Report: More Upstream Projects Meeting Targets
A new Wood Mackenzie report indicates that upstream oil and gas projects are starting to meet delivery targets after a period characterized by being behind schedule and overbudget.
The global downturn in the industry forced companies to critically evaluate and improve how they manage their major capital investments after a period where Wood Mackenzie says the top 15 project blowouts of the last decade were a cumulative $80 billion over budget.
"The scale of under-performance 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.”
However, there is now a growing list of mid to large projects that have been delivered on target over the past 12 months, he says. 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 its deepwater Gulf of Mexico Kaikias field online nearly a year ahead of schedule. Not only a quick turnaround, it epitomizes how the deepwater sector has transitioned to a simpler, lower-cost business model, says Rodger.
Wood Mackenzie has identified six key factors, that in most recent cases, combined to create better project execution:
• 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.
• Service sector collaboration and alignment on contracts, albeit mostly in northern Europe.
• Improved project management. Companies have more people looking at fewer things, while under-utilized service companies can offer their “A-team” for each major contract.
• Greater corporate discipline. Tougher pre-FID screening and more stringent hurdle rates have increased attention on execution and cost control.
• More pre-FID planning. More contracts are signed pre-sanction, often with preferred partners versus putting everything out to bid.
• Reduced scope. More tie-backs and brownfield projects that use existing infrastructure, less greenfield.
Improved project delivery through de-emphasizing of mega-projects is not sustainable longer-term in an industry underpinned by large, cash-generative assets, says Rodger. He already sees signs of re-engaging with giant, capital-intensive projects particularly for LNG. 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," Rodger said.