Industry getting on top of costs and delivery, report finds

There are signs that the days of upstream projects being behind schedule and over budget are past, according to a new report by Wood Mackenzie.

Offshore staff

LONDON – There are signs that the days of upstream projects being behind schedule and over budget are past, according to a new report by Wood Mackenzie.

Successful execution of capital projects has become critical for an upstream industry seeking to adapt to lower prices.

During the downturn companies were forced to evaluate and devise improvements to their major capital investments - the top 15 project ‘blowouts’ of the last decade were collectively $80 billion over budget, the report claims.

“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 $700 million over budget.”

Over the past 12 months, however, a growing list of mid- to large-size projects have started up on target, even in traditionally cost-intensive regions such as the Arctic and Caspian.

Examples cited of improved execution include deepwater (BP’sWest Nile Delta and Atoll, Eni’s Zohr and Cape Three Points offshore Egypt and Ghana); shallow-water gas (BP’s Shah Deniz Phase 2 in the Caspian); and subsea tiebacks such as Woodside’s Persephone (western Australia) and Wintershall’s Maria (Norwegian Sea).

Most recently, Shell brought onstream the deepwater Gulf of MexicoKaikias field almost a year ahead of schedule. Aside from the quick turnaround, this was a good example of how the deepwater sector has transitioned to a simpler, lower-cost business model, the report suggested.

Wood Mackenzie identified six main factors that have assisted some of the recent projects:

1.) Spare capacity through the supply chain. This results in improved performance and lower costs. In some basins such as the Gulf of Mexico and presalt Brazil, drilling efficiency has risen substantially.

2.) Service sector collaboration and alignment on contracts, mainly in northern Europe.

3.) Improved project management. Companies have assigned fewer people to take care of fewer tasks, while at the same time under-employed service companies can offer their ‘A-teams’ for each major contract.

4.) Greater corporate discipline. Stricter pre-final investment decision (FID) screening and more stringent hurdle rates have pushed the focus increasingly onto execution and cost control.

5.) More pre-FID planning. Contracts are being ‘signed and sealed’ pre-sanction, often with preferred partners as opposed to the old method of putting everything out to bid.

6.) Reduced scope. More tiebacks and brownfield projects using existing infrastructure, fewer greenfield developments.

There has also been less focus on mega-projects, but this will likely not continue for long in an industry underpinned by large, cash-generative assets.

However, the majors are re-engaging with giant, capital-intensive LNG projects, with 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 mega-projects 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,” Rodger said.

08/14/2018

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