Improved execution of oil & gas upstream projects is now being achieved thanks to greater corporate discipline, more pre-FID planning and reduced project scope. This allows project delivery to finally hit the mark after a period of dismal performance on project returns, a new Wood Mackenzie report shows.
The oil & gas industry used to have a reputation for always delivering upstream projects behind schedule and over budget. But the latest trend to execute ‘capital projects’ has helped the industry adapt to lower prices.
Six key factors, in most recent cases surveyed by Wood Mackenzie, help enhance project execution: Spare capacity through the supply chain, leading to better performance and lower costs. Service sector collaboration and alignment on contracts, as well as improved project management. Tougher screening, more stringent hurdle rate and better pre-sanctioning of projects before taking a Financial Investment Decision (FID); and finally, reduced scope, meaning more tie-backs and brownfield projects that use existing infrastructure, less greenfield.
Staggering scale of underperformance
The global economic downturn had forced companies to critically evaluate and improve how they manage their major capital investments. According to Wood Mackenzie figures, the top 15 project blowouts of the last decade were a cumulative US$80 billion over budget.
"The scale of underperformance was staggering," said Angus Rodger, research director, Wood Mackenzie. "Surveying the last decade of project delivery, the average development started-up six months later than planned and US$700 million over budget. That is a huge amount of value destruction."
Cost overruns mostly in Arctic and Caspian region
Still, there is a growing list of mid- to large projects that have been delivered on target over the past 12 months. This includes areas previously “notorious for cost blowouts,” as Rodger put it, such as the Arctic and Caspian.
Examples of improved execution include deepwater (BP's West Nile Delta and Atoll, Eni's Zohr and Cape Three Points), LNG (Novatek's Yamal), shallow-water gas (BP's Shah Deniz Phase 2) and subsea tie-backs such as Woodside's Persephone and Wintershall's Maria.
Most recently, Shell brought onstream its deepwater Gulf of Mexico Kaikias field nearly one year ahead of schedule. “Not only a quick turnaround,” he commented, “it epitomises how the deepwater sector has – for now – transitioned to a simpler, lower-cost business model.”