New research by EY highlights the scale of the challenge that the oil and gas industry faces in managing large-scale capital projects.
The International Energy Agency (IEA) forecasts that the industry will need to spend around $20trillion between now and 2035 if it is to continue to keep pace with the growing global demand for oil and gas.
This means that the high levels of capital expenditure currently being seen in the industry are likely to be maintained or even increased for the next 20 years.
As resources are being discovered in new geographies, often remote from the markets that they will serve, there will be a continuing need for large-scale supporting infrastructure to develop these resources.
The “mega-project” has become an increasingly common feature of the industry in recent years as the industry has moved to new frontiers and taken advantage of technological advancements to commercialise new hydrocarbon resources.
However, the industry has a mixed record in bringing these projects in on time and on budget.
The complexity and range of factors influencing the final outcome make such projects extremely challenging.
In a recent EY survey of over 100 industry executives, “Business Pulse exploring dual perspectives on the top 10 risks and opportunities and beyond”, increasing project scale and complexity made it into the top ten industry risks for the first time.
Recently completed EY research looking at this issue identified over 350 oil and gas capital projects (pre- and post-final investment decision – FID) with a capital spend in excess of $1billion.
The results highlighted the scale of the issue:
- 63% of post FID projects had reported cost overruns
- 70% of post FID projects had reported time overruns
There were variations across geographies (Africa, Asia Pacific, Europe, Middle East, Latin America, North America) and across project types (LNG, pipeline, refining and upstream).
Perhaps not surprisingly, developed markets performed slightly better than emerging markets and well-established technologies such as pipeline and refining projects performed slightly better than LNG and upstream projects.
However, the differences were relatively minor, indicating this is an industry wide problem as opposed to one that is limited to geography or a part of the value chain.
These projects face a range of unpredictable variables including commodity prices, labour markets, local content, fiscal policy and, of course, geology and climate.
Such factors can often conspire to make the most carefully constructed cost projections look extremely optimistic.
Getting to grips with this challenge and improving performance in predicting and managing mega-project costs will be critical to the industry going forward. Capital providers and shareholders will demand it.
Rising oil prices over the past decade have in many cases masked significant cost overruns but this is a trend that cannot continue forever. A period of falling or stable oil prices will only magnify the importance of this issue.
Andrew Deane is a director – advisory services with the EY Aberdeen oil & gas team