The Theoretical Foundation of Strategic Procurement: Mitigating Cost Overruns and Delays in Petroleum Exploration and Production Projects

Abstract

Petroleum exploration and production (E&P) projects are high-stakes megaprojects that are notoriously susceptible to cost overruns and delays. This paper posits that a fundamental shift from a traditional, transactional procurement model to a strategic approach can serve as a powerful mechanism for mitigating these systemic issues. The study develops a conceptual framework by synthesising four key theoretical perspectives. Transaction Cost Economics (TCE) explains how strategic procurement's structured processes reduce the administrative and operational costs associated with complex transactions. Agency Theory addresses the principal-agent problem, demonstrating that robust Supplier Relationship Management (SRM) can align interests and mitigate opportunistic behaviour, a primary driver of project failure. The Resource-Based View (RBV) re-frames procurement as a source of sustainable competitive advantage by developing inimitable capabilities, such as advanced IT systems and strong supplier relationships, that are difficult for competitors to replicate. Finally, Behavioural Economics provides a crucial psychological lens, showing how data-driven procurement practices can counteract cognitive biases like the planning fallacy and optimism bias that lead to initial underestimations and flawed project budgets. By integrating these theoretical arguments, this paper provides a robust foundation for understanding how strategic procurement can be a proactive tool for enhancing project performance and ensuring financial and operational resilience in the volatile E&P sector.