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E&Ps Told to Not Ignore 'Obvious' in Downcycle

With continuing pressure on natural gas and oil prices, producers are rethinking how to budget their capital expenditures (capex), but they shouldn't ignore the "obvious" ways to succeed in the current economic downturn, according to a report by UK-based consultancy Arthur D. Little (ADL).

Between 2007 and 2008 many exploration and production (E&P) companies dealt with an average 17% jump in inflation for labor, equipment and material costs, ADL noted in its report, "Managing Capital Investment Programs." To guarantee a return on income in today's "difficult" pricing environment, producers have to ensure that capital-intensive projects are managed even more effectively, ADL's energy and utilities experts concluded.

"With falling oil prices and constrained project budgets, the most significant challenge E&P firms face is the successful delivery of their current project portfolios," said Stephen Rogers, global chief of ADL's energy practice. "However, cutting these projects now could have long-term repercussions on supply.

"Rather than cutting individual projects to save costs, we urge oil companies to revisit their full portfolio of capex projects with a new lifecycle approach to managing successful projects."

ADL acknowledged that some of its observations are "obvious." However, "the litany of recent over-budget and over-schedule oil and gas projects demonstrates that even the most sophisticated upstream companies are not able to 'get it right' every time," the consultancy noted.

Most E&P project failures are due to ineffective management -- not because of a lack of funding -- ADL found.

To ensure success in the current downturn, ADL recommends:

For more information, visit www.adl.com.

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