Radical Change Needed To Improve the Efficiency of E&P Projects
Exploration and production (E&P) projects are operating at an unsustainable pace and the best way to get them back on track is a radical change in how operators and managers view them, an expert said.
In a webinar hosted by the SPE Gulf Coast Section, Neeraj Nandurdikar, director of E&P practice at Independent Project Analysis (IPA), examined the reasons why projects fail to consistently meet expected profit levels and what could be done to ensure success.
Although they make money for their owners, Nandurdikar said the industry has had a dismal track record with E&P projects because they deliver much less than expected. In the past decade, three of every four projects recorded a loss in net present value (NPV) 2 years after startup compared with the value promised at the final investment decision (FID), with some projects recording losses of up to 300% in NPV. An average project loses 35% of its planned value.
The profits that E&P projects generate are a factor of high oil prices, which presents another problem, Nandurdikar said. As the cost of projects continues to increase, companies factor the higher price of oil into their projections, so the breakeven price for an average project inches closer to the market price, he said.
“Every day, when you look at a project, it costs more and more, and the amount of money we spend on projects is just staggering,” Nandurdikar said. “So we’ve got this dilemma where the prices that we get for our product aren’t going up, yet the cost of doing the project continues to rise. We need to get more and more (money) to make projects economical. We need more money for our product to make the projects work.”
IPA developed four criteria to determine the success of a project. A project is considered to have failed if it suffered in at least one of the following areas: a growth in costs post‑FID by 25% or more, overspending compared with similar E&P projects by 25% or more, a slip in schedule by 25% or a schedule 50% longer than the industry average, and the occurrence of severe and continuing construction problems within the first 2 years after FID. Only 20% of E&P megaprojects, or projects with capital expenditures of at least USD 2 billion fit the criteria.
An important factor in this production shortfall is an overemphasis on speedy schedules. Comparing the E&P industry with other industrial sectors, IPA found that E&P megaprojects finish at a 5% faster rate than non-E&P megaprojects, yet the latter experience a 25% average slip in schedule. This means that E&P operators schedule their projects to finish 20% faster than the industry average. Nandurdikar said most E&P projects are not compressible enough to handle such a squeeze. Given the losses that most projects incur, a push for significantly faster schedules is unrealistic, he said.
“What good is it to be on time or to be 6 months ahead of schedule if what you deliver is less than you planned? It’s not going to work. The NPV analysis might tell you that it’s better to come in 6 months faster, but the question is do we then also realistically use the fact that we might not get all of our production? That we might be 30% lower? That’s the real comparison,” Nandurdikar said.
To improve efficiency, operators must think of projects as assets built on the flow of information, as only one-third of the typical project cycle is spent building something, Nandurdikar said.
He divided E&P assets into three information streams: the basic data stream, which involves reservoir appraisal and technology development; the shaping stream, which involves the development of business objectives; and the project stream, which involves front-end loading, detailed engineering, and construction. An error in any of the streams can lead to added costs, schedule delays, and production shortfalls.
The integration of information across each stream requires a higher level of cooperation than is usually seen in projects. Nandurdikar proposed the creation of a chief integrator position to oversee every aspect of an E&P asset’s development and align the business elements with the planning and engineering. This role would be different from a project manager, who solely looks after the project stream of the asset. The chief integrator would be responsible for building an organization structured to adapt to the problems that may arise within an E&P asset.
“Let’s build a team, let’s build an organization for what we are going to face, rather than fit the project into the way we are structured,” Nandurdikar said. “Clearly, the way we do things today is not working and maybe somebody has a smarter solution than this, but I think we need to start working together. Shaping matters. Context matters. Everything matters. Integration, interface management, and the timely flow of information have to be at the core of the organization.”
The archived web event is available at https://webevents.spe.org/products/pfc-improving-business-decision-making-to-improve-asset-development-economics
Hurricane Energy Begins Offshore Installation of Lancaster EPS
Logistical work is taking place in advance of subsea installation activities, which have the large UK North Sea field on track for first oil in 2019.
The Missing Piece in Why Some Complex Projects Fail
Why do 80% of megaprojects in the oil industry fail? A recently published book reaches a counterintuitive conclusion on the leadership traits required to run complex projects successfully.
OGF Quiz: Project Execution Rules of Thumb
Want to do a quick test of your project execution skills? Try this 10-question quiz.
Don't miss out on the latest technology delivered to your email every two weeks. Sign up for the OGF newsletter. If you are not logged in, you will receive a confirmation email that you will need to click on to confirm you want to receive the newsletter.
20 April 2018