Megaprojects: Mega headaches

Will Leonard

December 1, 2014

A megaproject is one that costs more than US$5 billion to develop. They stretch a company’s capabilities to their limits, especially in the harsh climates like the Arctic or in ultra-deep water.

In 2000, oil companies took on seven megaprojects, while in 2012; they took on 37 megaprojects – a fivefold increase in over a decade, according to the Wall Street Journal.

The UK think tank Carbon Tracker Initiative (CTI) recently compiled the world’s 20 costliest oil projects under construction, with a combined price of $90.6 billion. Nine are in Canada, eight are oil sands projects in Alberta, the rest are either deepwater or Arctic projects.

These projects are expensive to develop, requiring huge supply chains, needing expensive shipping, massive transport networks and thousands of workers.

Why are megaprojects critical for the world’s energy supply? The easy-to-reach oil ran dry long ago or is in the hands of state-owned companies like Saudi Arabia or Venezuela. Major oil companies have to spend more money to produce less oil. And many of these projects take longer than expected to build and exceed budgets.

Plans to pump oil using man-made islands in the Caspian Sea could cost a consortium that includes Exxon and Shell $40 billion, up from the original budget of $10 billion.

Among the challenges and issues being faced are:

  1. Project complexity
  2. Completing projects on time and on budget
  3. Cost control
  4. Rising labor costs
  5. Safeguarding dividends
  6. Environmental concerns
  7. Production lower than expected
  8. Investment needed to improve production efficiency
  9. Increasing service costs
  10. Exchange rate fluctuations
  11. Underlying economic conditions affecting project viability
  12. Need for collaboration on projects

EY’s (Ernst & Young) report titled “Spotlight on oil and gas megaprojects” says that despite the importance of project performance, a high percentage of megaprojects fail to deliver on time or meet approved budgets, with 64% of projects facing cost overruns and 73% of projects reporting schedule delay.

Oil and gas price increases during the past decade have masked many of the consequences of megaproject overruns, but this trend is unlikely to continue. If the industry is to secure the required investment to supply future energy demand, it must delivery improved performance in the delivery of its capital projects, especially megaprojects.

Among the internal areas of failure identified by the EY report are poor procurement of contractors, poor contractor management, and ineffective project management. We believe that improvements could be made by delegating certain aspects of the project, such as automation and electrical systems, to the technology solution provider.

This does not mean that an operator or the principal EPC contractor loses any control. In fact, it could enhance their position by enabling them to focus more on the aspects of the construction at which they are skilled, while allowing the supply chain to handle day-to-day technical integration.

The concept of a main contractor status is something that has been at the disposal of the industry for many years. However, it is essential that the contractor is chosen carefully. As the EY report points out, “selection of contractors through which an organization engages with its third parties are key to project success, because poor selection decisions have significant consequences.”

A contractor needs to have the resource and global reach if their engagement is to be profitable. Quality clearly matters, as EY identifies: “Frequently, we see decisions based too heavily on cost, with insufficient emphasis placed on quality, despite the known impact of quality on project cost and schedule performance later in the project life cycle.”

The EY report also points out the impact of the human capital deficit on a project. As a result of labor shortages companies are struggling to secure the capabilities, capacity and expertise required to effectively manage their most challenging projects. Using, for example, a main automation contractor or main electrical contractor approach, can help plug these skills gaps, which are even scarcer on the engineering front.

One approach is to use a technology company with a broad portfolio to manage the risk. Provided such a company has a project management capability, the company can act as a MAC/ MEC and integrate the technology with a lower risk to cost and schedule. As technology evolves at a rapid pace, this option becomes ever more attractive.

Will Leonard
is the Head of Marketing for ABB’s Chemical, Oil and Gas business in the UK & Caspian region. Will has a dual honors degree in Business and Law at Keele University. He has worked in the industry for the past 10 years.