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Capital Projects Suffer Significant Cost and Schedule Overrun 

EY Spotlight on Megaprojects explores performance of capital projects in the oil and gas industry. They researched the performance of 365 oil and gas megaprojects and found that 64% experienced cost overruns and 73% reported schedule delays. The average cost overruns across all regions was an astonishing 59%.

EY analysed projects with a proposed capital investment of above US$1b in the following industry segments: Upstream, LNG, Pipelines, Refining and reviewed project performance in the oil and gas industry across the project life cycle, before and after the final investment decision.

Major Root Causes of Cost and Schedule Overruns

Internal Factors

  • JV and relationship challenges

  • Access to funding

  • Poor portfolio management and changing risk appetite

Data Considerations

  • JVs are complex and need diverse information to manage   divergent investment rationale

  • Data helps understand components potentially impacting project economic viability

  • Use historical performance data   to help Portfolio management  and  project selection

Portfolio and Commercial

  • Inadequate planning

  • Poor procurement of contractors

  • Aggressive estimates and optimism bias

Data Considerations

  • Ability to use benchmark data to challenge the planning process to avoid over promise

  • Real time information is required to drive procurement effort across the project supply chain,

  • Using own benchmark data to remove estimation bias.

Project Development

  • Ineffective project management

  •   Poor contract management

  •   Human capital deficit

Data Considerations

  • Accurate real time impact assessment of design to other functions is paramount to manage complex projects,

  • Real time Vendor performance monitoring will remove bottlenecks which often lead to variation orders,

  • Data based work estimation enables accurate resource planning.

Project Delivery

External Factors

  • HSE risk and local content

  • Regulatory delay and policy uncertainty

  • Inadequate infrastructure

Data Considerations

  • Historical HSE performance data allows assessment of costs to meet “Zero tolerance to accidents” environment on mega projects,

  • Regulatory and policy uncertainty increase execution risks,

  • Information on adequacy of infrastructure enables assessment of productivity factors.

Regulatory Challenges

  • Diplomatic and security issues

  • Financial and supplier market uncertainty

  • Civil and workforce disruption

Data Considerations

  • External real time data monitors changes to market fundamentals and provides advance warnings on:-

    • Vendors financial status

    • Exchange rates

    • Commodity constraints / prices

Geopolitical Challenges

Ineffective data management underpins all above root causes 

Business case for change 

Economist.PNG

Poor Productivity

 

  • Not attracting enough investment

  • Financially unhealthy (1.8% net profit)

  • Need to improve capital efficiency

  • Breakthrough vs. Continuous Improvement

    • Improve 2.5% per year via best practices, but …

    • Industry declines 3% per year

 

 Source: web.aacei.org