Economist's Corner

Megaprojects: Managing Risks and Controlling Costs

Varun Unnikrishnan, PricewaterhouseCoopers


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With the era of “easy oil” behind us, upstream companies face the challenging task of meeting the increasing global energy demand. Oil companies push the boundaries of technology to squeeze out every barrel of oil from their existing fields, while exploring further and drilling deeper to exploit new reserves. With the complexity involved in the operations going up, the industry is building larger and more complex projects. Such megaprojects require billions of dollars of investment, multidisciplinary teams, meticulous planning, flawless execution, and cutting-edge technology. As is the case with any complex project, delays and cost overruns haunt project managers right from the stage of conceptualization. The reasons for these delays can be broadly classified as technical and nontechnical.

Technical Complexities

Nontechnical Factors

Examples of project delays due to the mentioned reasons are ample across the industry. Upstream projects in the Caspian Sea and Russia have been delayed by multiple years and billions of dollars due to technical complexity. Australian LNG projects are running behind schedule and with cost overruns due to the lack of skilled manpower and complex supply chains. An Indian refiner faced delays due to regulatory hurdles and land acquisition problems.

Project delays are common across both international oil companies (IOCs) and national oil companies (NOCs). In the case of IOCs, pressure from shareholders for maintaining a healthy reserve replacement ratio leads to project managers taking on ambitious targets and untested technologies, causing project delays. While for NOCs, the challenge in executing projects in an integrated manner in the face of procedural constraints, complex contracting procedures, possible government interferences, and less autonomy are major reasons for project delays.

Such delays not only lead to cost overruns, but also result in deferred hydrocarbon production, thereby delaying revenue generation. With the shareholders focused on higher return on investment, such delays and cost overruns are deemed unacceptable.

Project managers have long been using traditional tools and techniques like stage-gates, work breakdown structure, and Critical Path Method/Program Evaluation and Review Technique models to plan and execute projects. However, to tackle the complexities of megaprojects, companies have adopted new techniques and more efficient work practices such as the following.

Increased management oversight. As senior management comes under pressure from shareholders and financial institutions to ensure tight capital control, management oversight on large projects has increased. Frequent status updates and constant tracking of these projects have become a boardroom agenda. This not only ensures that the project managers are adhering to their timelines, but also highlights potential risks well in advance, enabling management to take corrective actions.

Integrated planning and execution. The traditional “silo” approach to project design is being replaced by an integrated planning and execution approach. Critical OEMs and vendors are engaged from the FEED stage. This ensures that all major stakeholders are seamlessly integrated during the design phase, prevents any surprises during the project execution, and eliminates the potential for rework.

Information technology. Project and portfolio management tools have helped provide project managers with better real-time visibility of project risks by analyzing information from multiple sources, thereby helping them make timely and informed decisions. These tools have also enabled collaboration between stakeholders, resource optimization, and real-time cost monitoring.

Modularization and standardization. The construction industry has embraced the concept of modularization wherein the entire project is broken down into various modules, which can be fabricated at a dedicated facility leading to reductions in cost and time. These modules are then transported to the project location for assembly. Modularization cuts down the necessity to transport raw materials and machines for construction to the project site, thus reducing the possibility of delays. Standardization of modules is yet another step wherein specific modules are consistently manufactured to predefined specifications to enable reusability in different projects.

Integrated sourcing and procurement. Integrating the sourcing and procurement function during project conceptualization helps in putting together a procurement strategy early on in the project. This not only reduces delays due to nonavailability of parts or long lead times, but also ensures the sourcing strategy is in line with the project requirements and timelines. Standardization of parts further enables the procurement department to source parts cost-effectively and helps to minimize risks with quality and lead time.

While there are numerous examples of project delays, instances of on-time completion of projects within the stipulated budgets are also worth mentioning. A global exploration and production company completed one of its deepwater Gulf of Mexico projects before the scheduled time, generating significant early cash flows to the business. An integrated oil and gas company commissioned its project offshore Nigeria 5 months ahead of schedule and USD 400 million below the anticipated budget. These instances have been possible largely due to companies demonstrating a disciplined project management approach and following the industry best practices mentioned earlier.

With the cushion of high oil prices dissipating, contracting and sourcing of capital are becoming increasingly difficult. To ensure the success of megaprojects from both the technical and financial perspectives, the energy industry will have to focus more on containing project risks, reducing delays, and ensuring faster “first oil” to improve the viability of such projects and enhance shareholder confidence.

Varun Unnikrishnan is a principal consultant with PricewaterhouseCoopers India’s oil and gas consulting practice and focuses on hydrocarbon operations. He started his career with Oil and Natural Gas Corporation as a production engineer. Unnikrishnan holds a master’s degree in mechanical engineering from the Indian Institute of Technology and an MBA in operations from Indian School of Business.