Volume: 1 | Issue: 2

Oil and Gas Industry Megaprojects: Our Recent Track Record

Summary

In a recent major study of industrial megaprojects, the author finds that oil and gas industry megaprojects fared very poorly. Earlier studies showed that the results of oil and gas megaprojects were quite similar to the results from megaprojects in other industrial sectors. With this much larger and more recent set of megaprojects, we find that upstream megaprojects are more fragile than their non-oil and gas industry cousins. The author attributes this finding to the poor functional integration that characterizes upstream project organizations, which makes these complex projects much more sensitive to poor preparation, schedule aggressiveness, and loss of continuity in project leadership.

Introduction

Projects throughout the process industries--oil and gas, chemicals, and minerals--have become significantly larger and more complex over the past decade or so. The underlying reasons for increasing project size and difficulty are understood--we are developing natural resources in progressively more difficult circumstances simply because we have to. Moreover, the choice of oil and gas developments is influenced by the decisions of some large resource-holding countries to restrict or delay the development of some more easily accessible reservoirs.

Eight years ago at the Offshore Technology Conference, the author reported on a distressing pattern that Independent Project Analysis (IPA) was seeing in offshore projects: Success, measured by how well we meet promises made at the time of the financial investment decision (FID), declines rapidly with project size (Merrow 2003). (Note: IPA benchmarks projects before FID and project systems in the oil and gas and other capital-intensive industrial sectors.) While projects in the USD 300- to USD 600-million range were largely successful, the success rate for the megaprojects--defined as exceeding USD 1 billion measured in constant start-of-2003 terms--was approximately 50%. Interestingly, megaprojects in other industrial sectors, such as downstream oil and gas, minerals, and chemicals, had approximately the same rates of success and failure.

In this updated analysis with a much larger sample of both oil and gas and other process industry megaprojects, our conclusion is quite different for oil and gas projects. While non-oil and gas development projects increased in size and difficulty, they maintained a success rate of approximately 50%. This rate of success is certainly not good, but at least it had not declined despite the much more difficult projects market. Meanwhile, the performance of oil and gas megaprojects collapsed; only 22% of these projects could reasonably be called successful. While the successful projects were spectacularly successful, the other 78% were equally unimpressive with 33% real cost overruns, cost indices that averaged 1.37, and execution schedule slip of 30%. More importantly, a disappointing 64% of these projects experienced serious and enduring production attainment problems in the first 2 years after first oil or gas. The issue this paper addresses is why the relative performance of oil and gas megaprojects dropped so precipitously in the first decade of the twenty-first century.
 

Read or download the full SPE paper 153695-PA.


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