A conceptual model for project management of exploration and production in
the oil and gas industry: The case of a Brazilian company
Jesus Leodaly Salazar-Aramayo
a,⁎
, Roseane Rodrigues-da-Silveira
b,
Mariana Rodrigues-de-Almeida
b, Tereza Neuma de Castro-Dantas
aa
Programa de Pós-Graduação em Ciência e Engenharia do Petróleo, Universidade Federal do Rio Grande do Norte, Av. Salgado Filho, 3000, Natal, RN, Brazil
b
Pós-Graduação em Engenharia de Produção, Universidade Federal do Rio Grande do Norte, Av. Salgado Filho, 3000, Natal, RN, Brazil
Received 12 June 2012; received in revised form 27 August 2012; accepted 25 September 2012
Abstract
The objective of this study was to obtain a better understanding of factors that influence Exploration and Production (E&P) project management success and corporatefinancial performance. The study follows structural equation modeling (SEM) methodology to achieve greater understanding of the intricate network of relationships between variables involved in E&P project management. A comprehensive theoretical framework was needed to formulate the conceptual basis of research. Observation of the real world and practical experiences were also important. To that end, we conducted a case study in a large Brazilian oil company. Field research was essential because of the lack of similar studies in the oil and gas sector. The model developed is a theoretical construct known as a structural and measurement model (set of latent variables, observed variables and hypotheses, depicted in a path diagram). This model contributes significantly to the company because it is a global representation of the main factors for improving E&P project management. However, thefindings should be interpreted with caution because adjustment and validation of the theoretical model were not performed.
© 2012 Elsevier Ltd. APM and IPMA. All rights reserved.
Keywords: Project management success; Project success; Project inter-dependencies; Exploration and production; Oil and gas industry
1. Introduction
Projects are essential to the success of any company, com-bining activities that lead to new products and services, improved procedures, implementation and development of new business. Successful projects increase sales and reduce costs, improve quality, customer satisfaction and the work environment, among other benefits. As a result, a growing number of companies have recently begun to use project management as a key strategy for remaining competitive, increasing the possibility of value creation in their business (Lewis, 2000).
The consensus among several authors (Dinsmore and
Cabanis-Brewin, 2006; Kerzner, 2010) is that the current scenario
favors the application of project management as a formal methodology (fierce competitiveness, more demanding clients, technological advances, shorter deadlines).
According to the Project Management Institute (PMI, 2008), project management is the application of knowledge, skills, tools and techniques to carry out project activities. The challenge in large companies is to provide guidelines for managing project activities and a consistent procedural framework, both for individual projects and across projects. This enables leaders from all specialties to work together and communicate with one another.
Examples of complex, high-risk projects are the exploration and production (E&P) of oil and gas, occurring worldwide in diverse geographical and socioeconomic environments. On the ⁎ Corresponding author. Tel.: +55 84 94611836; fax: +55 84 33422401.
E-mail address:salazarjesus@hotmail.com(J.L. Salazar-Aramayo).
www.elsevier.com/locate/ijproman
0263-7863/$36.00 © 2012 Elsevier Ltd. APM and IPMA. All rights reserved.
http://dx.doi.org/10.1016/j.ijproman.2012.09.016
one hand, risk exists due to geological uncertainty regarding reservoir structure, characteristics of the cap rock and the volume of hydrocarbons (Jahn et al., 2008; Motta et al., 2000; Suslick and
Schiozer, 2004; UNEP, 1997; Weijermars, 2009); on the other
hand, there is economic risk as a result of uncertain cash flow (future cost and prices) and the likelihood of finding and pro-ducing in sufficient volume (Motta et al., 2000; Suslick and Schiozer, 2004; Wagner and Armstrong, 2010; Weijermars,
2009). Postali and Picchetti (2006)emphasize the irreversibility
of E&P projects as a critical additional element, that is, future implications of decisions are relevant because of the long life cycle of these projects and the specificity of resources involved. Furthermore, due to its global presence, economic importance and environmental sensitivity, the oil and gas sector is subject to pressure from different stakeholders, increasing its complexity. Thus, it is helpful to outline models that more accurately represent the complex and multidimensional reality of E&P projects in order to facilitate their management. By aligning the factors that influence project success, we found a gap in studies regarding the interaction between these factors and their respective impact on performance in the E&P sector. The objective of the present study is to obtain a better understanding of factors that influence management success and corporate financial performance of E&P projects. For that purpose, we conducted a case study in a Brazilian oil company, describing critical variables in order to measure project management success and corporate financial performance. Formulation of the conceptual model applies structural equation modeling (SEM) to achieve greater under-standing of the intricate network of relationships between variables involved in E&P project management.
2. Literature review
2.1. The importance of project management and project governance to achieve project success
A project is a complex effort involving interconnected acti-vities, with the purpose of achieving an objective, and a temporary, non-repetitive process (Dinsmore and Cabanis-Brewin, 2006;
Khatib, 2003; Lewis, 2000; Nicholas, 2004; PMI, 2008).
Managing a project implies planning and monitoring its execution, enabling objectives to be achieved. Project management no longer has a specific focus (managing projects), but rather has become an organizational skill that permeates all levels of the company (business process) (Kerzner, 2010; Kerzner and Saladis, 2009;
Lewis, 2000; Nicholas, 2004; PMI, 2008; Westland, 2006). The
need for project management is no longer debated, but rather what form it will take (methods, tools, personnel, among others)
(IPMA, 2006).
A number of authors (Dinsmore and Cabanis-Brewin, 2006;
Kerzner, 2010; Kerzner and Saladis, 2009; Nicholas, 2004) have
suggested analyzing the institutional structure, thereby facilitating project management efforts. This latter issue is related to the concept of“project governance”.Bekker and Steyn (2007, p.5)
define project governance as“a set of management systems, rules, protocols, relationships and structures that provide the framework within which decisions are made for project development and
implementation to achieve the intended business or strategic motivation”. A specific organization would have its own model of “project governance”. A study conducted byBekker and Steyn
(2008)concludes that it is not possible to generalize a project
governance model, since different projects might require different approaches. Yilin et al. (2008) state that project governance works indirectly on project management performance. Further-more, Bekker and Steyn (2008) observe the need for formal project governance to achieve better project performance.
A project is considered successful when it is carried out within the desired deadline, budget and quality level, meeting the ex-pectations of the primary stakeholders. At this point, the work of
Cooke-Davies (2002) is particularly relevant in distinguishing
between “project management success” and “project success”. Specifically, project management success is measured against the widespread and traditional measures of performance (cost, time and quality) and project success is measured against the overall objectives of the project. This implies that project success cannot be measured until after the project is completed. By contrast, project performance can be measured during the life of the project.
TheIPMA (2006, p.40) defines project management success as
“the appreciation of the project management results by the relevant interested parties”. Thus, “project management success” is synonymous with “project management performance”, because the interest is in assessing management performance and not project results.
As shown inFig. 1, project management lies within the internal project environment and is one of the responsibilities of the project manager. Project success depends on perceived values of agents who are in the external environment. In this respect, project governance offers an “atmosphere” within which decisions are made for project development and implementation to achieve the intended business motivation.Munns and Bjeirmi (1996)suggest that the natural tendency of the project management team will be to focus on completing the project within the set criteria of cost, time and quality (project management success), because the emphasis of project management techniques is towards meeting specific, short-term targets. There is less importance placed on satisfying long-term strategic objectives related to project success. As we move from project management success through project success to corporate performance, a new set of processes and practices comes into the picture as being crucial to achieving consistently suc-cessful projects (Cooke-Davies, 2002).
2.2. The E&P sector in the oil and gas industry
The economy, particularly in industrialized countries, depends on oil and natural gas (Postali and Picchetti, 2006; UNEP, 1997;
Weijermars, 2009) and in order to meet this demand, the oil
industry operates at high intensity levels worldwide. The industry consists of two segments: upstream, including exploration and production (E&P), and downstream, which deals with refining and processing crude oil and gas, as well as their distribution and commercialization. The tendency in coming years is towards an increase in the volume of activities to meet growing needs.
Experts (Jahn et al., 2008; Manzano and Monaldi, 2008; Motta et al., 2000; Postali and Picchetti, 2006; Suslick and Schiozer,
2004) characterize the E&P segment using the following dimensions: i) generation of significant revenue; ii) high volumes of investments, often with no return; iii) reserves in institutionally weak countries, with high political risks; iv) significant risk variation during different phases; v) wide demand; and vi) volatile prices.
Within the extensive oil industry chain, E&P projects absorb the largest percentage of invested capital which, in association with the substantial risks, makes the decision process highly complex. An E&P project is the combined effort of multidisciplinary teams; for example, a reservoir engineer may need to run economics for a licensing round, but is waiting for the drilling engineer to provide a cost estimate. In turn, drilling engineers cannot prepare cost estimates until they receive the expected bottom hole location from the geoscientist.Close (2006)notes three critical factors that cause gaps in E&P projects: i) functional expert/staff members do not understand how their contribution impacts other steps in the larger process; ii) individuals have many tasks to perform on any given day, and it is not always obvious that a particular unfinished task is
delaying the overall process; and iii) there is no automated way to communicate with various team members in order to inform them about the status of the overall process, as well as the impact of their individual tasks.
Project management methods in oil and gas companies have matured in recent decades to sustain both market demand and reserve replacement expectations. However, the new scenario in the 21st century needs more talent to help fill the
energy supply gap. Weijermars (2009) points out that
management skills that are especially important for E&P projects include: i) leading effective change; ii) leadership and human behavioral skills; iii) multicultural team management; iv) managing project risks; and v) knowledge management in learning organizations.
3. Methodological procedures
Two lines of investigation were followed: i) identifying the relevant constructs of E&P project management and their Fig 1. Relationships between project management, project governance, project management success, project success and corporate performance.
measurement components, and ii) identifying the causal relation-ships that determine successful E&P project management and corporative financial performance.
A case study was conducted (from August, 2010 to July, 2011) at Petrobras S.A., the largest Brazilian company in the oil industry and the fifth largest in the world in terms of market value (PFC Energy, 2012). Petrobras S.A. operates in 28 countries, produces 2,538,000 barrels per day, and has reserves of 16 billion barrels (Petrobras, 2012). The company is currently facing significant challenges due to changes in its business environment, such as: i) emergence of new E&P companies; ii) open market for the importation of oil and its derivatives; iii) establishment of partnerships for exploration, production, refinement and distribution; iv) the discovery of large oil reserves; and v) growing pressure from society to protect the environment. These changes demand different project management strategies.
E&P projects at Petrobras S.A. vary in size, type, and location, among other characteristics, representing the most important segment of the industry, as evidenced by Business Plan figures for 2012–2016, which include investments of US$ 141.8 billion for E&P, accounting for 60% of the total (Petrobras, 2012).
This study was conducted in 4 stages: i) initial exploratory research; ii) data collection for construct selection; iii) selection of modeling technique; and iv) development of structural measure-ment models.
3.1. Initial exploratory research
This step includes an ample bibliographic review, which was essential for defining the scope of the study and develop field research. Non-structured interviews were conducted with the managers of the areas involved in E&P projects, who were informed about study objectives, the central objective being E&P project management. At the same time, a documentary analysis was carried out to verify corporative standards in technical re-ports, internal publications as well as information available on the Intranet and Internet.
3.2. Data collection for construct selection
In this stage, a list of the main variables involved in E&P project management at Petrobras S.A. was elaborated. Next, 25 E&P project managers were selected by intentional sampling. These professionals, who are typically responsible for the immediate management of projects, have sufficient knowledge of global management processes. Using the Delphi technique (Rowe et al., 1991), and the list initially elaborated, managers helped select model constructs within the framework of PRODEP methodology, explained further on.
3.3. Selection of modeling technique
The constructs selected are latent variables with multidimen-sional interactions, representing management aspects of a wide range of E&P projects. With respect to evaluating theories and modeling complex systems, the main goal of classic multivariate
statistical techniques is to broaden the researcher's explanatory ability and research project efficiency. The greatest limitation of these techniques is their inability to examine more than one rela-tionship at a time. By contrast, SEM simultaneously assesses relationships of dependence, where the dependent variable in one relationship may be independent in another, allowing a better assessment of the phenomena under investigation.
SEM is widely applied in several fields of knowledge. A number of empirical studies on project management have been published. As part of initial exploratory research,Table 1was prepared to describe relevant SEM research in the area of project management.Table 1is a starting point for applying SEM in E&P project management. Although the E&P industry is in many ways unique, there are lessons to be learned from studying other in-dustries and the characteristics of their high-performance com-panies (Close, 2006).
SEM is defined in terms of constructs and then searches for variables to measure them.Fig. 2summarizes the procedure into seven stages: (1) developing the theoretical model; (2) constructing path diagrams; (3) converting path diagrams into a structural and measurement model; (4) defining the type of data input matrix and estimating the structural model; (5) verifying the structural model; (6) evaluating adjustment criteria for the model; and (7) interpreting and modifying the model.
The model developed is a theoretical construct known as a structural and measurement model (set of latent variables, observed variables and hypotheses, depicted in a path dia-gram). This model does not intend to be an instrument for predicting the success of a project or of its management, since, without its empirical validation, that is, steps 4 to 7 inFig. 2are not part of the study's scope. The aim here is to demonstrate the first stages of SEM and show how a theoretical review and a case study can serve to initiate modeling of an explanatory theory of project management, underscoring that flaws may occur during this construction, which must be adjusted in the validation phase of the model. Consequently, the results of the present study should be considered partial and interpreted with caution.
3.4. Development of measurement components and causal hypotheses
At this stage, methodology proposed byHair et al. (2009)was used to establish measurement components and identify the causal relationships between constructs. A literature review and, mainly, field research, allowed the establishment of causal relationships between the exogenous and endogenous constructs of the model. During the modeling process, the Delphi technique was used with 10 senior engineers, which helped define measurement compo-nents and causal hypotheses.
4. Conceptual model and hypotheses
Model construction must involve a thorough theoretical review based on experience and practice. Field research focused primarily on a detailed study of the E&P project management system.
4.1. Project management within Petrobras S.A.: PRODEP The project development and execution program (PRODEP) aims at achieving excellence in management by means of guide-lines for applying the project management system. As shown in
Fig. 3, PRODEP is a cyclical process linked to the project supply
chain and consists of several stages connected by gates. These seek to clearly establish, organize and sequence the procedures, activi-ties and products to be developed in project planning and imple-mentation. PRODEP's design is based on: i) the system of Table 1
Studies applying SEM in project management.
Year Authors Country Project management topic addressed NC NH SS SEM
software
2004 Dvir, D.; Lechler, T. Germany Impacts of plan changes on project success 6 7 448 LISREL
2005 Gowan Jr., J.A.; Mathieu, R.G. USA The importance of management practices in the performance of information system projects
7 10 449 AMOS
2006 Aronson, Z. H.; Reilly, R. R.; Lynn, G. S.
USA The impact of leader personality on new product development, teamwork and performance
7 5 143 LISREL
2007 Kearns, G. S.; Sabherwal, R. USA Antecedents and consequences of information systems planning integration
8 15 274 EQS
2007 Li, L.; Wei, Y.; Fei, C. China Relationship between project manager leadership and performance 2 2 105 LISREL 2008 Hong, H.-K.; Kim, J.-S.;
Kim, T.; Leem, B.-H.
South Korea The effect of knowledge on project performance 4 5 197 LISREL
2008 Rauniar, R.; Doll, W.; Rawski, G.; Hong, P.
USA The role of senior managers in developing new products 5 6 200 AMOS
2008 Raymond, L.; Bergeron, F. Canada Information systems for project management, their impact on managers and project success
5 8 39 PLS
software 2009 Wong, P.S.P.; Cheung, S.O.;
Fan, K.L.
Hong Kong Analyzing the relationship between organizational learning styles and project performance
5 6 83 AMOS
2009 Zhu, Y.; Su, H.; Pan, Q., Guo, P.; Yu, M. China Attributing weights for indexes of evaluation for projects in areas of reuse
6 6 359 AMOS
2010 Isik, Z.; Arditi, D.; Dilmen, I.; Birgonul, M.T.
Turkey The role of exogenous factors in the strategic performance of construction companies
4 3 73 EQS
2011 Doloi, H.; Iyer, K.C.; Sawhney, A.
Australia The impact of contractor performance on project success 4 8 97 AMOS
2012 Li, H.; Arditi, D.; Wang, Z. China Transaction costs and project performance 4 7 198 AMOS
NC: number of constructs; NH: number of hypotheses; SS: sample size.
COMPLETE AND VALIDATED MODEL THEORY 1 2 3 4 5 6 7 Developing the theoretical model Constructing path diagrams
Defining the type of data input matrix and estimating the structural model
Evaluating adjustment
criteria for the model Interpreting and
modifying the model
Verifying the structural model
SCOPE OF THIS STUDY
Observation, interviews and documentary analysis
to adapt the theory to the phenomena studied
CASE STUDY
Converting path diagrams into a structural and measurement model
Fig 2. The seven steps for SEM, from“black hole” of theory to a representative model of reality. The case study should improve the quality of the model (the dotted line marks the scope of the present study).
approval, monitoring and reassessment of investment projects within Petrobras; ii) the project management model from the project management body of knowledge (PMBOK®); iii) the organization and attributions of Petrobras; and iv) corporate guidelines for environmental, health and safety (EHS) for E&P projects.
Large-scale projects such as E&P endeavors are noted for the high probability of financial loss during their execution. Thus, one of the primary challenges for PRODEP is to reduce the likelihood of losses and successfully complete the project. In other words, concluding it within budget, in the appropriate time period and achieving pre-established performance parameters. PRODEP is a wide-ranging institutional program in which E&P projects are conducted in accordance with project governance at Petrobras S.A. Therefore, the model used was developed within the framework of the PRODEP system.
4.2. Developing the theoretical model 4.2.1. The basis of the model
A number of factors can cause difficulties for Petrobras S.A. E&P projects during their life cycle, such as incomplete seismic and geological information; lack of synchronization between engineering and supply chronograms; inconsistencies, inaccurate data and constant changes; delays in outsourced services; lack of specific procedures; flaws in quality verification; shortage of skilled teams; lack of communication between project teams, among others. The project manager seeks to deliver a project within time, budget and quality parameters, but this is only part of the “overall good picture”. As defined byIPMA (2006), project success must be assessed from the viewpoint of project stakeholders, implying a more challenging definition. The constructs included in our model attempt to capture the dimensions that determine project management success (Table 2).
4.2.2. Defining the constructs and measurement components Our model resulted in five constructs: i) Project Team; ii) Planning and Control; iii) Quality and Scope; iv) Project
Management Success; and v) Corporate Financial Performance. The first three constructs represent the characteristics of E&P project management, the fourth is the endogenous variable, which measures project management performance, and the last represents the financial dimension of corporate performance. The option of considering only financial performance is justified by the company's priority, a typical characteristic of private entities. Specific sets of indicators were proposed to measure these constructs, applied to projects in several earlier studies and specifically by Petrobras.
4.2.2.1. Project Team measurement component. A number of investigations (Chan et al., 2004; Cooper et al., 2004; Ernst, 2002; Griffin, 1997; Li et al., 2007; Rauniar et al., 2008; Souder et al., 1997; Thamhain, 2004; Wi and Jung, 2010; Wong et al., 2009) have indicated that effective functional integration and information exchanges between members improve team perfor-mance. With respect to team composition, several studies (Chan et al., 2004; Cooper et al., 2004; Ernst, 2002; Griffin, 1997; Meixell and Rodriguez, 2009; Thamhain, 2004; Weijermars,
2009; Wong et al., 2009) offer strong evidence that
interdisci-plinarity among members, training and experience positively affect team performance. In addition, effective communication is vital in project environments to avoid duplicating information and ensure those involved receive the necessary information in a timely manner (Chan et al., 2004; Close, 2006; Cooper et al., 2004; Ernst, 2002; Raymond and Bergeron, 2008; Souder et al., 1997; Thamhain, 2004; Weijermars, 2009; Wi and Jung, 2010;
Wong et al., 2009). Thus, to measure the Project Team construct,
we established the technical experience of the team, project coordination, as well as training and communication among team members.
4.2.2.2. Planning and Control measurement component. Given their high technical specialty and wide range of procedures, a key element of E&P projects is compliance with norms and standards
(Chan et al., 2004; Close, 2006; Dvir and Lechler, 2004; Ernst,
2002; Thamhain, 2004; Weijermars, 2009). Field research
Project initiation
Project
sanctioned End of Scope
RGs RGs RGs RGs DSG-2A DSG-1 DSG-2 DSG-3 DSB-1 DSB-2A DSB-2 DSB-3 VCB-4A VCB-4B VCB-4C VCB-4 VCB-5 Gate 1 Gate 2A Gate2 Gate 3 Gate 4A Gate 4B Gate 4C Gate4 Gate 5 Identifying and/or Evaluating the opportunity Selection Stage (Conceptual Project)
Definition Stage (Basic
Project) Execution/Implantation Stage Closing
1 3 4 5
PLANNING CONTROL
2
RG: review group; DSG: decision support group; DSB: decision support bundle; VCB: verification and control bundle Fig. 3. PRODEP system as an expression of project governance within the ambit of the E&P projects in Petrobras S.A.
identified the recording of lessons learned as a differential element of project management. The quality of estimates regarding necessary resources and deadlines is also important (Alarcon and Mourgues, 2002; Chan et al., 2004; Close, 2006; Dvir and Lechler, 2004; Hatush and Skitmore, 1997; Kearns and Sabherwal, 2007;
Meixell and Rodriguez, 2009; Weijermars, 2009). The PRODEP
system critically analyzes each project in Review Groups (RG), by means of Verification and Control Bundels (VCB). In order to measure the Planning and Control construct, five variables were defined: norms and standards of work, recording lessons learned, flexibility in critical pathways, failure to conclude within the deadline, and resource planning flaws.
4.2.2.3. Quality and Scope measurement component. Within the project governance model of Petrobras S.A., Review Groups (RG), Decision Support Groups (DSG), Decision Support Bundels (DSB) and Verification and Control Bundels (VCB) avoid changes in project scope, a negative element in management performance
(Dvir and Lechler, 2004; Ernst, 2002; Griffin, 1997; Rauniar et al.,
2008; Souder et al., 1997; Thamhain, 2004; Weijermars, 2009).
Finally, although there is little evidence in the literature, non-compliance with environmental legislation is deemed a loss of project quality (Magrini and Lins, 2007; UNEP, 1997; Zhu et al., 2009). The following variables measure Quality and Scope construct: quality control programs, recording safety practices,
Table 2
Theoretical and empirical references to identify the main variables of project management within Petrobras S.A.
References Areas of study
1. Project team 2. Planning and control 3. Quality and scope
1.1 Communication problems 2.1 Communication failure with hired companies 3.1 Accurate definitions of the scope of the project 1.2 Lack of training in the project
management team
2.2 Not adhering to norms and standards 3.2 Errors in the results of exploratory evaluation 1.3 Failures in project coordination 2.3 Lack of standardization in monitoring 3.3 Constant changes in
requirements (short-term response) 1.4 Lack of experience in similar
projects
2.4 Failure to record lessons learned 3.4 Inadequate risk analysis 1.5 Overburdened designers 2.5 Errors in resources estimates 3.5 Misinterpretation of
environmental laws 2.6 Inaccurate cost and budget estimates
2.7 Inadequate planning of critical resources 2.8 Inaccurate time and deadline estimates
1.1 1.2 1.3 1.4 1.5 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 3.3 3.4 3.5
Griffin (1997) ● ● ● ●
Hatush and Skitmore (1997) ● ● ● ●
Souder et al. (1997) ● ● ● ● ●
UNEP (1997) ●
Alarcon and Mourgues (2002) ● ● ●
Cooke-Davies (2002) ● ● ●
Ernst (2002) ● ● ● ● ● ● ● ● ● ● ● ● ● ●
Chan et al. (2004) ● ● ● ● ● ● ● ● ● ● Cooper et al. (2004) ● ● ●
Dvir and Lechler (2004) ● ● ● ● ● ●
Thamhain (2004) ● ● ● ● ● ● ●
Aronson et al. (2006) ●
Cheung et al. (2006) ●
Close (2006) ● ● ● ●
Wang and Liu (2006) ●
Kearns and Sabherwal (2007) ● ●
Li et al. (2007) ●
Magrini and Lins (2007) ●
Hong et al. (2008) ●
Rauniar et al. (2008) ● ●
Raymond and Bergeron (2008) ●
Meixell and Rodriguez (2009) ● ● ● ● ●
Weijermars (2009) ● ● ● ● ● ● ● Wong et al. (2009) ● ● ● ● Zhu et al. (2009) ● Isik et al. (2010) ● ● ● Wi and Jung (2010) ● ● Meng (2011) ● ● ● Li et al. (2012) ● ● ● ● Field researcha ● ● ● ● ● ● a
short-term response ability, accurate definitions of scope and requirements and awareness of environmental legislation. 4.2.2.4. Project Management Success measurement component. Several authors (Dinsmore and Cabanis-Brewin, 2006; Hatush and Skitmore, 1997; IPMA, 2006; Lewis, 2000; PMI, 2008; Westland, 2006) consider completion within the predicted deadline, cost restrictions and adequate performance levels as primary project goals. Baccarini (1999), Lewis (2000), Westland (2006) and
Kerzner (2010)add a fourth dimension regarding the quality of the
project management process. From a broader standpoint, some authors emphasize that project success includes the notion of value for the company and its stakeholders (Bekker and Steyn, 2008; Cooke-Davies, 2002; IPMA, 2006; Kerzner, 2010; Kerzner and Saladis, 2009; Lazlo, 2003; Munns and Bjeirmi, 1996; Yilin et al., 2008). We aim to measure Project Management Success according to the following criteria: project completion within the predicted time period, project completion within the budget forecast, desired quality and cost reduction outcomes.
4.2.2.5. Corporate Financial Performance measurement
component. Private oil and gas companies use financial
indicators to measure performance (Jahn et al., 2008; Kaplan and Norton, 1992; Motta et al., 2000; Russo and Fouts, 1997; Suslick
and Schiozer, 2004; Yang et al., 2011). The main financial
indicators for Petrobras S.A. are: Return on Capital Employed (ROCE), EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), Operating Margin and Net Operating Income. These indicators measure the Corporate Financial Performance construct. Table 3 summarizes the model constructs and their respective measurement variables.
4.3. Defining the hypotheses of the model— constructing path diagrams
The theoretical model is composed of five constructs and their inter-relationships are shown inFig. 4. The central construct is Project Management Success, which acts as a mediator or moderator of the effects of organizational complexity surrounding E&P project management and their impact on corporate financial performance. In order to meet the research objective, seven hypotheses were formulated, representing inter-variable influences. 4.3.1. The relationship between the Project Team and Planning and Control
Planning and Control take place over the project life cycle and consist of baseline and facilitative processes. Prior research
(Close, 2006; Ernst, 2002; Griffin, 1997; Meixell and Rodriguez,
2009; Souder et al., 1997) considered the following as facilitators:
personnel recruitment, communication aspects between team members, training and project manager leadership.
Hypothesis 1 (H1). Well-coordinated project teams, with ex-perience, good training and internal communication positively affect project planning and control.
4.3.2. The relationship between the Project Team and Project Management Success
Project management literature (Dinsmore and
Cabanis-Brewin, 2006; Lewis, 2000; PMI, 2008) gives special emphasis
to managing human resources. Team members are key players in project success. The consensus of a number of studies (Close, 2006; Cooper et al., 2004; Ernst, 2002; Griffin, 1997; Khatib,
Table 3
Constructs and measurement variables for the model.
Constructs Observed variables References
Project Team (ξ1)
x1 Technical experience Griffin (1997),Souder et al. (1997),Ernst (2002),Chan et al. (2004),Cooper et al. (2004),
Thamhain (2004), Close (2006), Li et al. (2007),Rauniar et al. (2008), Raymond and Bergeron (2008),Meixell and Rodriguez (2009),Weijermars, 2009; Wong et al. (2009),Wi and Jung (2010); field research
x2 Project coordination
x3 Training
x4 Team communication
Planning and Control (η1)
y1 Work norms and standards Hatush and Skitmore (1997),Alarcon and Mourgues (2002),Cooke-Davies (2002),Ernst
(2002),Chan et al. (2004),Dvir and Lechler (2004),Thamhain (2004),Close (2006),Kearns and Sabherwal (2007), Meixell and Rodriguez (2009), Weijermars, 2009; Wong et al. (2009),Meng (2011); field research
y2 Recording lessons learned
y3 Flexibility in critical pathways
y4 Failure to complete on time
y5 Resource planning failures
Quality and Scope (η2)
y6 Quality control programs Griffin (1997),Souder et al. (1997),UNEP (1997),Cooke-Davies (2002),Ernst (2002),Dvir
and Lechler (2004),Thamhain (2004),Magrini and Lins (2007), Rauniar et al. (2008),
Weijermars, 2009; Zhu et al. (2009),Isik et al. (2010); field research y7 Recording security practices
y8 Short-term response ability
y9 Accurate definitions of scope and
requirements
y10 Awareness of environmental legislation
Project Management Success (η3)
y11 Project completion within the predicted
time period
Munns and Bjeirmi (1996),Hatush and Skitmore (1997),Baccarini (1999),Lewis (2000),
Cooke-Davies (2002), Khatib (2003), Lazlo (2003), IPMA (2006), Dinsmore and Cabanis-Brewin (2006),Westland, 2006, Bekker and Steyn (2008),PMI (2008),Yilin et al. (2008),Kerzner and Saladis (2009),Kerzner (2010); field research
y12 Project completion within the budget forecast
y13 Desired quality outcomes
y14 Cost reduction
Corporate Financial Performance (η4)
y15 ROCE— Return on Capital Employed Kaplan and Norton (1992),Russo and Fouts (1997),Motta et al. (2000),
Suslick and Schiozer (2004),Jahn et al. (2008),Yang et al. (2011); field research y16 EBITDA — Earnings Before Interest,
Taxes, Depreciation and Amortization y17 Operating Margin
2003; Lazlo, 2003; Meixell and Rodriguez, 2009; Souder et al.,
1997; Westland, 2006) is that effective functional integration,
through communication flow and information exchange between the areas involved, results in improved project management performance.
Hypothesis 2 (H2). Well-coordinated project teams, with ex-perience, good training and internal communication, positively affect project management success.
4.3.3. The relationship between Project Team and Quality and Scope
In order to ensure coherence with the proposed goals, the formation of competent, experienced and trained teams has proved to be a decisive factor in practice (Close, 2006; Dvir and Lechler,
2004; Meixell and Rodriguez, 2009; Souder et al., 1997).
PRODEP excels at clearly defining the scope of E&P projects and as such, in the initial stages of the Stage-Gate® process Review groups (RG) and Verification and Control Bundels (VCB)
H3 H6 H2 H4 H7 Project Team Planning and Control
Quality and Scope
Corporate Financial Performance Project Management Success H1 H5
Fig. 4. The structural model in a path diagram.
λy 16 4 y15 y16 y17 y18 ε15 ε16 ε17 ε18 y3 y1 y2 y4 y5 ε1 ε2 ε3 ε4 1 β31 Project Team ξ1
Planning and Control η1
Quality and Scope η2 Corporate Financial Performance 4 Project Management Success γ11 γ21 y11 y12 y13 y14 ε ε 11 ε12 ε13 ε14 β γ31 β32 x1 x2 x3 x4 δ1 δ3 δ4 y10 y8 y6 y7 y9 10 9 8 7 6 λy11 λy21 λy31 λy41 λy51 λy11 3 λy 12 3 λy 13 3 λy 14 3 λy62 λy 72 λy82 λy 92 λy10 2 λy 15 4 λy 17 4 λy 18 4 ς1 2 ς3 ς4 δ2 ε ε ε ε ε ς η 3 η ε ε ε ε 21
Fig. 5. Structural equation model for E&P project management at Petrobras S.A., including a latent exogenous variable (ξ1) operationalized by 4 independent variables (x1–x4);
four latent endogenous variables (η1,η2,η3andη4) operationalized by 5 dependent variables forη1(y1–y5), 5 forη2(y6–y10), 4 forη3(y11–y14) and 4 forη4(y15–y18),
respectively. Independent variable errors are represented byδ, the error associated to each dependent variable is represented by ε, and the error of each latent endogenous variable is shown asς. Factorial weights (λ) and structural coefficients (γ) are represented by cause and effect order. For example, the factorial weight of factor ξ1in x2isλx21. Similarly,
avoid changes in this scope; this aspect is particularly critical in E&P projects, given the significant financial losses involved in delays and rework.
Hypothesis 3 (H3). Well-coordinated project teams, with ex-perience, good training and internal communication, positively influence the quality and scope of E&P projects.
4.3.4. The relationship between Quality and Scope and Project Management Success
The most common definition of project management success is related to complying with the triple constraint: deadline, cost
and performance. It can therefore be inferred that project success depends on defining and managing its scope. However, delivering project success is necessarily more difficult than delivering project management success. Munns and Bjeirmi
(1996),Lewis (2000),Cooke-Davies (2002),IPMA (2006)and
Kerzner (2010) report that adhering to the scope does not
guarantee project success since project management success involves first-order control of the achievement of pre-determined goals.
Hypothesis 4 (H4). Quality and scope of E&P projects posi-tively contribute to their management success.
y8 = λy82 η2 + ε8
Measurement Model of “Overall Performance of the Project” construct y13 = λy133η3 + ε13 y18 = λy184η4 + ε18 y12 = λy123 η3 + ε12 y16 = λy164η4 + ε16 y15 = λy154 η4 + ε15 y17 = λy174η4 + ε17 y14 = λy143 η3 + ε14
Measurement Model of “Overall Performance of the Project” construct y9 = λy92 η2 + ε9 y6 = λy62 η2 + ε6 y4 = λy41 η1 + ε4 y2 = λy21 η1 + ε2 y5 = λy51 η1 + ε5 y1 = λy11 η1 + ε1 y3 = λy31 η1 + ε3
Measurement Model of “Quality and Scope” construct
y7 = λy72 η2 + ε7
y10 = λy10 2 η2 + ε10
y11 = λy113η3 + ε11
η3 = β31η1 + β32 η2 + γ31ξ1 + ς3
Measurement Model of “Planning and Control” construct Measurement Model of “Project Team” construct
x3 = λx31ξ1 + δ3
x1 = λx11 ξ1 + δ1
x2 = λx21ξ1 + δ2
x4 = λx41 ξ1 + δ4
Measurement Model Structural Model
η1 = γ11 ξ1 + β12η2 + ς1
η2 = γ21ξ1 + ς2
η4 = β43 η3 + ς4
4.3.5. The relationship between Planning and Control and Project Management Success
All projects need plans and controls, without which they would be difficult to execute and assess. Project management theory suggests that reliable planning and efficient control are decisive factors in project management success (Cooke-Davies, 2002; Dinsmore and Cabanis-Brewin, 2006; Kerzner, 2010;
Munns and Bjeirmi, 1996; Westland, 2006).
Hypothesis 5 (H5). Adequate planning and control of E&P projects positively affect management success.
4.3.6. The relationship between Quality and Scope and Planning and Control
Scope management is the foundation of construction project management processes. In accordance with several investigations
(Dvir and Lechler, 2004; Ernst, 2002; Hatush and Skitmore,
1997), without this conceptual base it becomes impossible to adequately control costs, deadlines and changes in scope. Once the scope is defined, the project enters a phase of detailed planning. Scope management enables the creation of a baseline, without which errors occur when determining how to proceed, causing an undesired increase in scope (scope creep), chronogram delays, higher costs than those forecast, personnel shortages, changes in requirements and specifications, below-expected quality, products that do not satisfy clients, and even project cancelation (Cooke-Davies, 2002; Dinsmore and Cabanis-Brewin, 2006; IPMA, 2006; Kerzner, 2010; Kerzner and Saladis,
2009; Munns and Bjeirmi, 1996; PMI, 2008).
Hypothesis 6 (H6). Well-defined quality and scope positively affect E&P project planning and control.
4.3.7. The relationship between Project Management Success and Corporate Financial Performance
Projects are essential elements of company success and powerful weapons in creating economic value and competitive advantages. The strategic importance of project management in the corporate world has grown and, according toKerzner and Saladis
(2009), project management has evolved into a business process.
Indeed, direct and indirect links exist between project success and corporate success; for example, successful development projects improve time to market, and can increase competitive position, product sales or product margins (Cooke-Davies, 2002; Munns
and Bjeirmi, 1996). Typically, project management success will
translate into good corporate financial performance.
Hypothesis 7 (H7). The management success of E&P projects positively influences corporate financial performance.
4.4. Converting path diagrams into a structural and measure-ment model
As shown inTable 3, Petrobras. S.A. uses specific indicators to measure corporate financial performance, which are the result of the combined influences of the following constructs: Project Team, Planning and Control, Quality and Scope and Project Management Success.
After identifying exogenous and endogenous variables and measurement components, and formulating the hypotheses of influences between the constructs, we proposed the model shown
in Fig. 5. This framework represents the multidimensional
interactions of variables that affect E&P project management success at Petrobras S.A. and its corporate financial performance. The model in Fig. 5 depicts E&P project management at Petrobras S.A., which is integrated into PRODEP methodology, characterizing its project governance framework. After the opportunity for closure is identified, projects are developed and executed by specific teams following a rigorous Stage-Gate® process consisting of planning and control. Throughout their life cycle, E&P projects are evaluated to determine their continuation, adaptation or abandonment. This methodology ensures the quality and scope of these projects. As a result of the interaction between these factors, project management achieves a specific degree of success and will contribute either positively or negatively to corporate financial performance.
The constructs represent latent variables and, as such, must be measured indirectly through particular observations, forming the measurement components for each construct. Some model variables correspond to criteria already employed by the company in project management, while others were proposed based on the literature and previous empirical research. The constructs and their interactions define the financial behavior of the organization.
Fig. 6 depicts the set of linear equations representative of the
model, which must be resolved by employing SEM software in the verification and adjustment stages, using a representative sample of the empirical data obtained from the variables observed. 5. Discussion and conclusions
The objective of this study was to obtain a better understanding of factors that influence the E&P project management success and corporate financial performance within Petrobras S.A. Results are discussed on two levels: i) theoretical implications and ii) practical consequences.
From a theoretical standpoint, the model developed follows SEM methodology. The SEM technique was used to better achieve research objectives. The modeling process with SEM requires a theoretical foundation of the phenomenon under study. To meet this requirement, an ample review of the literature allowed us to formulate the conceptual research bases (Fig. 1). Moreover, observing the real world, experiences and concrete practices is also essential in modeling (Hair et al., 2009; Kline,
2011; Morôco, 2010). To meet this condition, a case study of the
largest Brazilian oil and gas company was conducted (Petrobras S.A.). Field research was essential because of the lack of similar studies in the oil and gas sector, which is characterized by technological innovation, constant changes in the global eco-nomic and geopolitical scenario, and the turbulent environment in which oil companies operate.
With respect to practical consequences, field research identi-fied PRODEP as the global framework in which E&P projects are developed, and an integral part of the Project Governance model of Petrobras S.A. We found that all processes defined by PRODEP for the management of E&P projects are supported by
robust methodologies, well-suited to the complex nature of such projects. In this respect, the first three methodological steps of SEM were carried out (Fig. 2): (1) developing the theoretical model; (2) constructing path diagrams; and (3) converting path diagrams into a structural and measurement model.
As a result of the literature review and field research, we developed a theoretical model composed of five constructs: Project Team, Planning and Control, Quality and Scope, Project Management Success, and Corporate Financial Performance. The Project Management Success construct mediates the effects of several factors on corporate financial performance. Thus, the model shown inFig. 5depicts the network of relationships and influences between latent variables representing E&P project management at Petrobras S.A. In order to measure each latent variable, variables were identified, initially associated with dis-ruptions or failure in the project management process. In other words, the identification of factors that would negatively affect the management performance of E&P projects is prioritized in order to eliminate or mitigate them during the project life cycle using the PRODEP system. The choice of model constructs is based on the specific characteristics of Petrobras S.A., in ac-cordance with the scope of the present study. The constructs, indicators and hypotheses were validated by project managers and senior engineers.
The model developed is a theoretical construct known as a measurement and structural model (set of latent variables, ob-served variables and hypotheses, depicted in a path diagram). In order to determine whether the model created adequately rep-resents the reality under investigation, four final steps are nec-essary in SEM modeling and are suggested for future studies. 5.1. Limitations and suggestions for future research
The main limitation of this study was the lack of reference SEM studies applied to E&P project management. As a result, studies conducted in other sectors were used (Table 1), mainly, in the construct identification phase.
Since the model only considers the financial aspects of corporative performance, it is suggested that future investigations assess dimensions such as market, social, and environmental performance, among others.
The model constructs developed are considered, a priori, representative of the phenomenon under study. However, other constructs could be relevant in alternative models, such as the project manager's competence, involvement of top level manage-ment, project size, project complexity, risk allocation, stakeholder influence, legislation, market conditions, strategic alliances, among others. Other models can certainly be formulated as alternative theories to explain the determining factors of successful E&P project management and corporative financial performance. However, a comparative assessment between our model and alternative models can only be conducted using empirical data and may be the object of future research.
Finally, for Petrobras S.A., the model developed represents a contribution to reaching a better understanding of factors that determine the success of E&P project management and corpora-tive financial performance. However, definicorpora-tive conclusions
regarding the validity of our model as suitable representation of the phenomenon studied cannot be confirmed here, given that not all the methodological steps of SEM were performed. Thus, con-clusions must be considered partial and interpreted with caution. References
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