Global upstream project delivery is finally hitting the mark
Has the oil and gas industry finally turned around its reputation for always delivering upstream projects behind schedule and overbudget? Emerging signs of improved execution suggest companies are getting it right after a period of dismal performance on project returns, according to a new Wood Mackenzie report.
The successful execution of capital projects has become of crucial importance to an upstream industry adapting to lower prices. The downturn forced companies to critically evaluate and improve how they manage their major capital investments, and it is clear why. 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."
In comparison, 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, 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, it epitomises how the deepwater sector has - for now - transitioned to a simpler, lower-cost business model.
Delivering fields on time and on budget has long been an evergreen issue in the oil and gas industry. Wood Mackenzie has identified six key factors, that in most recent cases, combined to create better project execution:
1. Spare capacity through the supply chain. This leads to better performance and lower costs. For example, in some basins – Gulf of Mexico, pre-salt Brazil – drilling efficiency has improved dramatically.
2. Service sector collaboration and alignment on contracts, albeit mostly in northern Europe.
3. Improved project management. Companies have more people looking at fewer things, while under-utilised service companies can offer their 'A-team' for each major contract.
4. Greater corporate discipline. Tougher pre-FID screening and more stringent hurdle rates have increased attention on execution and cost control.
5. More pre-FID planning. More contracts are 'signed and sealed' pre-sanction, often with preferred partners versus putting everything out to bid.
6. Reduced scope. More tie-backs and brownfield projects that use existing infrastructure, less greenfield.
Improved project delivery in recent years has in part been supported by Big Oil's de-emphasis of mega-projects in the current environment. But this is not sustainable longer-term in an industry underpinned by large, cash-generative assets.
While there have been a few large-scale oil developments sanctioned in recent years, it is not many by industry standards. It is in the LNG space where there are clear signs companies are re-engaging with giant, capital-intensive projects. This includes new developments in Canada, Mozambique, Qatar, Papua New Guinea, Russia and Australia.
"There is a looming wave of big pre-FID LNG developments building on the horizon, all aiming for sanction between 2018 and 2020. After a fallow period in new LNG project sanctions, and megaprojects in general, the next 18 months will likely see a step change. This will be the real test of whether the industry has addressed the issue of poor delivery," Mr Rodger said.