CA for extractive industries ... energy industries

Dear Colleagues

The application of value analysis using the Community Analytics (CA) framework to the extractive industries and energy industries changes the performance profile of these industries and the entities in these industries.

The accounting that is used to compute "profit" in the typical extractive industry has costs to gain access to the resources, and costs to take the resources out of the ground, costs to process the resources and cost to transport and distribute to the consuming public. The revenues are what the consuming public pays to have the resources in a consumable form. Profit is revenue minus cost.

But there are two costs that are missing. One is that the raw resource itself is consumed in this process. For the community where the resource is extracted, initially the resource is there, and then later it is not. This is a value reduction ... very significant ... and totally excluded from the profit calculation. Imagine what it would cost for an oil company to replace all the natural petroleum that that has extracted over the last 100 years with a synthetic equivalent!

A second issue is that there are costs associated with the customer using the product. When oil is burned there are the products of combustion that must go somewhere ... and usually they are simply vented into the atmosphere. Very little cost for doing this to the consumer ... and nothing passed back to the oil company ... but there is damage to the community and to society. A little bit of pollution over a very long time and by billions of people soon adds up ... but the way we do profit accounting allows this large number to be ignored.

The value proposition for the extractive industries and the energy sector is very different when value change is included rather than simply going with the simple money accounting profit metrics. The CA methodology puts in place ways to quantify these value ... and with quantification of the value change that is impacting society, the decision making about the extractive industries and the energy sector may be substantially changed.

If we change the way the game is scored ... we change the way the game is played.

Peter Burgess