicators is lifting costs per barrel of oil equivalent (BOE), demonstrating the extent to which a company is controlling operating costs. The basic formula for calculating lifting costs is annual lifting costs divided by annual production in BOE.

Additionally this can reveal how efficient a company is at getting product out of the ground. Since managers budget anticipated lifting costs as they evaluate acquisitions and drilling investments, it is imperative that the costs be monitored and appropriate adjustments be taken if costs get out of line. Lifting costs are also a metric used in peer comparisons.

When considering lifting costs as a KPI, it is necessary to determine if this metric is being used to control costs, measure efficiencies or provide peer comparisons. The following should be kept in mind.

Controlling cost. Include only costs that are deemed controllable. The calculation would not include depreciation, property and/or severance taxes, for example, as these are not under control of the field and operating personnel.

Improving operational efficiencies. Include all operating costs, such as production-related costs and workover costs.

Peer comparison. Benchmark the company to peers in the industry, keeping in mind that this ratio is computed using both oil and gas production. Since the cost to produce oil is typically higher than the cost to produce gas, ratios may be skewed when comparing a company primarily in oil to one that is primarily gas.

Additionally, lifting costs may vary by area, such as offshore and onshore. Peer comparisons should take into account the geographic areas in which the company operates.

Lifting-cost comparisons can be done between business units, geographical areas, prospects, pumpers, and more. By evaluating these costs, a clear picture of operations in each of these areas will be obtained.

Gross profit per barrel. Although lifting costs indicate how well a company is controlling costs and how efficiently it is operating, revenues should also be reviewed when measuring performance. For example, lifting costs on a particular field may be high, but if the sales price is also high, the operations may be deemed efficient.

To calculate gross profit per barrel, take gross revenue receipt per barrel, less lifting cost. These net amounts should be compared to determine efficiency of the cost center.

AFE cost comparisons. For those operational managers whose incentive compensation is based on performance against plan, monitoring budget to actual authorization-for-expenditure (AFE) costs is critical. They also have obligations to partners to stay within certain cost parameters, and to guard against charges being improperly coded to their projects.

Managers should review actual costs, taking into account projected costs, and should monitor percentage completion of the project. By closely scrutinizing these metrics, operation managers can feel confident that the projects are being managed properly.

Purchaser receivables. Marketing representatives are responsible for negotiating the best price for the commodities produced, and monitoring whether the purchaser fulfills these marketing obligations is imperative to success. Purchaser receivable balances should be monitored daily to determine if contractual obligations are being met. Immediate action can then take place if payment has been delayed.

Revenue/cost benchmarks. Oil and gas companies continually monitor and compare revenue, cost and/or income. These calculations are sliced and diced and sorted to match the accountabilities that are managed by the company. This data is reviewed by business unit (independently defined by each company), such as by acquisition, drilling program, geography and more.

The review typically includes comparing costs and revenue, looking for pricing variances or production variances, and comparing budget to plan.

Another KPI that is reviewed by oil and gas producers is the rankings of top producers. Some companies review the top fields; others, the top wells. Regardless of the category, companies often focus their review on the top producing properties, since adjustments to their top performers have significant impact on the bottom line.

Production KPIs. Monitoring production volumes is essential to maintaining a pulse on operations. Observing changes in production trends allows timely adjustment of operations-or forecasts. Production-related benchmarks can be used to monitor volumes produced from specific wells or from a combination of wells. Some of the benchmarks that should be reviewed follow.

Daily production. Track daily production volumes to insure that production trends are not decreasing. If production is down, immediate corrective action can be taken. KPIs for daily production should graphically display volumes by day. This should be reviewed at a company, district, field and even a well level. Average daily production volumes should also be monitored. Often, the average is a better indicator of trends than a straight daily number.

Monthly production. Review production volumes monthly to catch trends in the production curves. Volumes should be analyzed at each level of responsibility in the company-business unit, district, field, well. By focusing on anomalies, proactive operations adjustments can be triggered.

Well downtime. Review this on a monthly basis, as production volumes will be adversely affected during downtime. This analysis should include the days or hours the well was down. This analysis could point to operational issues that can be easily resolved.

Exception reporting. Set benchmarks for production volumes and be alerted when production volumes fall below the benchmark. By drawing attention to these exceptions on a timely basis, corrective action can be planned immediately.

Land management. Losing a lease can negatively affect the economics of an entire prospect. Likewise, holding onto a lease that is no longer core to the business can be a costly expense. Missing an obligation on a lease or a well could also negatively affect operations. These land metrics are focused on preventing disasters, rather than measuring performance. Yet they are important measures of efficient operations.

Expiring leases. Data on lease expirations can be used to prioritize drilling schedules and justification of moving rigs.

Payout status. The status of well payout can affect the profitability of the operations. Reaching payout status should trigger ownership changes on the division of interests. Payout status should be reviewed on a monthly basis for those properties that are nearing payout. For all properties, payout should be calculated and reported at least quarterly.

In summary, reviewing KPIs in a timely manner can have a positive impact on the bottom line. Corrective operational action can be initiated, market expectations can be reset, and executives will have the tools to hold managers responsible for operations.



Key Performance Indicators ofThree Oil & Gas Divisions

Accounting

• Accounts Payable

• Accounts Receivable



Land

• GWI/Working Interest Ownership

• Lease Expirations

• Lease Acreage Information

• Net/Gross Working Interest Ownership

• Acreage Report



Production

• Daily Production

• Latest Well Tests

• Monthly Production

• Tank Volume

• Well Downtime

• Well Information (well, location, status, etc.)



Rick Slack is president and chief executive officer of Denver-based Bolo Systems, a provider of IT and financial software and services to oil and gas producers. He was previously with CogniSeis Development and the GeoGraphix business unit of Landmark Graphics Corp. He has degrees in geology and geophysics.

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