• 4 minutes China goes against US natural gas
  • 12 minutes WTI @ 67.50, charts show $62.50 next
  • 15 minutes Saudi Fund Wants to Take Tesla Private?
  • 3 hours Downloadable 3D Printed Gun Designs, Yay or Nay?
  • 4 hours Rattling With Weapons: Iran Must Develop Military To Guard Against Other Powers
  • 10 hours Permian already crested the productivity bell curve - downward now to Tier 2 geological locations
  • 7 hours Desperate Call or... Erdogan Says Turkey Will Boycott U.S. Electronics
  • 4 hours Batteries Could Be a Small Dotcom-Style Bubble
  • 11 hours CO2 Emissions Hit 67-Year Low In USA, As Rest-Of-World Rises
  • 14 hours The EU Loses The Principles On Which It Was Built
  • 6 hours Corporations Are Buying More Renewables Than Ever
  • 19 hours Starvation, horror in Venezuela
  • 23 hours Are Trump's steel tariffs working? Seems they are!
  • 23 hours Is NAFTA dead? Or near breakthrough?
  • 22 hours How To Explain 'Truth Isn't Truth' Comment of Rudy Giuliani?
  • 20 hours The Discount Airline Model Is Coming for Europe’s Railways
Alt Text

A Major Setback Looms For Colorado Shale

November elections in Colorado are…

Alt Text

Why Saudi Oil Production Suddenly Dropped

Oil prices jumped on Monday…

Alt Text

What Happens Next To China’s Crude Imports?

Crude oil flows to Chinese…

Salman Ghouri

Salman Ghouri

Dr. Salman Ghouri is an oil and gas industry advisor with expertise in long-term forecasting, macroeconomic analysis and market assessments.

More Info

Trending Discussions

The Single Most Important KPI For Oil & Gas Companies

Oil

It is no secret that the CEOs, owners, shareholders and creditors are curious to know how a company is progressing. If there was only one KPI that could measure the overall performance of a multinational Oil & Gas company, which one would those with a stake in the company choose?

In every organization, there are a number of Key Performance Indicators (KPIs) which help to assess its financial health, physical performance, operational excellence and health, safety and environment (HSE).

It is often seen that management develops a series of KPIs for each category and displays it on the management dashboard to assess the health of the organization. The objective of such KPIs is to facilitate appropriate and timely decisions in order to steer the company towards its set objectives. For each category, there could be many KPIs, all of which may be of equal importance. However, if the shareholder or CEO or creditors are interested in one single KPI, which one should be given greater emphasis and why?

Any layman can suggest the main objective of any oil and gas company is to maximize profit while increasing the value of the company year after year. In order to do this, the company must generate more revenue while cutting costs. To achieve this, the company must enhance its oil and gas production year after year. For the sake of discussion, we are assuming that oil prices are to hover around $50/bbls for many years. This would suggest that revenue and profitability hinges on the level of production, while remaining vigilant on cost. Related: Aramco Looks To China Ahead Of IPO

This is to say that a company needs to continually invest its financial resources in exploration and development activities to broaden their portfolio. The greater the proved oil and gas reserves added to the company’s resource base, the greater the value of the company.

Maximizing profit increases the value for shareholders, but oil and gas companies must continue to produce more in succeeding years. The problem with this, however, is that production of oil and gas resources today, means that a barrel of oil produced today will not be a part of the portfolio tomorrow. That is, with the production of each barrel of oil, remaining proved reserves will deplete unless new reserves are added to replenish the quantity produced. This is what is called the Reserves Replacement Ratio, and it is one of the KPIs CEOs and shareholders would be interested in measuring to assess the overall performance of the organization.

If the company were to fail to discover and add new proved reserves, its available resources would eventually be exhausted, leaving the company in a rather difficult position.

This ratio is especially important as it provides a glimpse into the overall health of the company, including how well the company’s upstream operations are performing – are they acquiring enough blocks, acreage, drilling exploratory wells and making enough discoveries? Failure to achieve this single KPI means the company is unable to increase oil and gas production year after year, reflecting negatively in the financial performance of the company’s profit & loss statement.

By Salman Ghouri for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News