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EY: oil & gas megaproject overruns to cost industry more than $500B
15 August 2014
A new report by EY finds that 64% of multibillion-dollar, technically and operationally demanding oil & gas megaprojects continue to exceed budgets, with 73% missing project schedule deadlines. On average, current project estimated completion costs were 59% above the initial estimate. In absolute terms, the cumulative cost of the projects reviewed for the report has increased to $1.7T from an original estimate of $1.2T, representing an incremental increase of $500B.
|Proportions of projects facing cost overruns, delays and budget overruns. Source: EY Megaprojects oil and gas report. Click to enlarge.|
The report—“Spotlight on megaprojects”—is based on the review of 365 projects with a proposed investment of above US$1 billion in the upstream, LNG, pipelines and refining segments of the oil and gas industry. Included are projects that have been proposed but have yet to reach the final investment decision (FID) and those that have passed the FID and are in the construction phase but still have yet to begin operations. Of the total number of megaprojects (365), updated cost data and time data was available for 199 and 243 projects, respectively.
While the report looks at current industry performance, longer-term industry outlooks suggest that project delivery success is actually decreasing, especially in certain segments of the industry, such as deepwater, where complexity and risk are considerably higher. Poor execution can potentially result in the project being economically uncompetitive and negatively impacting an organization's overall financial results.
Companies can no longer rely on oil and gas price increases which in the past have masked many of the consequences of megaproject overruns. Unconventional discoveries have already had an impact on the economic viability of many megaprojects and securing capital is only going to become more difficult unless companies are able to consistently deliver on deadline and within budget.—Axel Preiss, EY’s Global Oil & Gas Advisory Leader
Geographically, the proportion of projects facing cost overruns is highest in the Middle East (89%), followed by Asia-Pacific (68%), Africa (67%), North America (58%), Latin America (57%) and Europe (53%).
These figures tie in with the proportion of projects reporting schedule delays with the Middle East being the highest (87%) followed by Africa (82%), Asia-Pacific (80%), Europe (74%), Latin America (71%) and North America (55%).
The research shows that in the post-Final Investment Decision (FID) stage, 65% of the projects analyzed were facing cost overruns, with an average escalation of 23% from the approved FID budget. The reasons for this are varied and may be impacted by the geographic location of the project.
There are several internal and external factors that influence the success of a megaproject. Internal factors include inadequate planning; access to funding; poor procurement of contractors and contractor management; aggressive estimates; optimism bias and changing risk appetite. External factors such as regulatory issues and geopolitical challenges can also hamper performance. In addition, given the scale of the investment, the impact of exchange rate fluctuations and commodity constraints can be severe and lead to megaprojects being delayed or even cancelled.
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