During 2004, management consulting firm James Miller & Co. Inc. conducted an industry-wide analysis of the drilling function of upstream oil and gas companies. The objective was to ascertain how companies manage the drilling function, and to find and categorize key issues that adversely impact their drilling performance. More than 50 upstream companies provided input of some type to the analysis. This included three supermajors, 14 large independents and 10 national oil companies. In addition, direct input was provided by 11 major service companies. The participants operate in the U.S., Canada, Mexico, Venezuela, Brazil, Norway, the U.K., Italy, Russia, Spain, Saudi Arabia, China and Australia. In all, 321 executives, managers and professionals were interviewed. Additionally, direct input was provided by more than 300 of the companies' other professionals and staff, covering a variety of issues including authorization for expenditure (AFE) creation, legal, environmental/health/safety (EHS), supply chain, asset teams and field operations. Also, extensive public information on the upstream industry was collected for the study. As a result, 15 key factors were identified that play a significant role in differentiating the performance of drilling functions among the upstream organizations that were studied. Of these, capital discipline was identified as one of the most significant drivers of performance excellence in an upstream organization. It's no secret that drilling and completing an oil and gas well costs a lot of money. By any measure, the cost of an individual well drilled and completed today is significantly greater than at any time in history. And, drilling-related activities can easily account for more than 60% of an upstream organization's total capital budget. Yet, despite all of the attention it receives from executives and investment analysts, capital discipline is inefficient in most organizations. In a significant number of upstream organizations, up to 20% of the investment capital is ultimately wasted through inefficiencies in the "back end" of the capital process. Much of this waste is due to a lack of focus on execution or implementation after a project has been approved for drilling. Every upstream organization has the equivalent of a capital-planning process that results in a formal budget for each project (the authorization for expenditure or AFE), which is the estimated cost to design, drill and complete an oil or gas well. Usually, a team develops the rationale to support the AFE. This is the "front end" of the process. It can proceed in many upstream companies with the seriousness and diligence of planning for a moon shot, yet execution often results in chaos and calamity. It is the post-approval environment-specifically implementation-that constitutes the greatest opportunity for significant improvement relative to capital discipline and sustainable performance. What practices or decisions should the investor or the executive look for in terms of drilling-related capital discipline? For every $1 billion spent by a large upstream company on drilling-related activities, in excess of $100 million is wasted. This could be spent on more drilling. Also, the poor quality of well development and facilities construction may reduce the well's long-term performance potential. Why does this waste or value-destruction occur? Drillers have been driven by three essential performance metrics: Get to bottom-hole depth fast, drill a low-cost well, and don't show up in an evening-news disaster report. These objectives are necessary, but they don't encourage capital discipline. In drilling, there are uncontrollable risks-acts of God. But the reality is that many implementation issues are acts of man and can be corrected. These issues abound in this industry and are too often disguised as something attributable to unforeseen anomalous events. Atomization of capital Capital discipline starts to break down at the point of project approval when a phenomenon-"the atomization of capital"-commences. It is at this point that projects, as they move toward implementation, are deconstructed into many discrete spending decisions. The long-standing, and woefully inadequate, solution post-approval has been to entrust these projects to a project manager to see that tasks proceed according to plan. However, disparate organization business units, individual drilling foremen and superintendents, procurement agents, and other project-related personnel, acting with good intentions, but following flawed functional strategies, often create a tsunami of inefficient spending outcomes for the money allocated to the drilling project. The dynamics of a fragmented organization can thwart even the most accomplished of project managers. Atomization of capital occurs with every purchase order, at every interface between the upstream organization and outside suppliers, when the left hand doesn't know what the right hand is doing, and when organization structure creates emotional and political barriers to good execution performance. The specific causes of dysfunctional capital discipline include the use of industrial-era organization structures that fragment supply chain, drilling, exploration, reservoir engineering, legal, EHS and business units. Under this type of organization, each report to a different executive and there is no real point of integration. A drilling project manager must "work around" the various edicts, egos, political agendas, and emotional issues of each of the constituents to complete the project. Capital discipline breaks down as well-meaning people go about carrying out their specialty functions, often without regard for, or even awareness of, the impact of their actions on the ultimate success of the drilling project. The mantra of the last 20 years in upstream boardrooms has been to cut costs. While cost is certainly a component of prudent business practice, too many companies have developed a cost-myopia that actually destroys value. There are a number of CEOs in this industry who take great pride in being cost-cutters. Possibly few of these individuals have a good idea of the damage that the cost mandate and the atomization of capital does to their organization's performance, nor do they seem to realize the amount of opportunity that is missed from better capital discipline during project implementation. Capital discipline can be achieved in execution only by first creating a business design that enables better decision-making-one that favors value creation over cost-cutting. It is also important to continuously build capability centered on credible value-creation practices. Demanding ever-lower costs and shouting louder will not help. A better business design will include more significant integration of the major organization units that are engaged in the spending activities associated with drilling wells. A mindset shift is very much in order so that drilling managers are once again recognized as a central key to ensuring better spending decisions and in inculcating an emphasis on value-creation rather than cost-cutting. Capital discipline will occur when those most qualified for execution decisions are given the power to see to it that tasks go as they should. Drilling should be viewed as the strategic key to realizing value engineering rather than as the pedestrian service function that is commonly de rigueur today. M James A. Miller is president and chief executive officer of management-consulting firm James Miller & Co. Inc., Houston. Study findings and conclusions have been provided to the major study participants, and the firm is preparing to publish two books pertaining to its findings: Drilling: The Point of the Spear and The Alpha Organization™.