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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.

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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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Comments

Been there, suffered the consequences.

Every capital-intensive industry cries out for expertise in Project Management. Oddly, despite all the tools we have today to access and understand project spend and earned value, the magnitude and impact of project overruns is about as bad as its ever been.

For those of you early in your careers (or who have bright, ambitious offspring with a head for budget, schedule, and people), your income potential is definitely looking up. When I left the industry (downstream side in the Houston area), a solid PM operating in the $50-100M project range could demand upwards of $175k/ann. Project Management Directors, running a section of 4-6 PMs were going for about $50k north of that.

On another topic: I would be interested in hearing perspectives of readers about the cause of endemic overruns.

Could be group think blinded by beliefs. If the guys at the top think it is no problem, then it is NO problem. This has been seen at NASA and in corporations for many decades.

Herman

As a long time PM in Canadian downstream (mainly) and upstream projects, suffering the blame for missed budgets and schedules, I would list the following
a). Owner pressure to get price and ROI into line to meet hurdle rates for investment in a particular project (as opposed to all the other opportunities being evaluated for limited CAPEX)
b). Perennial shortages of engineering, project management and craft labour (particularly in Western Canada).
c). Rush to get to market when oil prices signal “go”. All the projects attempt to go at once, leading to (b) above.
d). Mismanagement of contractors (as identified by EY in the article). Too many owners try to act as managing contractor, micromanaging the EPC firms they hire.

CJY

Does the increasingly difficulty of finding new oil and gas reserves has anything to do with this?

Why not funnel these funds into renewable energy (RE) instead, while the lack of new investment in new oil and gas drilling will raise the prices of oil and gas, and will allow increase in profits, while the investments in RE will be safe because RE will never run out!

These people provide management and consulting services and apparently see much room for improvement in the operationally demanding areas of the oil & gas industry.
I wish them and the oil industry well.

But the increasingly difficulty of finding new oil and gas is probably one of the more predictable conditions that must be dealt with.

Just like farming, the oil business is full of risks and cruel twists of fate.

But it is the investor’s money that they use, not mine. That's why I wish them well.

Why not stop funneling MY tax dollars down rat holes like EVs.

Let the entrepreneurs spend their OWN money as they see fit?

Since HEVs and EVs first entered the U.S. market in 1999; they have saved about 35 million barrels of oil - in total - a 15 year rat hole. That 35M bbls is only a 4 day supply of light duty vehicle fuel and likewise less than 4 days of imported oil.

The oil industry has allowed us to significantly reduce oil imports - arguably more important than most any other accomplishment including unilateral Co2 reduction.

The shift from coal fired power plants and the reduction in GH gasses in the US is largely due to the decades long struggle, mostly by small independent oil drillers and frackers, to tap into tight oil and gas.

Carbon-dioxide emissions in the United States have dropped to their lowest level in 20 years.

The oil industry has allowed us to significantly reduce oil imports - arguably more important than most any other accomplishment including unilateral Co2 reduction.

That's why I wish them well.

Roger,

You are on to something there, under estimating the difficulty of the task goes beyond optimism. The "can do' attitude becomes more difficult than the first estimates.

Thanks, CJY, for the valuable insights from somebody in the game. Hope all is going well for you.

SJC, as a guy who also got batted around off and on during consultancies associated with the Boeing 7E7/787, I find your overall perception to be right on. Leadership hubris catalyzed by acquiescence and groupthink is among the most toxic formulas in business.

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