This paper summarizes a study to determine the effect of financial ranking criteria on development goals of oil and gas organizations. Economic analysis and ranking was applied to one hundred projects representing oil and gas projects representing oil and gas investment opportunities available to an organization. Each project's after tax cash flows were subjected to four financial analysis methods for ranking. The four analysis methods used were net present value to investment ratio (NPVI), present value to investment ratio (NPVI), internal rate of return (IRA), payback period and profit to investment ratio period and profit to investment ratio (P/I). After ranking, the projects were totaled according to a particular organizational objective. Totaling of projects by ranking would continue until a projects by ranking would continue until a limiting resource to the organization was exhausted.
This study demonstrates the insensitivity of financial analysis methods for ranking whether the organization is limited by capital or manpower. It concludes that the only requirement for a ranking criterion to properly allocate resources is that the criterion quantifies the organizational goal to some degree. Decision makers charged with selecting the most attractive growth portfolio of investment opportunities will do well with any profit measuring criterion for ranking.
Many investment analysis techniques and ranking schemes have been forwarded within the oil and gas industry to assist development managers in decision making. Managers charged with the responsibility of developing annual funding plans are particularly concerned with the proper particularly concerned with the proper selection of projects which will maximize the use of limited resources.
The importance of proper project selection can be attributed to several key factors First, in most oil and gas organizations, development projects represent a sizable financial investment. Project selection decisions have a significant impact on the current and future financial positions of the organization. Projects often entail large organizational commitments that translate into significant opportunity costs if an improper choice is made. Second, the returns from projects are diverse in terms of projected outcome for the organization. For instance, a heavy reliance on rate of return measures for development project selection may lead to an unbalanced portfolio of product and process improvement efforts rather than process improvement efforts rather than financial expansion. Third, the time required to complete a project may range from a few months to years depending upon whether the project is exploratory in nature or a longer-term development effort. The level of complexity for project evaluation and control will also project evaluation and control will also vary accordingly.
During the 1960's, a growing use of return on investment and payback assisted in project evaluation and selection. The project evaluation and selection. The decade of the 1970's witnessed an explosive growth in the development of quantitative methods for managerial decision making and project selection.