What is the definition of strategic planning?Â
The short answer is to monetize your vision statement. You may agree or disagree, but increasing the bottom line motivates the private and public sectors. Additional undertones are associated with safety, environment, culture, and history. But in the end, strategic planning provides a path to achieve a mission.
The process is well known. The strategic goal begins by defining your vision statement, assessing where you are, and determining your priorities and objectives. Define responsibilities, measure, and evaluate the key performance indicator results. For Cogent’s clients, a small to medium size target organization has strategic planning directly associated with short and medium time frames. Let’s define short: as one to three years and medium: as three to five years. This business strategy, addressed by many at Cogent Analytics, is considered one of the critical core knowledge areas to be preserved.
Understanding the strategic initiative.
I will address strategic planning at different levels: governments and large corporations. My experience with governmental entities: MEM-PDVSA, ANH-Ecopetrol, and GUMS-Pemex, and large corporations: British Petroleum, ExxonMobil, and Chevron have left a footprint in my understanding of the differences, especially in the timeline, and depth and reach of their planning process. I will describe their approach with examples in the following paragraphs.
As you can derive from the client base, my consulting expertise is in the Oil and Gas industry: exploration, development, processing, transportation, refining, marketing, and distribution of hydrocarbons. Let me share a few brief case studies from each entity I have worked for to illustrate the main differences between short to medium and long term goals.
A long-range strategic plan – time and scale.
The oil reserves of a country or a public oil entity are subject to careful evaluation; they are the fundamental equity that sustains their balance sheet. As part of the strategic objective, they address quantity, risk classification, and valuation. This planning methodology determines the reach of the economic horizon of their corporate level strategy.
MEM-PDVSA has the largest known hydrocarbon reserves in the world, and their strategic objective horizon is 30 years. British Petroleum’s tactical planning horizon is 25 years. In both cases, they review the trending issues and develop scenarios making a strategic plan that identifies the problem. For example, they include a plan and forecast for 100 and 150 years in their strategic thinking. In the late 1900s, both entities predicted the introduction of the electric car within 20 to 50 years. Today, electric cars are an everyday occurrence.
Another example is the PDVSA action plan to strategically associate with ExxonMobil, Chevron, and British Petroleum, among others, to jointly develop the extra-heavy oil reserves of the Faja del Orinoco. In late 1990 and early 2005, they invested US $25B in developing and upgrading the extra-heavy oil from the Faja del Orinoco. The average time elapsed from LOI to the completion of the project took +/- than ten years, and the time horizon of execution of the project is 35 years. An example of this is how MEM-PDVSA’s mission was to monetize Venezuela’s extra-heavy oil reserves.
Strategic thinking – economic modeling.Â
The monetization of the hydrocarbon reserves is the main subject of project economics strategic priority. Long-term planning gives direction, and midterm project management provides the basis for budgeting capital investment projects.
Long Term Goals: ANH and Colombia’s “Apertura” are excellent examples of the long-term planning process and visualization. I was part of the multicultural team that provided strategic direction and executed the opening of the Colombia hydrocarbon reserves to local and international investors. The planning process started with an inventory of Colombia’s hydrocarbon reserves and a technical evaluation to assess exploration risk. Applying what we learned during the Venezuelan opening, we propose and aid in the execution of public hydrocarbon exploration. The business strategy involves economic evaluation and prioritization of the exploration blocks. A risk economic model was prepared, and we assigned priorities to plan and sequence the offering.
Mid-Term Goals: Ecopetrol strategic planning gives the guiding principles to select the capital expenditure projects that are more profitable for the organization and key stakeholders. During the Ecopetrol process, the Castilla field was defined as an internal target for development. Chevron was turning over an operating agreement, and Ecopetrol wanted to evaluate and plan the exploitation of the remaining reserves. Further, we contracted to aid in the evolution of the Castilla field. As a result of effective strategic planning and execution efforts, production increased from +/- 20,000 BPD to +/- 150,000 BPD. Application of new up-to-date technology contributes to the ROI achievement.
Operational planning – process optimizations.
The supply and services are always critical to the strategic planning process. A SWOT assessment typically defines the strategic objective and responsibilities within the organization. Critical issues like food and fuel supply are vital for the region’s stability. Therefore, emphasis is made on meeting the ever-growing demand for goods and services.
Hydrocarbon industry optimization, GUMS-Pemex, is an excellent sample of operational planning and process optimization. Let’s review the supply of transportation fuels: gasoline & diesel, to Mexico, which became one of the most critical issues to be resolved by the Mexican central government and their state oil company. Mexico absolves the expenditures associated with the exploration risk, and as a result, large hydrocarbon reserves were discovered and developed. The production from said fields was exported and refined at the USA Gulf Cost. Only to be sold back, to Mexico, as refined products: gasoline, diesel, etc. During the strategic planning process, it became evident that developing the Mexican refining capacity would eliminate the evident “Molecular Tourism.” Therefore, five refining projects were conceptualized and executed. Furthermore, the vision statement included 3rd (Petrochemicals) and 4th (Plastics, Fibers, etc.) levels of hydrocarbon transformation. GUMS-Pemex generated direct and indirect capital investments +/- $US25B, creating new and futuristic economic development centers.
Market assessment strategy – price scenarios.
Price scenarios are another challenge to be addressed as part of the strategy execution efforts. Anyone who has done economic modeling evaluation knows the four elements required to determine the fundamental economic indicators, like the return on investment. The first two are capital and operating expense estimates, best known as CPEX and OPEX. These are directly supplied by the project definition and, as such straightforward to calculate. The third key performance indicator is the legal and applicable taxes: federal, state, and municipal. This one requires special attention and should be addressed by a qualified tax expert willing to certify the adequate treatment of all federal, state, and municipal tax requirements. The fourth indicator is price, which is the most difficult to assess and determines the project’s economic feasibility.
Price Scenarios by recognized institutions are expensive. Purvin & Gertz are well known in the hydrocarbon industries and accepted and sanctioned by the Security and Exchange Commission. Purvin & Gertz provides price forecasts for hydrocarbon production through the horizon year of 2030. Another method of estimating hydrocarbon prices is to evaluate the West Texas Intermediate (“WTI”) price and use correlations to all other products and byproducts. The best way to calculate the cost of the WTI, without expending money, is to get the forecast from the consumer’s point of view (IEA: International Energy Agency) and the forecast from the producer’s point of view (OPEC+) and take the midpoint between the two projections.
British Petroleum (BP) is well known for its forecast. In the long run, their price scenario forecast WTI at a constant value of 70 $/B, +/-10%, and this forecast, on average, has over time held. Plotting the WTI for the past fifty (50) years will verify this assessment. Also, BP’s estimate of trends is well-known and respected. BP is one of the major oil companies that consistently has paid a 6% dividend. A test of endurance and excellent long-term strategy development.
Define organizational goals – measure and evaluate results.
The best method to measure and evaluate is to set up regular follow-up meetings and compare what you’ve forecast versus what has happened. The best practice utilizes the CMS (once a week) and the Wealth Budget and Profit Plan (once a month) to review the actual result versus periodically. You report progress evaluations, adjustments, and updated forecasts to maintain an updated strategic management business plan. This process is a generally accepted practice typically used by most organizations. For successful strategic planning, the best approach is to review mid-year and compare previous trends and analysis as a function of the new economic realities. Businesses use the new strategic goals and an updated strategic plan to prepare the wealth budget and profit plan for the following year.Â
The MEM-PDVSA evaluation. I was responsible for presenting our oil and gas market evaluation to leadership and the Board of Directors once a month. Most of the time, the presentation began by explaining why we got the forecasted oil price wrong. The lesson learned is that it is difficult to predict the direction of the market. Therefore, most major oil companies’ organizational goals hedge on buying and selling futures paper barrels.
The purpose of strategic planning.
In conclusion, the purpose of strategic planning is to share the consensus’s vision and give direction. Specifically, it breaks down the company’s vision into tangible goals for your organization. The deliverables provide the time frame and assignment of responsibilities for meeting the objectives of an institution or an organization. For small to medium companies, tactical planning should be an exercise for growth and survival. Today’s ever-changing economic environment requires the business owner to take action to find his strategic position. The strategic planner identifies threats, treats them as opportunities, and embraces change as he builds its strengths and cures its weaknesses.