Rising costs are challenging the economic feasibility of megaprojects, forcing operators to be more selective in taking final investment decisions (FID). Recently, two major developments in the US Gulf of Mexico and one in the Barents Sea were delayed for various financial reasons. The Malaysia National Oil Co. is hinting that it could defer some major projects due to increasing costs and softening oil prices. Meanwhile, the most dramatic example of the implications of inflating project costs is in Australia. About $150 billion in resource projects have been deferred, revised, or canceled during the past six months, according to a recent study commissioned by the Business Council of Australia (BCA). This includes the Browse LNG and Sunrise LNG projects. In April, Woodside Petroleum shelved plans for the $45-billion Browse LNG development, saying the development concept did not meet the company's commercial requirements for a positive final investment decision. Following further evaluation, the company said it will recommend FLNG as the optimum concept for development of the three Browse gas fields offshore Northwest Australia. It would use Shell's FLNG technology, which is to be deployed on the Prelude field. Shell may not have taken FID for the marginal gas development without the emergence of FLNG technology.
The BCA study,Securing Investment in Australia's Future: Report of the Project Costs Task Force, was launched late last year to further investigate the findings of the 2012 BCA commissioned report, Pipeline or Pipe Dream? Securing Australia's Investment Future. The 2012 report compared the costs of resource projects in Australia to the US Gulf Coast. Its findings were a 40% cost premium for resource projects overall, and a 200% cost increase for offshore oil and gas developments on the back of laybarge and drill rig costs. The study also noted that megaprojects worldwide are found to have a 60% failure rate in terms of cost or time overruns. This year's follow-up report confirmed that project costs in Australia indeed are higher than in other developed countries. It found a number of key drivers for the high costs, including: problems with planning, design, scheduling, and procurement - partially caused by overly optimistic project scheduling, scarcity of suitably qualified and experienced project managers and engineers and other key occupations, which at times led to inadequate project execution.
The study identified four key areas for reform to reduce Australian costs. These include improving access to a skilled workforce; improving government approvals processes; a workplace relations environment that is focused on productivity; and alleviating impacts of remoteness.
Concept selection
Correct framing in the feasibility and selection phases of a project can achieve lower costs outcomes while minimizing engineering recycle, explains Martin Stewart, Granherne. Stewart, in a special report forOffshore, describes how results from recent development studies illustrate demonstrable relationships between functional design choices and facilities total installed cost (TIC). To illustrate this point, he compares the development of a field in Northwest Australia to a fictional equivalent in the Gulf of Mexico. Stewart's full analysis begins on page 30.
Megaprojects have a low success rate. Rising project costs and a projected flattening oil price environment are further stretching the economics of megaprojects offshore. But, as noted earlier, proper evaluation early in the project design phase could minimize delays. "The most important single predictor of project success for any upstream project is the asset front-end loading index," said Ed Merrow, founder and CEO of Independent Project Analysis, Inc. (Offshore, 2003). The index is a weighted numerical combination of the status of deliverables that define the reservoir, the facilities, and the wells construction program for an upstream development. He added, "Despite another 20 years of experience with large projects, you can't help but conclude that we have seen no material progress in the control of very large developments." That was ten years ago.
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